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Right, Right, Right

Just read an interesting article on a discussion board (sorry, don’t have the source link) about the new wave in retailing.

Interesting because it talks about how big-box stores are downsizing to meet the needs of the new shoppers.

Interesting because it talks about how today’s shoppers (now being called Generation C for their connected, communicative, computer-savvy, community-minded outlook) shops differently than any previous generation.

Interesting because it quotes heavily an inventory management software company that uses a lot of 50-cent words like…

Deploying network inventory strategies that optimize stocking policies and maximize the availability merchandise, reducing stock-outs and eliminating excess inventory, in a forward-looking time-phased methodology combined with guided exceptions, and early warning signals to support root cause analysis.

The bottom line of the article is that today’s customer is using her phone, her computer and the Internet to do more research than ever before making purchases. She knows the products, the features, and the general price range.

She will only buy from you if you have the Right product in the Right price range and give her the Right kind of service.

Yeah, not really a new concept to retail. The only difference is that it is easier for customers to know what are the right products and right price range for them. So you have to be as savvy as them.

You have to be following trends in your area closer than before to make sure you have the right products. You have to be paying attention to price far more than you used to (although the Internet makes that easier for you, just as it is easier for her.) You have to be giving far better service than what is found in a typical retailer (and you cannot have an off day.)

The big box stores are in trouble because even with all their computers they cannot accomplish the first thing on that list because they cannot react fast enough when things change. And they never had a chance at Right kind of service. Yet all their focus has been on getting the Right price. They are downsizing because their sales are downsizing. Look at their same-store sales. Down for Wal-Mart, Target, K-Mart, Sears, and Toys R Us.

For the specialty stores, our biggest issue is having the right products, followed by having the right prices. We have to be careful we do not drive ourselves out of the market by dropping a line as soon as it gets discounted somewhere and thereby not having the right goods. Then we have to look at pricing and what we can afford. We don’t have to match but we have to be in the range. The one thing we do have Right is the customer service (most of the time:-).

The reason the Internet is having such a huge influence on retail sales lately is because it is accomplishing the first two Rights (product and price) and getting better on the third (service).

Retail hasn’t really changed. Customers haven’t really changed. If you have the right products to meet their needs at a fair price and you take really good care of them, you’ll have plenty of customers coming through your doors. Same as it has always been.

-Phil Wrzesinski

www.PhilsForum.com

PS Sure, you have to work hard to do all those things. But retail has always been that way. Ancient Chinese Proverb says, “To open a shop is easy, to keep it open an art.” Roy H. Williams said, “If making a profit were easy, everyone would be doing it.”

PPS Before you spend a penny on a software program full of 50-cent words, check out what I have to say for FREE.

The Price is Right (Where it is)

I don’t recall any time in the past 18 years where price has been such a driving issue for retail. Is it the economy? Is it the Internet? Is it the smart-phone barcode apps?

For whatever reason, all most retailers seem to be thinking about is where to set the price. How low do you go?

The easy answer is to set the price at what the customer perceives the product to be worth. Figure out what the average person would expect to pay and charge that amount. You’ll sell tons!

What about profit, you ask?

Well, for that, you’ll probably need to raise your prices.

But how?

Simple… Raise the Perceived Worth of the item in the mind of the customers. You do that three ways:

  1. Merchandise the product more effectively. Give it a special place on the shelf. Put a table cloth under it and a spotlight over it. Build a display that tells a story about the product. All of these things make the product appear more valuable to a customer.

  2. Make a sign for it. Put on the sign the story behind the product, the benefits of buying/using that product. Signs sell.

  3. Teach your staff everything on the sign and then some. Make sure they know what problems the product will solve so they can match customer to the product.

Quit worrying about price and instead focus on raising the customers’ perceptions and expectations. You’ll sell more and make more at the same time. Oh yeah, and you’ll have more fun doing it!

Happy Easter!
-Phil

PS For more on Pricing for Profit, download the FREE eBook.

Signs Really Do Sell Your Stuff Better

Yesterday I worked with my staff on signage. Rick Segal has repeatedly said that signs on a display help sell that merchandise 43% better than a display without signs.

I talked about the first reason why in an earlier post.

Here’s another reason to consider… Value

Perceived Worth
When a customer enters your store, the first thing she is doing is putting a mental price on every item she sees. I call this the Perceived Worth (PW) – what it is worth to her.

If she doesn’t need the item, the PW is zero. If she does need it, she assigns it a PW and then checks the price. If the price is much higher than her PW, then she won’t buy it. Likewise, if the price is much lower, she still won’t buy it. At least not until she figures out why it is so cheap.

