By Jane and Larry McGrath
There's an old, but extremely true saying in retailing: "well bought is half sold." By improving your purchasing techniques, you can reduce your costs, inventory, and prices. But buying wisely means more than just negotiating low wholesale prices. It requires searching out any incentives offered by your suppliers such as quantity discounts, special offers, freight allowances, extended payment terms, and cooperative advertising allowances.
Extended payment terms help your cash flow by enabling you to sell the item before you pay for it. And, even though advertising allowances may be a pain to document for reimbursement, they can pay for a significant part of your advertising costs, helping increase your bottom-line gross profit figure.
Although it doesn't pay to stock up on slow-moving items just because you get a "bargain" on a case lot, when you can anticipate needs and combine several items to build a larger order, you just might even qualify for a freight allowance or even a quantity discount.
Another approach to lowering your overall buying costs is to participate in some type of cooperative or buying group. Although many retailers feel there are disadvantages, cooperatives do give small-volume member high-volume buying power. By pooling orders, small retailers can gain discounts and price breaks typically reserved for big box stores or chains.
Also be open to working with new reputable suppliers who can offer you equivalent or better product, service, price, and terms. Buying from fewer suppliers may generate increases in total purchase volumes, leading to discounts or terms improvements.
This may offset the perceived savings of buying directly from several manufacturers at lower item cost but higher minimums, increased freight costs or more difficult terms.
While it's naive to think that price isn't an important factor in almost every sale, a customer isn't always looking for lowest price—he's looking for value. But, because "value" resides in the customer's perception of the product, not the product itself, it's your knowledge of your customers that gives you the power to make the best pricing decisions.
You're the only one who knows that a customer will gladly pay list price for an oil pump because he needs to install it before Friday night's race and you have it in stock. Or, that another customer will probably buy some suspension parts from you today if you give him a 10 percent discount on his tires.
You won't always be able to beat the competition's prices, but you can make up for the difference with service convenience. When you keep your customer focused on the product and its value as a solution to his or her problem, the price can become a secondary concern. And, your costumers will come to appreciate the difference between value and price.
How do you set a price? Low enough to entice customers to come in? High enough to make a fair profit? What the market bear? You can concentrate on generating new buyers and quick sales by advertising price reductions, but if you're not covering all your costs, you'll under-price yourself into bankruptcy.
When do you match the competition's prices? On advertised specials? When a customer asks? If you discount prices across the board to meet competition, you place your business at risk, if, on the other hand, you never lower prices you lose credibility and customers.
There's no doubt that pricing is a difficult and uncertain process for racing retailers. But there's also no doubt that effective pricing is the key to managing profits. To achieve sustainable profitability, your pricing strategy must be an integral part of your business strategy, not an afterthought.
And, that strategy can't be built on selling everything at the suggested retail price, or taking a standard markup on every product, or on undercutting the competition's prices. It has to be based on a thorough understanding of the racing market, your customers, and what it costs to operate your business.
To efficiently set prices, you need to use a strategy that assures profit stability yet allows you to change individual product and service prices quickly to meet market demands.
As strange as it may seem, retailers are more likely to under-price product than they are to over-price it. In fact, too many under-price themselves right out of business. It's important to remember that true profits come only after you cover all the costs, pay yourself, generate a reasonable return on investment, and make provisions to continue business.
So, before you price an item, compute these four business basics:
- The actual cost of product. This goes beyond just what you pay for the part. It includes freight, costs of ordering, such as phone, fax, postage; terms, including any interest you must pay; and other costs directly tied to the part.
- The cost of operation. Factor in everything it takes to run the business, such as salaries, rent, utilities, advertising, and insurance. This includes your personal income needs.
- A reasonable return on capital investment for you or your investors. The risks of a small business are certainly greater than the risks of keeping money in a bank CD, so the returns should be greater, too.
- The requirements for capital renewal, continuation, and growth. This need to set aside money for expansion, repayment of investor money, and addition of new inventory lines is too often overlooked by retailers. As a result, many shops go out of business after five or six years of operation.
Using a time period of a year to minimize seasonal fluctuations, work with your accountant to determine actual or estimated dollar figures for each of the four elements of price. Once you have this base information, you can work on setting prices.
Based on the four elements of price, determine what overall gross profit margin you need. Do you need a 30-percent gross profit margin? A 35-percent? A 40-percent?
Markup is the figure you use to multiply the cost of goods for the final selling price. Markup equals 1/(1-Profit Margin). Multiply $6 by 1/(1-.4). The answer is 6 x 1.66, which equals $10. You have a 40-percent profit margin.
Using this system as a starting point your "cost of sales" for an item should be multiplied by the markup to arrive at your selling price. For example, an item "costs" you $12.65. For 40-percent gross profit margin, multiply by 1.66 to arrive at $21.00. You might set your selling price at $21.00, and enjoy a 40-percent gross profit margin.
But because racing is such a volatile market with customer preferences that seem to change between race nights, your pricing system must also be flexible.
To stay competitive, some prices will need to have a lower markup and some will sell with a higher percentage markup. Your goal is to maintain a mix of prices that results in healthy gross profit margin year after year, while still allowing sales to flourish.
Routinely check your competition's prices and advertised prices to keep you current on what items are price sensitive. Price sensitive items are high visibility items, like oil, spark plugs, and filters that are easy for customers to compare. Also consider other factors such as a brand name that's running hot, a contingency tie-in, or the convenience of having an item in stock. When you have all the information, you can sensibly and regularly adjust pricing. And, as you need to decrease margins on price sensitive items to stay competitive, you can increase margins on less visible items to keep your overall gross profit at your desired level.
Also investigate other strategies that can help you maintain the overall gross profit margin you need. An increasing number of retailers are looking at ways to add and advertise product lines that traditionally give higher profit margins than hard parts. For example, fanwear typically has a gross profit margin of 40 to 50 percent. When high-markup product lines fit your image, they can really add to your pricing flexibility.
It's also important to increase the number of products you carry that can be individually priced, with a structure that allows changing the margin.
There's no doubt that implementing a variable pricing strategy takes more time and energy than the typical across the-board markup and making daily, weekly, and monthly price changes is demanding. But retailers who make it work agree that the results definitely make it worthwhile.
Retailers suggest that the best tool to figure and keep track of all these pricing changes is a computerized accounting system. And, when you include some type of coded inventory tags, you can even use the system to track inventory turnover item-by-item for extra price-setting information.
For example, fast-moving items might carry a lower margin since you don't have to carry them in inventory and they are probably an incentive to bring customers into the store. Slower-moving items would carry a higher margin to reflect the cost of keeping them in inventory and the service to customers of having them available.
Although using a variable pricing strategy takes more work than just shelving product with manufacturers' stickers, it gives you control of your profits for long-term success.