The price is right, but profits are off. What gives?

Photo courtesy of Flickr user Deborah Fitchett

Photo courtesy of Flickr user Deborah Fitchett

“I know my cost of goods and a reasonable markup” Annie Ford said, describing how she came to price the items carried in her downstate Illinois retail business. “And business is good. I know customers appreciate bargains, so I put sale items at point of entry to the store, and advertised accordingly on store signage. We’re picking up more customers every month. So why am I not making a profit?”

Annie was influenced by traffic volume, which distracted her from profit analysis. We did a transaction analysis because while customer pricing approval is great, and Annie carried sufficient inventory to be profitable, she needed sales across all product lines to maintain those margins. Her average-transaction numbers were skewed toward lower-end sales. After we showed her why selling ten $10 items would never be as profitable as making two $50 sales, her next question became, “Then how can I shift my customers toward more middle-of-the-line sales?”

We helped her put this plan in place to increase sales of her more profitable items:

1. Set realistic daily revenue targets
We divided Annie’s gross expenses by the days she was open for business and added 10 percent overall to allow for profit and to cover sluggish days due to bad weather, etc. — that’s the average revenue number she had to hit every day to stay in business. A performance study showed that when sales associates clearly understand goals, they are 22 percent more likely to deliver them. Also, if a business consistently features lower items or sales racks as a hook, as Annie did, overall sales tend to skew downward.

2. Price anchor the higher-profit items
Annie sold inexpensive purses ($20 average) on one table, and on another display she featured her most profitable mainstay purse (Dana Buchman, average $59). Vera Wang bags ($100 range) were hung on a third rack area. We had her change her marketing to display the “expensive ” Dana Buchman bags backed by a fan display of the “more expensive” Vera Wang options. Sales of Dana Buchman bags increased 20 percnet in the next month. Displaying an expensive item next to a more expensive item makes the target item a “better choice” versus being a “costly choice”.

3. Bundle to upsell
We paired the lower-price generic purses with lower-priced outfit displays to discourage a single sale of an inexpensive outfit or an inexpensive purse. We got rid of “sale racks” and had bargain areas where sale-priced clothing was racked – with matching regular-priced scarves, lower-end jewelry lines and generic purses to suggest buying an inexpensive, complete outfit.

4. Offer sale prices on minimum purchases or multiple buys
Instead of having a sales table at the entrance, we suggested Annie hand customers a coupon worth $5 off any sale of $25 or more, etc. so that they could apply it toward a larger sale. To make it easy for customers, we placed a few small, lower priced sales items on the counter so that if they checked out a few dollars light of the $25, they could easily pick up a $3 item to save $5 and, since that item was on sale, to save even more.

What could you share with Annie and our readership that worked for you to shore up profits?

About Jody Glynn Patrick

Jody is President of Glynn Patrick & Associates, which provides management consulting, executive coaching and strategic planning services. She is Publisher Emeritus of In Business magazine, which she published for 17 years. Selected as the “U.S. Business Journalist of the Year” in 2007 in Washington, DC, by the U.S. Small Business Administration, Jody has been a business reporter, editor, radio talk show host , and has won other state and national journalism awards. At the same time, she has helped corporate clients grow their businesses -- the basis for her practical coaching advice here. She also was the 2005 Athena Award recipient for her leadership role in mentoring other professional women. Jody will be talking with you weekly on TDS’ blog to share her insights and tips from the C-Suite perspective. Follow on G+.

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