Value Equation*
The Value Equation here is when the Actual Price equals the Perceived Worth. When they match, the sale is made.

That’s where signs come in. They raise the PW of the products they are on.

Most customers are generally ignorant of all the features and benefits of the vast majority of your products. If they only knew how cool or beneficial the item was, the more they would think it is worth. And there are only a handful of ways for them to find out.

  • Look it up on the Internet (and possibly buy it there, too).
  • Ask an employee (which the other post explains why most men won’t do that, and half the women aren’t too eager to do that, either)
  • Read the package (which often requires touching the box, something they might not be committed enough to do)
  • Read the sign next to the package (which they will often do without a second thought)

Signs Bring Action
Signs take less of a commitment on the part of the customer, so they are more willing to read them than the package itself. A well-written sign gets them to commit a little more and compels them to pick up the item with a higher PW already in their mind.

Well-placed and well-written signs can make a huge difference in your sales. Just remember these three tips for crafting your sign.

  1. Answer the most frequently asked questions. The goal of the sign is twofold – raise the PW and get them to pick up the item. Answer whatever question a customer might have that would accomplish either or both of these goals.
  2. Make it about the Benefits. Why should the customer give this product another look?
  3. Handwritten signs are okay for temporary use, but more permanent signs should be Professionally printed.

You can quickly and easily increase your sales, move out slower merchandise, and make higher margins with the simple and proper use of signs.

-Phil

*PS For a complete explanation of how the Value Equation works, check out the FREE eBook Pricing for Profit.

Black Friday Deals – A How To

Okay, you’re gonna venture into the murky waters of Black Friday with some doorbuster specials at your retail store. You better know what you’re getting into. Do it right and you’ll see your registers ring. Do it wrong and you just might be borrowing trouble.

Here are some tips to help you navigate the seas of this retail extravaganza.

First answer this… Why are you having Black Friday doorbusters? Is it to draw traffic? Grow market share? Move out some slow sellers? Because your shopping center makes you?

Knowing this makes all the difference in the world.

Going After Market Share
If you’re trying to grow market share and draw in new traffic, you have to have a really good deal on a whole lot of good stuff. And you need to share that info with the whole marketplace, not just your fan base. Email and Facebook won’t help you grow traffic and market share. They are only preaching to the choir. You’re going to need a flier in the newspaper or an ad on radio or TV. And that deal better be a killer deal because you’re up against a whole bunch of killer deals from a whole bunch of deep-pocketed retailers.

Still not afraid? Good.

Now you need to make sure you have enough product to keep the momentum going. Run out of your best deals in the first few minutes and the rest of the day is sunk. You need to have enough merchandise to last the first couple of hours minimum, otherwise you’ll send away far more unhappy people than happy ones – not a good marketing plan this close to Christmas.

And lastly, you have to make sure your staff is ready for the challenge. Do you have traffic flow under control? Is everybody up to speed on the deals and how to ring them up? Is everybody okay with the new hours? (especially if you’re opening up extra early) Are they trained for dealing with unhappy customers, unruly customers? It’s a given that you’ll have at least one or two.

That’s a minimum of what it will take to attempt to grow market share on Black Friday. (And there’s no guarantee it will work. The competition is pretty savvy.)

Moving Out the Dogs
Maybe all you need to do is get some slow movers off the shelf, make those dogs bark. You can give the appearance of having a Black Friday type event without all the expense and risk, just by marking down some merchandise that you were probably going to mark down anyway.

First, this is a good day to start those markdowns. The Transactional Shoppers are out in force and looking for a deal. Second, you won’t have as many unhappy customers, seeing that it was older, closeout merchandise in the first place.

Plus, you can advertise that kind of sale purely to your fan base and make them feel even more special because they knew what was happening before the general public who has to show up Friday to see what is on sale.

Doing Nothing At All
Then again, you don’t have to do much of anything to make Black Friday special. Put out a pot of coffee for those early risers. Dress up the store in your best Christmas spirit. Make sure your shelves are fully stocked & straightened. Put your happiest smiling faces on the sales floor and let them do their magic.

The day after Thanksgiving has always been a strong shopping day, and it wasn’t the discounts that always drove the traffic. Only in the last couple decades have we seen this day become the who-can-open-earlier-and-sell-it-cheaper event that it is. You don’t have to join that fray to be successful.

