Retailers, What to do about the Internet?

I’ve been following a conversation on another forum that was started with my recent post, “Are Your Suppliers Letting You Down on the Web?”  You may recall that the original article was about manufacturers who don’t use the web effectively to communicate with their dealers.  Like most on-line conversations, this one has morphed into a discussion on how independent retailers and manufacturers should handle Internet sales to consumers.

We know that there are price-only shoppers who will come into your store, get all the information they need, then go to the web to buy the item at the lowest price they can find.  On the other hand, there are customers who do their research on the web then buy the item locally.  The question is, which group is bigger?  My guess, and it’s only a guess, is that more consumers fall into the second group.

Maybe I’m not a very good shopper, but I’m in the second group mainly because I (1) prefer to support my local merchants and (2) I’ve yet to find anything on line that I couldn’t buy at the same price, or close to it, locally.

Here’s the thing.  If I can buy an item for, say $200.00 on line and I can buy it for $210.00  or $220.00 locally, I’ll buy local every time.  Basically, I’m a mechanical idiot.  It’s worth it to me to spend an extra 5-10% to have somebody close by to hold my hand when I can’t figure out how to make something work.  I’m not alone.  Based on the statistics, a lot of people feel the same way.

Case in point:  I just bought a new cell phone.  The instruction book wasn’t in the box.  Today I’ll go back to the store and get it.  If I had bought the phone on-line, I’d have to send an email and wait for a response.  Assuming they get back to me, I’ll then have to wait for the instruction book to come in the mail.  Meanwhile, I have a $179.00 phone that I can’t use properly.

To me, the key to competing with on-line merchants is to let the customer know how much your service is worth.  Granted, some people just don’t care.  All they’re interested in is getting the lowest price.  Chances are those people aren’t your customers anyway.  If there were no Internet, they’d either buy from the big box store, or they’d be searching the ads in the back of the magazines.  Either way, you don’t get the sale.

There’s a lot of hype about on-line merchants.  The media love them!  Price shoppers think they’re the greatest thing since sliced bread.  (I wonder what the greatest thing was before somebody invented sliced bread?)  Anyway, the facts don’t necessarily support the hype.  Depending on the industry, web sales still represent a small piece of the total pie.  According to the US Department of Commerce, 3rd Quarter 2009 on-line sales represented 3.7% of all retail.  Obviously the percentage varies by industry, but overall, nine out of ten retail dollars are spent at brick and mortar stores.

e commerce stats

Big on-line merchants like Amazon.com are doing very nicely, thank you.  But there’s still a huge market out there for your store.  Rather than chasing sales that you’re never going to get, in 2010 your brick and mortar customer should be your major focus.

Granted, on-line sales are growing, 4.7% in the third quarter of ’09 vs. 4.3% in ‘o8.  Today’s strategy may not work in the future but carpe diem,  seize the day.

Meanwhile manufacturers will continue to wrestle with the question of how best to market their products.  That 4.7% is worth more than $30 billion, hardly chump change.  Like I said in my last post, brick and mortar independent retailers should support suppliers who support them.

Here’s a post that I wrote in 2006 on Your Business Strategy that you might find interesting.

Avoiding Problems with the FTC

[Disclaimer:  I am not a lawyer.  I don't play one on television.  The following should not be considered legal advice.  When in doubt, consult with your attorney.]

This post was inspired by a conversation on another forum about pricing.  To make a long story short, Dealer A was selling an item at a fair markup.  Dealer B was selling the same item barely above cost.  The question was, how could dealer A convince Dealer B to charge a more reasonable price?

The answer to the question is "He can't."  The Federal Trade Commission doesn't look kindly on two or more competitors agreeing on retail pricing.  In fact, it's a felony.  I don't know about you, but the last place I want to be is in federal prison, surrounded by murderers and thieves, when they found out I got busted for "acting together (with a competitor) in ways that can limit competition, lead to higher prices, or hinder other businesses from entering the market."  It could be a very long twenty years.

Seriously, the FTC defines "Price Fixing" as "companies getting together to set prices."  So, what's Dealer A to do?  First, contact the manufacturer.  US courts have established that manufacturers do have some rights when it comes to setting retail pricing.  Let them handle it.  Worst case–your rep might go to jail, but you won't.  (Be sure to send him/her a card at Christmas.)

