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David Geller

David Geller: Everyday Low Prices

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Negotiating discounts with customers is a slippery slope, writes David Geller.

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Should you negotiate price with your customers?

[h3]Everyday Low Prices[/h3]

[dropcap cap=W]hat a topic! Everyone wants a bargain and the American public has been taught to wheel and deal. The sale mentality is everywhere: Car sales, clothing, computers, shoes, office supplies. Jewelry? Are you kidding me? We’re the kings (and queens) of wheeling and dealing![/dropcap]

Many jewelers will mark up their prices, merely to provide wiggle room for discounts they use to make a customer feel comfortable and that they received a good “value.” There are two arguments as to whether you should do this or not.

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[inset side=right]Even though you’ve marked an item up to mark it down, you’ll probably end up discounting it even further to get the sale.[/inset]The pro-discounting argument goes “Everyone else does it” and that you must also discount simply in order to compete. A sale brings in traffic and a nicely-run sale can increase cash flow. (But please notice that I didn’t say “profits” right off the bat.)

The anti-discounting argument is even larger. From square one, you’ve set yourself up for every sale by these customers to be discounted. But the worst part, in my mind, is this: Even though you’ve marked an item up to mark it down, you’ll probably end up discounting it even further to get the sale. And, chances are, if pushed hard enough, you’ll end up selling it below that magic dollar number that you had established as your cushion.  

I can tell you from my travels to stores and phone conversations that retailers who have decided to stop discounting and adopt a “one-price-for-everyone” policy make more money. They pay their bills on time and usually make a larger gross profit percentage. Closer to 50%, while others wheel and deal and end up with a 42-46% margin overall.  

If you discount as a business practice, don’t get me wrong: sure, it can work in your favor. But as Sir Isaac Newton said “For every action, there is an equal and opposite reaction.” If you sell for less you must then sell more units (turn). And if you find that your discounting doesn’t increase sales, then you’re losing ground.  

To sell those additional units, you have to close more people. If 10 people walk in and you sell three, your closing ratio is 30%. If you could sell four out of 10 you’d increase sales by a whopping 30%. Here’s some ways you can make that happen:

[dropcap cap=1.] One reason why you could sell more units by increase your closing ratio is because your sales staff is better trained. That’s sales training.[/dropcap]
[dropcap cap=2.] Another reason you could sell more actual units is because you have more humans walking through the front door. That’s advertising and marketing.[/dropcap]
[dropcap cap=3.] Still another reason you could sell more units is you actually had the products in stock that the customers wanted (not what you thought they wanted) and you had it at the price they wanted to pay. If every sale seems to be a struggle, this could be a big reason. This is a purchasing and merchandising function.[/dropcap]

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Let’s look at the numbers. You’re going to buy an item at $100 and either hike up the price in order to discount it … or just mark it at a normal price and stick to your guns. Look at these two examples and see how many more units you have to actually sell to get the same gross profit dollars in a year.

[h4][b]No discounting-one low price[/b][/h4]

Cost: $100
Selling Price: $195
Gross Profit: $95
Gross Profit(in one year selling 100 units: $9,500

[h4][b]Higher mark up, then discounted[/b][/h4]

Cost: $100
Tagged at: $240
Discounted: $168
Gross Profit: $68
Quantity sold required to reach $9500 gross profit: 140.

You have to sell 40 more units!

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Wow. Just to keep up, if you now sell 3 out of 10 people you have to sell 4.2 out of 10. Can you and can your staff do that? Well, you’ll have to if you want to make up for all those big discounts you just handed out.  

You can run your own numbers, and see where you’ll end up with different pricing approaches. Let’s say you try to sell the item for the full retail price of $240, not $168 or even $195. In that case, to make $9,500 in gross profit dollars, you’d only have to sell 68 units — 32% fewer sales you’ve have to make to still gain $9,500. Hmm.

Of course, it may be harder if your competition is selling for less. But a lot of the resistance you’ll encounter can be overcome with better sales training, or smarter purchasing.

It may be tough to convert and retrain the customers to your new “everyday low pricing”. It may even take a year. But after you finish that bottle of Pepto Bismol, you’ll be set.

David Geller is an author and consultant to jewelry-store owners on store management and profitability. E-mail him at dgeller@bellsouth.net.

[span class=note]This story is from the July 2004 edition of INSTORE[/span]

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David Geller

Here’s What’s Really Keeping You From Having More Money

If you think it’s low margins, you’re wrong.

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I WAS READING THE Big Survey in last month’s issue of INSTORE, and one question popped out at me: “What will be your greatest priority next year?”

Thirty one percent of respondents said, “Boosting profitability.” The money-savvy ones (21 percent) said, “Clearing old inventory.” Most jewelers just don’t get that there is a big difference between making money and having money.

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Someone once taught you that margin was your most important metric. Yep, that was a good thing when everyone made two and three times key, but no more. What hampers you from having money is not low margins as much as inventory level.

Your debt typically equals one-half to three-quarters of your inventory that’s more than a year old. It shows up as accounts payable, credit card debt, lines of credit, and money owed to you (the owner) for money you’ve personally loaned the company.

Having money depends on your ability to keep that debt to a minimum. How can you do that? As a jewelry store/shop owner, there are a few options.