In fact, if you take the hands-off approach, make sure you staff your store stronger in the afternoon and evening, and be ready for another big rush Saturday. There are a lot of customers choosing not to fight the long lines Friday. To them, no deal is worth the hassles of long lines, unhappy people and early mornings. They’ll be out in force later and don’t want to deal with those been-up-since-three-don’t-bother-me sales people.

This Black Friday, whatever you decide to do, do it consciously and do it right!

Happy Thanksgiving!

-Phil

Here’s Something I’m Watching

Yesterday’s paper had an article about a new strategy Wal-Mart is rolling out. They’ve decide to do… wait for it… price cuts. Yeah, they’re cutting prices again (you’d think with all the price cuts that their prices should be zero about now, right?).

Here’s the interesting part of the article… They are only cutting prices on 20-30 key items – mostly groceries like cases of Coke. Twenty to thirty out of 100,000!?! And that’s gonna change people’s perception and drive traffic to new levels?

Either Wal-Mart thinks the general public is really gullible, or perception truly is reality.

I predict they’ll get a little bit of a traffic bump from people who only want the specials, but with such a small selection of price cuts, I also predict their competitors will have no problem matching them. (In fact, according to the article, Target and Kroger already had.)

But in the long run it won’t move the needle. But if it does…??

Yeah, that’s why I’m watching it.

-Phil

PS Apparently Wal-Mart has run out of ideas. Hopefully you haven’t.

Profits versus Cash Flow – Which Will You Choose?

Sometimes in retail you are faced with a difficult choice. In a tough economy, one of those choices is Profit vs. Cash Flow.

Sometimes you have to give away your profit to get more dollars streaming through the till. Sometimes you have to give up chasing dollars just to protect your profit margins.

The question is when do you choose Profit or when do you choose Cash Flow?

The answer is when you know exactly where your business stands, where you want to go, and what you need to do to get there.

For instance…

My goal for this past year was to show a profit. The bank gets a little nervous when you don’t show a profit, and to guarantee a renewal of my line of credit in these tough lending times, I knew that showing a profit would give the bank confidence in my stability and ability to succeed.

Last November I made a conscious choice to go after profit instead of cash flow. I chose not to run a direct mail coupon incentive that I had used in previous years. The trade-off was dramatic. Sales were down for November because I gave no incentive to shop early. Profit margin was way up, though, because I didn’t give away the house.

But as I looked at the lost sales in November, the question begged… Did I lose those customers for November or lose them for good? The answer came quickly in that first week of December… I only lost them for November. At the end of the two months my sales were where I expected going into the season, down only slightly. But my profit was up for the same period compared to last year. Had I run the coupon, I would have increased sales (cash flow) but decreased profit.

Because I knew my goals and knew what I needed to do to achieve them, I was able to be successful. Because I knew how my choices would affect my cash flow and profit, I was able to choose the right approach.

So what is the right approach in your business? It depends on your short and long term goals. Do you need to improve cash flow to fund a new project? Or do you need to show a strong financial statement to your investors? Do you need to improve cash flow to pay off your vendors or do you need to grow your profit to pay off yourself?

When times are good, you can do both at the same time. But when times are tight, you sometimes have to choose. Choose wisely, my friends, by knowing your goals and the means by which you will achieve them.

-Phil

PS The choice was made easier because our cash flow had been strong up to that point. What I lost in cash flow was allowable because I had built up cash flow from the previous year (at the expense of profit) Sometimes it is a seesaw between the two.

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

Yes They are Price Shopping With Their Phone – It’s Okay

The new applications on iPhones allow your customers to scan a bar code on a product on your shelf and get all kinds of information online including the price others are charging for the very same item.

Oh no! Oh, yes. Customers can more easily price shop you than ever before. What are you going to do?

Some stores are banning customers who do this. Don’t be one of them.

Allow your customers to use this new app. Embrace the technology. As Bob Phibbs pointed out so well, use it as a means of connection with your customer. Ask them what they found. See if the info is accurate. Chances are, you’ll be able to add info to what they find, or at the very least be able to make that info relevant by explaining to the customer what it means.

By all means, however, treat these customers with ultimate kindness and respect.

Sure, many of them are price shoppers, transactional customers, who won’t ever be loyal or profitable for your business. But that is no excuse not to kill ’em with kindness.

One thing we know about transactional customers is that they are always big on word of mouth. They love to talk about their shopping experiences.

And when they leave your store, they could be saying, “Wow, what a bunch of overpriced jerks!”

Wouldn’t you rather they said, “What a friendly knowledgeable store – expensive – but they really know their stuff,”?

