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Variable Pricing and Promo Pricing

Creating a Basketful of Profitability

When this writer was a retailer, we made a practice of reviewing our business in several areas; our advertising budget and plan, our hours of business, and the sales per each hour of personnel.

We also spent a great number of hours working on our pricing strategy. Our efforts were directed towards two areas. The first was our margin of the overall store as well as the margin in each of our departments and finelines. The second area of concern was our promotional price list.

With regard to departments and finelines, the computer provided us with detailed reports comparing the month's sales to the same month last year as well as year to date, and last year to date. Our job was to review the information and find ways of making our business more profitable.

Our departments were the broad categories of merchandise. One example of a department would be beverages. Finelines were the subcategories within that department. An example of finelines would be cocoas, teas, and coffees.

As these reports were generated, we compared this information to that received from vendors and by way of trade magazines such as Gift Basket Review.

As we looked at the industry standards and our margins, we took special note of those departments and finelines where we were below the average. With these substandard areas, we looked to see where we could increase our margins. As we increased our margins, we were pleasantly surprised in two ways. The first is that we saw no change in our sales; the second was that this increased margin, and dollars, fell to the bottom line.

Another way that we looked at this report was to look for the departments and finelines that had margins above our store average. With this group we checked to see where this merchandise was located in our store. Because this was the merchandise that contributed the most margin to our store, we wanted to make sure it was prominently displayed so as to enhance the chances and opportunities for sales.

The second way we looked at our above average departments and finelines was to see if there were any additional products we could be adding. If there were 15 flavors of coffee, could we add more?

It was amazing that when we took the contribution a product made towards profit into consideration as we designed the sales floor of our store, how we could still have an attractive store but could increase sales by putting the most profitable items in the most prominent positions.

The second area of profitability we spent a lot of time with was our promotional price list. These were the items that we found customers to have a strong idea of what their price should be. This occurred because our competitors had chosen to advertise these items. They were also the items that competitors chose to have in their window displays and front door area to attract customers with.

The promotional price list will vary in size from store to store depending on the number of products and departments that your business has, as well as the number of competitors you have.

The items on your promotional list are determined by shopping the competition, and by watching their ads. As you select an item to be on the promotional price list you will need to gather the sales and profits history of that item.

This is done so that we will be able to see if a promotional price is actually helping to increase sales. For example, you may select a 16 ounce bag of a particular brand, or select flavors, of coffee beans to be on the list. It is selected because a coffee specialty shop, like a Starbucks, keeps a large display of bagged beans near their checkout for all customers to see. Because you are an independent, many customers perceive you to be a higher priced store. The task is to make sure this perception does not become a reality.

We accomplish this by also having the same product at the same price. If we are going against someone who only sells their own brand of products then we must make the effort to have the customer think our product is of equal or higher quality than our competition. Of course, we too need to have a display in a prominent position, with plenty of inventory and a sign promoting the value and price.

If the competition has advertised the product in a newspaper, then we can further the comparison by placing the part of their ad promoting this product on a 5" x 8" poster card along with a comment to the effect of, "This is what they call a sale price. We offer this value every day. Why shop around for sales?"

We mentioned the need for having the sales and profitability history of the item. After having taken our example item and added to our promotional price list, we will want to examine its sales after a three month and six month time period. If we have increased our sales substantially, then we can assume we have correctly identified an item which our customer recognizes by price.

However, if after our test time periods we see that our sales have not increased or have increased by such a small margin that we are now making less profit, then we are probably incorrect and will want to return the item to its regular price.

As you create, and fine tune, your promotional price list of products you will want to review where and how you are buying these items so that you can maximize your profit. You may also find vendors that will work with you in obtaining special pricing for these items. The justification to you and the vendor is that there is no sense in your stocking a promotional price item if you have to sell it at a price that is substantially higher than the competition.

As you complete each of these two tasks, you will have a smile on your face as you recognize that you have maximized the profitability of your sales floor by way of your department and fineline reviews. And, you will recognize that smile on your customers' faces as you know that your store is taking good care of them and that they do not need to go looking to the competition for a better price.

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This article is copyrighted by Tom Shay and Profits Plus Solutions, who can be reached at: PO Box 1577, St. Petersburg, Fl. 33731. Phone 727-464-2182. It may be printed for an individual to read, but not duplicated or distributed without expressed written consent of the copyright owner.

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