  1. Repairs. This is a revenue stream that requires very few resources to produce income. Your ongoing costs are findings, small stones and your jeweler’s paycheck (plus the occasional equipment upgrade).
  2. Buying scrap. This really only requires several thousand dollars of cash on hand to make a profit. Buy it on Monday, mail it on Wednesday, get a check on Saturday and you’ve made a profit and replenished your cash to do it again.
  3. Inventory sales. This is likely your biggest cash outlay, and it needs to throw off revenue monthly. All of it must throw off revenue at least once a year. All of it. You can’t wait two and three years to have money come in to pay a bill or check tomorrow.

Look at 1 and 2 above. The amount of money required is small. You don’t keep scrap very long and most people order “just enough” in findings for jobs this month, maybe a few extra items.

But inventory piles up for years and causes debt. In a jewelry store, your average inventory level should be somewhere between your cost of goods sold and gross profit amounts for a 12-month period. Any amount above that will show up as debt and poor cash flow.

Keeping inventory within these two numbers (give or take) will increase positive happy cash flow, increase your checking account balance, lower total overall debt, remove stale and outdated inventory, and may actually increase sales as you have more leverage to buy new fashionable jewelry that pleases your customers.

That would be a good thing, right?

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David Geller

Can You Make Money at 12 Percent Margin? Yes, But Here’s What It Takes

As one factor decreases, another must increase.

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CAN YOU MAKE a living on a profit margin of just 12 percent? Did the word no come to mind? You’re wrong.

For coin or bullion dealers, 8-12 percent gross profit margin is the norm, and they make a lot of money with little debt.

The “magic triangle” includes profit margin, inventory turn and inventory level. The combination of all three tells your future in a store, how much money will be left over to pay all bills and have money in the bank.

Let’s take a simple store math example for a year using keystone. A typical jewelry store would have a net profit of 5 percent. Here’s how a P&L would look:

Total Product Sales: $500,000
Cost of Goods: -$250,000
Gross Profit: $250,000
Expenses (45%): -$225,000
Net Profit (5%): $25,000

Are you making money? Absolutely. Do you have any money left over after paying expenses? Depends.

Imagine if last year, you sold everything at Christmas, not a stitch of inventory left. January 2nd, you fly to New York with three suitcases and buy the $250,000 of inventory that the cost of sales above pays for. You’ll have no debt. If something sells within six months, you have the money to reorder the replacement for the case, thus always having a stocked showcase.

Divide $250,000 in cost of goods by inventory of $250,000 and you get one turn a year.

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Now assume the same figures above, but instead of three suitcases costing $250,000, you bring five suitcases and bring back $600,000 of inventory for the store. Same sales and profit numbers as before. Did you make a profit, make money? Yessiree Bob! Do you have money? No! You bought $100,000 more inventory than the sales you took in. So how do you pay for it?

  • Owe vendors way past the due date
  • Put it on credit cards
  • Go to bank and take out a line of credit
  • Personally skip paychecks
  • Take money from your personal checking accounts

In this scenario, your inventory is $350,000 higher than the cost of goods sold. Divide cost of goods by inventory level, and it shows you have a 0.41 turn. A turn of 0.41 means this store has more inventory than needed for two years.

So, what’s the secret to having money?

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The long and short of it is, if you’ll keep your inventory levels approximately equal to the gross profit dollars you’ll make over a year, you’ll both make money and have money.

The lower the profit margin, keep inventory lower, or if you must have a higher inventory level at lower margins, then turn it faster. Instead of taking 12 months to sell it, sell within nine.

It takes all three for The Magic Triangle to work magic in your store!

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David Geller

What You Can Learn About Turn from Clothing and Furniture Stores

Hint: Turn more, earn more.

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THERE ARE REALLY only three important numbers in a retail store: gross profit dollars, inventory on hand, and inventory turn. So who’s better at managing money among these three retailers?

Store                         Gross Profit %
Jewelry                      42.6%
Furniture                  45.0%
Clothing                    46.5%

Darn close, aren’t they? The grass isn’t so green on the other side after all. Or is it?

Let’s look at inventory turn, which means how many times a year an item sells. (These numbers are from stores doing “pretty well.”)

Store                            Turn            Days in the Store
Jewelry                   1.4                       260
Furniture               3.5                       104
Clothing                 4.3                       84

A clothing store won’t keep a shirt/suit/jacket/blouse in the store more than three to four months. They will heavily discount it at that point to get it out the door; they don’t just “squash” merchandise closer together to show more like jewelers do.

Furniture stores work the same way. They have a natural problem: available floor space. The biggest reason for high turn in a furniture store was told to me by a furniture store owner: “Where am I going to store an extra 100 mattresses?”

Clothing stores get rid of their merchandise every quarter. Furniture stores get rid of their inventory every four months, and a good jeweler turns their merchandise a little over once a year. But most jewelers I meet have had their total merchandise for two-and-a-half to four years! This causes terrible cash flow and piles of debt.

If you buy jewelry in January, it should sell at least once by Christmas; that would be a turn of 1.0. If it stays until after Christmas, discount it or give a spiff to the sales staff to unload it, or even return it to your vendor and exchange it.

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If it is still there in 18 months, scrap it. That’s what clothing and furniture stores do.

Let me show you the money-making power of turn. All three stores are going to buy an item for $200. For a jeweler, this might be earrings; for a clothing store, a nice jacket; and for a furniture store, it might be a chair. In the table below you can see the cost, profit margin in dollars, and what that brings in for total product dollars in a year.

Keeping an item long-term is a detriment. Even if someone buys it three years from now, you should have had that $207 in profit for each of the three years, totaling $621 brought into the store (not the measly $163.35 you would make by holding it three years).

When it’s over a year old, most things need to be disposed of and replaced. Maybe your customers just aren’t buying what you have in stock. Change that!

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