If that doesn't work, stop carrying the offending line or product.  If you  can't make money on it, why carry it?  If it's a traffic-building brand, then you have to carry a profit line where you can make money.  [Hint:  Contact your Tacony Corporation representative.  He/she can help.]

Or, if you absolutely must sell the item in question, find ways to add value to justify your price.  Free delivery, free service, and free accessories are just a few things you might add.

Finally, the FTC has a booklet called "Competition Counts" that sheds some light on this whole "anti-trust" thing.  It's short and to the point, and you should have a copy of it on hand.  It's free.

Turnover

We’re all looking for ways to cut expenses.  We’ve posted here before on some tips to trim everyday expenses, but the largest expense item for most retailers is inventory.  How do we reduce inventory expense without hurting sales?  As Bob Negin points out on his Whiz Bang Tips site, that’s the $64,000 question. 

If you have too much inventory, you’re wasting money.  If you have too little inventory, you’re losing sales.  Hitting that happy inventory level that generates the most profits isn’t easy.  One measuring stick is turnover.  If you bought enough inventory on January 1 to last all year, then your turnover would be one (1).  If you bought enough inventory at the beginning of each month to last thirty days, your turnover would be twelve (12).  For most businesses, the ideal figure is somewhere in between.

This chart from Bob’s post gives a rough idea of average turnover rates for various types of stores.

Turnover_2

 

But, turnover isn’t the only metric for retail stores.  It’s important, but it’s not enough.  You have to look at other factors.

For example, take a look at the chart.  If a lumber yard can make 7.7 turns, how can an antique store survive on 1.7′?  There’s another number to consider.  It’s called gross margin.  Here’s a very simple example. 

Let’s say you carry two items, A and B.  You stock just one of each.  They both cost you $100.00.  You can turn item A ten times per year.  You can only turn item B five times per year.  But you sell item A for $125.00 making 20.0% gross margin..  You sell item B for $200, making 50 % gross margin.  Let’s do the math:

  COST MARGIN TURNOVER/UNITS SOLD PROFIT PER UNIT TOTAL PROFIT
item A $100.00 .20 10 $25.00 $250.00
Item B $100.00 .50 5 $50.00 $250.00

If you look only at turnover, item A looks like the better one to carry.  If you look only at gross margin, item B is the winner.  But the reality is that they’re both the same.

You have a lot of money invested in your business.  At the end of the day, you expect a return of that investment.  There are a number of other measurements that you can use to chart your business’ performance, but turnover and gross margin, when used in combination, are a good place to start. 

Why Should You Go After the High End Customer?

It should be fairly obvious that there are advantages to working with higher-end customers.  But sometimes, it’s good to review.  Here’s an interesting item by Michael Furniss called "8 Reasons to Target Higher Paying Customers".  His 8 reasons, along with comments, are very complete, so I’m just going to list the reasons by themselves.  For more information, check out Michael’s post.

  1. They make you immune to price cutting wars.
  2. They create the chance of a price increase war.  (I like this one.)
  3. They give you more room to create special offers.
  4. They are less likely to complain.  (I’m not so sure about this one.  What do you think?)
  5. They are more likely to buy again.
  6. They are more likely to refer similar people.
  7. They are easier to manage.
  8. They let you out advertise your competition.

I’m going to add a ninth one:  They are less affected by changes in the economy, gas prices, taxes, and all the other things that can cause low and middle-price shoppers to postpone their purchases.

Pricing Tips

Thanks to frequent reader and contributor Phil Engeman of Phil’s Sewing Machines in Washington, MO for pointing out an interesting site.  It’s called Pricing for Profit

On the site you’ll find a number of articles on the always-difficult subject of pricing.  One that you may like is called "Pricing for Profits and Growth–It’s as Easy as Early Bird, Regular, and Chef’s Table".  In it, writer Rafi Mohammed examines the pricing strategies of a high-end restaurant.  As you can tell from the title, "early birds" pay one price, "regular customers" pay a higher price, and "Chef’s Table" customers pay the highest price of all.  Rafi’s lesson here is that you can price your offering based on the perceived value to the customer, regardless of your cost.

Another article of interest is "4 Pricing Strategies to Prosper in a Recessionary Environment."  The title is self-explanatory.

Finally, there’s a timely post today on the subject of rose pricing during Valentine’s week.  You may be surprised to learn that your neighborhood florist isn’t getting rich selling the flowers for three times the normal price to desperate husbands. 

