Saturday, January 23, 2010

Two Ways to Increase Profit Margins (Without Bullying Anyone)

There are two simple ways to increase your profit margin. The first is to increase your prices. The second is to have fewer discounts and sales. (There is a third method to higher profit margin - lowering the cost of the goods, but that involves the vendor, which doesn't qualify as simple)

Did you know you could increase prices on some items and actually sell more at the same time?

Quick, without thinking too hard, tell me how much you would pay for a toilet plunger. Five bucks? Ten? What if it had a Vermont Pine handle and was made in the USA? Fifteen?

What if your only toilet was clogged and your wife was pregnant? Twenty Dollars?

Our perception of the cost of many items changes based on our needs and our belief in the product.

By the way, I just bought one the other day for $1.99 - well below what I would have gladly paid for one. (No, my wife is not pregnant.)

Too many retailers make the mistake of pricing items based on their cost. We dutifully take the cost of the item and use some factor or calculation to determine a retail price.

What we miss in this calculation is the human element of the equation. When a customer walks through the door she immediately starts making mental calculations on the Perceived Worth (PW) of each item she sees. If it's something she doesn't need, the PW is zero. But if it's something she needs, she assigns a dollar value to it. Then she checks the price tag. If the price and her PW match, it's pretty much a guaranteed sale.

But if they don't match, a second evaluation takes place.

If the price is higher than her PW, she's not buying.

If the price is lower than her PW she's going to ask, "What's wrong with this?" Until she answers that question to her satisfaction, she's also not buying.

This mental calculation is going on in your store every single day and costing you sales and profits because of it.

Here are two tips for pricing your products that use this knowledge to your advantage.

First, when a new item arrives, before you price it, take it around to your staff and ask them how much they think it is worth. You may be surprised to find that the PW of an item is often higher than the price you were going to mark it.

Second, think about prices the same way a customer thinks about prices - in rounded off numbers. No woman ever looks at a dress and thinks, "Wow this looks like an $87 dollar dress!" It's always numbers that end in zero or five. It's a fifty dollar, seventy-five dollar or hundred dollar dress. So don't price something $97.99 when perceptually it's a hundred dollar item. You're just giving away two bucks. The same is true with smaller amounts. $28.99 and $29.99 are the exact same price to a customer - both are a thirty dollar item. But to you, that extra dollar is your profit. You'd be better off standing at the front door handing out one dollar bills than giving them away blindly on a poorly priced item.

If you want even more tips on how to increase your pricing while actually making your merchandise look more affordable, download this free eBook Pricing for Profit.

The second thing eroding your profit margin is sales & discounts.

You keep hearing that everyone is looking for a bargain. The data backs this up. Kinda. A National Retail Federation survey showed that 40% of shoppers were looking for sales & discounts to determine where they shop. Another 12% were looking for everyday low prices. By my math, that only comes to 52%. The other 48% were using some other non-price-related criteria for determining where to shop.

You don't have to discount to get traffic. But you have to give customers what they want. And according to NRF, 48% want a great selection, great service, and a great experience. And those customers are willing to pay for it.

If you keep offering discounts, coupons and sales every time you turn around you're doing two things to your business.
  1. You train your customers to wait for a sale
  2. You train your customers that regular price is too high
If that's what you want, good luck. But if you want to increase your profit margin, you have to wean your customers off the sales, coupons and discounts and start offering them over-the-top customer service.

We gave up our one and only coupon this year. We lost a little bit of sales in November (when the coupon normally ran) and made some of it up in December. Best of all, we had a higher profit margin for the two months, which more than made up for the lower sales.

Bottom line? Our bottom line improved. We increased our profit margin another point. And that has made all the difference.

-Phil

1 comment:

  1. Exceptional advice and sooooo true! You are on the money (pardon the pun).

    ReplyDelete