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David Geller

How to Guarantee a Profit on a Jewelry Line That (Mostly) Generates Special Orders

That line you bought that never sells … but generates lots of special orders? Here’s how to turn a profit on it.

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MANY A RETAILER goes home frustrated that some lines in the case “just sit there and we only take special orders from them.”

Examples would be where you have a line of wedding bands, or a line of engagement rings that have to be ordered for each diamond sold or even those fancy enameled rings that can’t be sized and you must order it in the correct size. You’re making sales but the initial investment itself just sits there. Man, that’s a very expensive sample case, isn’t it? Wouldn’t it be cheaper to just show the customer a darn catalog?

Then of course the rep tells you, “You can’t sell it if they can’t touch and feel the rings.” The rep has got a good point there. You could easily invest $25,000 in a starting order for some of these really fancy lines and sell very little from that order. Oh yeah, we special order like crazy, but don’t sell many of these. Bummer.

But in the case of these lines where you have an initial setup and it causes other items to sell, we must look at this in a different light altogether. Let’s say you buy 10 rings of a line and each ring cost you $100. You have $1000 invested in these rings. Normally you would expect to double your cost by keystoning them. If you sold them all in one year you’d bring in $2000 (double your cost) and out of the $2000, the first $1000 either pays the bill from the vendor or you send it to them to buy even more of these good sellers. The second $1000 is yours; it’s the gross profit.

Now let’s say during the year you only sell three rings out of the 10. Yuck! You sold at cost $300 of these rings and you still have $700 of rings left to pay for. Divide $300 by the ending inventory of $700 and your turn is “0.42”. At this rate it will take you almost 28 months to sell them all. Here’s the bad part. You owe the vendor $1000 for all of the rings. By selling three in a year, you only brought in $600 in income. Right off the bat, you’re in the hole $400 to just pay the vendor. You don’t normally see this because you lump all of your bills together. But this is how it pans out. This line doesn’t even pay for itself. But now you think you’re doing okay because you sold some of these rings on a special order basis. But how can you tell?

It’s really very simple. Let’s look at a year of business. If you buy for stock 10 rings at $100 each look at what you would expect from this vendors’ rings:

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A. That the total sales when added up at year-end will pay for the vendor’s bill in full for the display unit (it’s $1000).

B. That any special orders from the sale of the display will also pay for itself and be profitable at least keystone for the special order rings that were sold, which is a 50 percent gross profit margin.

C. That might be the most you could ask for in the first year but I think it ought to be the minimum you would require. Each ring from the case sold would be profitable on its own … but it would be too much to ask for the three that were sold, to have enough profit to pay for the seven that didn’t sell. So we are going to ask the display unit to pay for its total cost and give us profit on the special orders in year one. Starting in year two we will continue to make a profit on the special orders and any ring sold out of the display unit will be 100 percent profit in years two and on. If it does that you will be happy, right?

So let’s look again at the scenario of only selling three rings of 10 from the the case, and making up the difference with special orders. Remember, the bill for the 10 rings has to be paid whether you sell them or not …

Here’s what has to happen. Firstly, such a display requires a higher profit margin. Just like a car going 30 mph from New York to California will take forever, keystone markup will take forever or require you to be a selling machine.

So the display rings cost $100 each and instead of selling for $200, we will sell them for $300. Special orders will have the same 3.0 markup. Our goal is, remember, to net keystone on the end result and pay for the display with someone else’s money.

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If we sell three rings from the display we are going to collect $900. (If we had keystoned, we would only have collected $600.) Let’s put that extra $300 in a “pay the display off” account. Keep that in mind.

So for every ring we sell at $300, we can give $100 to the “pay off the display” fund. So far we have $300 in our fund. We need only $700 more in “excess profits” to pay off the display. How can we get that extra $700 from special orders?

Well if each ring sold has a built in $100 in “excess profits”, divide $700 remaining needed by $100 “excess profits” and we need only sell seven special order rings from the display and the display will be paid off.

Sell seven special orders. They cost $100 each, $700 total cost. They bring in $2100. At keystone you would receive $1400. That extra $700 goes with the $300 from several paragraphs above and your display unit is paid for. Plus you made a keystone profit on all special orders (even though it required you to charge triple key).

So by selling three rings from the case in the year and seven special orders in the same year you have:

• Paid off the display unit.
• Made double your cost on all seven special ordered rings.

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Then starting in year two, you’ll get to keep the triple key profits from all special orders and any of the remaining seven rings when sold from the case will be 100 percent profit, as their cost was paid for last year.

In essence this idea of display rings is a two-year commitment. But you do make keystone on special orders in year one and the display is paid for. Not bad. You couldn’t run an entire store with merchandise you must wait two years to get a profit from, but this does work well for these cases.

This story is from the April 2003 edition of INSTORE

David Geller is a 14th-generation bench jeweler who produces The Geller Blue Book To Jewelry Repair Pricing. David is the “go-to guy” for setting up QuickBooks for a jewelry store. Reach him at [email protected].

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