Like many web sites, this one’s purpose is to introduce you to the author’s consulting service, and there’s nothing wrong with that.  But there’s some good information here with no login requirement, so you might as well check it out.

For more on pricing, be sure to check out the "pricing" category on MYOB.  The link is on your left.

P.S.  If you haven’t done it already, you’d better get your Valentine’s Day shopping done real soon.

A Super Sunday

Looking for something to do this weekend?  Market Watch reports that prime tickets for this Sunday’s Super Bowl are going for as much as $50,000.00.  Of course, you’re not just going to see a football game.  The price includes performances by Alicia Keys, Jordin Sparks, Paula Abdul, and Tom Petty and the Heartbreakers.

Of course, 50 grand doesn’t include getting to Phoenix, hotel accommodations or other expenses.  For example, two nights at the Hampton Inn in Glendale, AZ will set you back $449.10 per night, according to Expedia.com.  Come back next weekend and the same room will cost you $134.10.

Need a car?  An economy model from Hertz this weekend is going for $67.99 per day.  Next weekend?  $38.99.  Opportunistic pricing?  No, supply and demand.  If we’re in the widget business and we don’t sell all our widgets today, we can always sell more tomorrow.  But Super Sunday only comes once each year.  Even at 1/3 the price, that Hampton Inn probably won’t be full next weekend.

Want another example?  30 second commercials during the game are going for a mere $2.7 million.  That may seem like an outrageous amount of money, but consider the brands who come back year after year, many for multiple spots.  It must be worth it.

Here’s the thing.  Whether it’s a football ticket, a hotel room, a rental car, or a vacuum cleaner, people spend their money to get value.  If there’s somebody out there willing to pay $50,000 for two tickets to a football game, then it’s a fair price. It’s all in the customer’s perception of value.  If they think your product is worth more than their money, you’ve got a sale. The selling price has nothing to do with the seller’s cost.

In retail it’s called "value pricing" and it’s the best way to beat your competition.  Cost plus may work for
Sam’s and Costco, but the rest of us have to be a little more creative.  How well does it work?  The National Hockey League has one game scheduled for Sunday and it’s in Canada.  The NBA has two games, both Sunday afternoon.  How great would it be to have your biggest event of the year and have your competitors not even try to compete?

Most of us will never know.

Super_bowl

E-Gouging

If you’ve been following MYOB for a while then you know that one of this blogger’s pet peeves is over-priced hotels that charge big connection fees to use the Internet.  Considering that the $49.99 places almost always offer free high-speed, either via cable or wireless, I think it’s outrageous that the high-priced places think it’s ok to add another ten bucks to the cost of doing business from one of their rooms.

The irony is that your intrepid correspondent is attending the Excellence in Missouri Conference at the Tan-Tar-A Resort at the Lake of the Ozarks.  Keep in mind that it’s mid-November and a room at the Lake is about as desirable as an Alaskan cruise this time of year.  If it weren’t for conventions like this one, the place would be empty.  But it isn’t.  It’s full of business people attending our conference or one of the other meetings that are going on.

Perception equals reality.  Had the hotel increased their rates by $10.00 per night and included the WiFi for no charge, no one would be the wiser or particularly care.  But the add-on price makes it look like they’re gouging Internet users and leaves a bad taste in most people’s mouths.

This may just sound like a tight-wad complaining about spending ten bucks, but I really want you to consider your own business.  Do you charge "extra" for anything that would be  better included in the price?  Can you bundle any accessories along with major items to make the total package look more attractive?  Are you charging for anything that might generate additional sales if you provided it free of charge?

Think about it.  Look at your business through your customers’ eyes.  You just might find a way to improve the perceived value of your offering without really giving up any revenue. 

Please comment if you have any good (or bad) examples to share.

They CAN Afford It

The always insightful Seth Godin suggests that when the customer says "I can’t afford it", they really mean is "It’s not worth it."  He writes, "As in, it’s not worth reprioritizing my life, not worth the risk, not
worth what I’ll have to give up to get this, not worth being in debt
for."

A lot of us try to overcome the "can’t afford it" objection by lowering the price when, in fact, the fault isn’t with the price at all.  The fault is our inability to sell the value of our product to the customer.  A sales trainer once told me that there are two reasons why a person does something.  One is the reason that "sounds good".  The other is the real reason.  Sometimes the two reasons are the same.  Most of the time they’re not.

