The Quickest, Easiest Way to make Higher
Profits is to raise your prices
(And you can do it without making your customers mad!)
THE WHOLESALER
By Joseph R. Schmitt, Management Consultant
By Rich Schmitt, Management Consultant
© Copyright 1997 by Schmitt Consulting Group, Inc.
2141 Schuetz Rd., Suite 201, St. Louis, MO 63146
Phone: (314) 872-9199 Fax: (314) 872-9399
IN THIS HIGHLY competitive
economy, there are three popular
ways for you to generate higher
profits:
1. Increase your sales
2. Cut your costs
3. Raise your prices
Increasing
sales
usually
requires that you take business
away from your competitors.
Normally they don't sit quietly
while you do that. They respond
defensively with strategies aimed
at keeping their customers and
may even take some of your
customers in return. In the end
you both lose.
Cutting costs is tough too. If
you are running an efficient shop,
becoming a low-cost distributor
is a brutal job for you and your
people. It is hard to do this
without hurting customer service
and employee moral.
We feel the quickest, easiest
way to make higher profits is to
selectively raise prices. When
done correctly through price
merchandising, your customers,
competitors, and employees don't
realize you have done it.
calculation across an entire
product line. This usually causes
the price-sensitive items to be
overpriced, and may cause your
customers
to
buy
them
somewhere else. "Slow Movers"
tend to be under priced and you
leave money on the table when
customers buy. In the worst case,
95% of the products are under
priced, since the margins have
been set to make the pricesensitive products competitive.
price those price-sensitive items
aggressively. (Many are low to
even zero margin.) While we
don't recommend pricing to lose
money on anything, sometimes
even that can be appropriate if it
leaves a powerful impression
with your customers. The grocer
then prices the price-insensitive
items to make higher margins
(i.e., French bread, skim milk,
light bulbs, toothbrushes). The
result is a mix of prices that gives
the impression of low pricing and
yet generates reasonable overall
margins for the grocer. You may
say, "My customers won't accept
this kind of pricing change."
They do at the grocery store and
they will accept it from you if
you do it right.
Merchandise your Prices
What is price merchandising?
Pricing your product line by
product
demand
and
the
customer's sensitivity to price.
The grocery industry does the
most comprehensive job of this.
They know customers judge the
competitiveness of a store by How do you learn to do it right?
remembering only a handful of
There is more strategy to
items
(i.e.,
bread,
milk, pricing than can be included here,
You must merchandise to make the
most money for your company!
hamburger, eggs, etc.). While the
This is a proven business list may differ from customer to
customer, the total group of
technique.
Many distributors use a flat price-sensitive items is much
markup
or
gross
margin shorter than you think. Grocers
but here is the heart of a good
price merchandising system.
Establish a pricing relationship
between all items in a product
line. Review each product line
and classify every item according
to how sensitive your customers
are to the price. These relational
judgment rankings are not based
on dollar or unit sales levels but
on how your customers feel about
the price. Use your knowledge of
your market. This takes some
time but only has to be done once
since the way a customer feels
about a product does not change
unless the market changes or you
find
you
misjudged
the
customer's feelings.
Here are the groupings of
products we use:
A. Extremely price-sensitive
products
B. Very price-sensitive
C. The middle of the road
products. Most products
fall here
D. Price-insensitive products
E. Extremely priceinsensitive products
F. Even more priceinsensitive than ‘E’
Next you set a gross margin
percent for each class of products
within the product line and
calculate the new selling prices.
Remember the GM% for an "A"
item in one product line is not the
same as an "A" item in another
product line. (This is a big job but
the Profit Optimizer software
program helps with everything
except the market savvy.)
The ‘A’ items must be priced
competitively at all times. You
want to have low prices on those
items where price gets the
customer's attention. The margins
on ‘C’ items should be the target
GM (or sometimes higher) for the
product line. The margins for
‘D’s, ‘E’s, and ‘F’s should be a
fair compensation for carrying
these slower moving items. Most
wholesalers ‘chicken out’ here
but this is your opportunity to
generate the additional profits
you deserve.
Repeat this process for all
product lines. The "Profit
Optimizer"
software
was
specifically written to help
wholesalers and distributors just
like you to create, publish,
merchandise and maintain their
pricing. You can use it to
experiment with different pricing
strategies and in a matter of
minutes see the impact this could
have on your bottom line. Once
you reach your target pricing,
you print your own price catalog.
Some words of caution.
Pricing changes must be evolved.
You should start slowly and
change your prices gradually.
You don't want to be abrupt and
bring attention to the process.
You
may
ask,
"the
manufacturers merchandise the
products, why not use the their
recommended
prices?"
The
manufacturers merchandise the
products to make money for
themselves.
You
must
merchandise to make the most
money for your company!
A quick story!
One of our Profit Optimizer users
made a typing error and set the
GM% for a product to 75%
instead of the 55% he intended.
When he discovered the mistake
three months later, he had not
received one customer complaint
AND his sales volumes had not
decreased. The moral is that
customers tend to be less
sensitive to the 'D's, 'E's and 'F's
than you think.
©Copyright 1994 by Schmitt
Consulting Group, Inc.