We can drive ourselves crazy trying to close a sale by overcoming the wrong objection.  Our job as salespeople is to dig deeply enough to find the real reason why the customer won’t buy and then dealing with that objection, not just at the close, but throughout the presentation.  In a retail situation, the price of an item should be right there on the sign or tag, visible to the customer from the outset of the conversation.  Confirming the fact that the item is something the customer can afford should be done as early as possible, eliminating the "can’t afford" objection long before the close.

Radiohead

Radiohead
To quote Monty Python, "And now for something completely different."  A British band called Radiohead has released a new album called "In Rainbows".  I personally don’t know the first thing about the band, or their music.  But here’s the interesting part.  According to the Toronto Globe and Mail, since they have no contract with a record label, they’ve released "In Rainbows" themselves.  It’s only available on their web site.  You can’t buy it at Wal*Mart, or even at Amazon.com.  The twist is that YOU decide what you’re going to pay for it.

That’s right.  You can give them a dollar, or twenty dollars.  It’s up to you.    According to some sources, the band may have made as much as $10 million on the first day the download was available.  When you consider that the band gets virtually all the money, compared to the percentage they would receive from the record label under the normal agreement, it looks like the band made a pretty good move.  Radiohead is known for its innovative music, so it’s not out of character for them to come up with an innovative marketing model.

No one’s suggesting that this would be a good model for any other business.  The band has very little cost in their product.  Once they pay any backup musicians, pay for studio time, and pay a staff to handle the distribution, their cost is nearly zero.  They don’t even have to pay for a blank CD.  We should all be so lucky.

But it does show that we’re living in a different age.  Outside-the-box thinking is definitely in order when it comes to doing business in the twenty-first century. Cost plus pricing isn’t really a viable option anymore.  Those days are over.  But what’s going to take it’s place?  The key to setting the right price is figuring out what value the customer places on a product or service.  Maybe asking them isn’t such a bad idea.  What do you think?

The Price is Right?

Thanks to Larry Engemann of Phil’s Sewing Machines in Washington, MO for pointing out this article from Forbes.com on one of MYOB’s favorite topics; pricing.  If you’ve been following the news recently, you know that after only two months on the market, Apple dropped the price of its iPhone by 33% creating a firestorm among the first adopters who had stood in long lines to buy the device at full price when it first came out.  The criticism was so bad that Steve Jobs issued an apology and offered customers a partial rebate.

As we’ve pointed out here many times before, pricing is a complicated issue.  The days of marking up everything in the store by the same percentage are over.  Besides, cost-plus pricing is seldom the best way to maximize your profit. (See our earlier post on Variable Pricing.)

The Forbes article goes into some detail on "Temporal Price Discrimination", a terrible name for a business practice if ever I heard one.  It means pricing a product or service based on the customer’s ability or desire to pay.  I prefer "variable pricing".  For example, those first iPhone buyers knew that there would be price reductions sooner or later.  Apple’s mistake was taking too big a cut, too soon. 

Variable pricing can also be applied across seasons, geography, or by adding or taking away features.  After-Christmas sales are an example of seasonal pricing.  A Christmas tree is certainly worth less to the consumer on December 26 than it is on November 26.  A dealer would be leaving money on the table discounting seasonal items too early.

A good example of geographical pricing might be a hot dog at the ball game.   That 99 cent hot dog at 7-Eleven probably sells for $3.50 or more at the ball park.   Gasoline will usually be more expensive at tourist destinations than it is at home.

Variable pricing according to features can be an interesting one.  I had breakfast at Denny’s while I was out of town last week.  They offer a special "Senior’s Menu" for those 55 and over.  Their "Senior Omelet" costs quite a bit less than their "Ultimate Omelet".  But if you read the menu descriptions, the old follks version uses one less egg, and the accessories aren’t the same.  Either omelet is a good value. They’re just different and priced accordingly.  The same is true of their other "Senior" items.  (BTW, I’m over 55 but I bought the regular omelet.)

The author makes several other good points, but I’ll leave it to you to check them out. BI will mention that he (or she) talks about products that carry an emotional attachment or that become a symbol of the owner’s sense of self.  Kobe beef anyone?

If pricing is a problem for you, click on the "Pricing" Category link in the right column of this blog to see some of our earlier posts on the subject.  If pricing isn’t a problem, please use the comment link below to tell us how you do it.