Embrace the new iPhone apps and other programs that allow customers to price shop and get other info on your products. And then recognize that they came to you first. Now give them a reason to buy.

-Phil

Three Mistakes to Avoid

Circuit City is just about gone. The remaining stores are liquidating as we speak. This once fabulous chain (one of the 11 companies featured in Jim Collins’ book Good to Great) made two of the three classic retail blunders so common in a rough economy.

First, they slashed prices. In December 2006, in an effort to gain “market share” (the usual wrong-thinking excuse) Circuit City cut prices on flat-panel TV’s so low, there was no way to recoup the lost profits. The result? The worst loss in their history – $16 million.

Price-slashing is a desperate move at best, and usually backfires. Why? Most businesses never do the math. They don’t calculate the extra costs involved in selling the many more pieces they have to sell to make up the lost margin. If you make $500 per TV sold and you cut the price by $250, you need to sell twice as many TV’s to make the same profit. How much extra staffing and advertising will it take to do that? And how realistic is it that you’ll sell that many? Chances are you’ll spend more trying to sell the extra units, and also fall well short of your goal of units sold. Net result? Huge losses.

But, you say, Wal-Mart does it. Really? If all Wal-Mart did was slash prices they’d have been long gone years ago. No, Wal-Mart revolutionized operational efficiency. They made it possible to be successful on smaller margins. The volume came later as they gobbled up competitors in their ruthless expansions.

Unfortunately, price-slashing seems to be the retail mantra du jour. Sears & K-Mart have entered the fray, with JC Penney’s close on their heels. How’s that working out for you guys?

The only price-slashing that works is marking down the dogs as discussed in the previous post. Unless your business strategy is to go after the highly unprofitable Transactional Customers, price-cutting is only a recipe for disaster.

The second blunder Circuit City did followed right on the heels of the first mistake. After realizing such huge losses, in 2007 Circuit City went on an expense-cutting spree. The first to go? The high-priced, experienced sales personnel – the front-line sales staff with knowledge and sales expertise. To save money, Circuit City fired all the highest paid sales associates and replaced them with lower-paid hourly workers. And as anyone could have predicted, customer service dropped just as quickly.

When you’re selling commodities, maybe this works. But when you’re selling technology that evolves faster than the average mind can keep up, experience counts for something. Knowledge and know-how are your ally.

Unfortunately for Circuit City, this loss of knowledge in the sales staff left them with only one tool to compete in the electronics market – price. And we all know how that worked out.

In tough times, when sales are slow, one of the biggest expenses is payroll. The temptation is to cut payroll to save money. But when cutting payroll means sacrificing customer service, you’re just cutting off the nose to spite the face.

When your goal is to be the expert your customers can trust, payroll is no longer an expense, it is an investment. Instead of cutting staff, teach them to service better, to connect stronger, to sell more. Help them become more profitable for your business. Treat them like an asset, like an investment, and leverage that asset to get you the best returns it can.

If you have to make cuts, trim the fat. Cut out the inexperienced, non-productive, non-performing staff. Just as you would drop the stocks that don’t perform in your portfolio, drop the staff that don’t perform. And don’t worry about what they make. There is a reason all those Circuit City employees were making so much – they knew more, they worked more, they sold more. And the same is probably true with your staff, the most productive members make the most (if not, they deserve a raise). Keep the productive ones, give ’em raises, and cut the non-productive staff.

Price-Slashing and Payroll Cutting, two big mistakes you can’t afford to make in this economy.

The third? Marketing. We’ll save that for next time.

-Phil

No More Pollyanna, It’s Time to Talk Cash

Okay, enough Pollyanna posts about being positive in a down economy. Enough about turning off and tuning out the media. You can only control a few things. Over the next few weeks we’ll talk about those few things you can control in concrete ways.

First, and foremost, is Cash Flow. In retail cash is king. Without it you’re dead in the water. With it you’re ready to meet the new demands of a new market.

The tricky thing is that cash is directly related to inventory. Too much inventory, not enough cash. Too much cash, not enough inventory. How do you find the balance?

Let’s be honest. Most of us don’t have too much cash and too little inventory. We’re just not that smart:-) So start with this simple thought. If cash is tight, if you’re struggling to pay the bills, you probably have too much inventory. More importantly, you probably have too much bad inventory – what we call the dogs. And if these dogs won’t hunt, you gotta set ’em loose.

How can you tell if a dog won’t hunt? Some dogs are easy to spot. If you haven’t even sold half of your inventory over the course of a year, it’s woofing big time. Some dogs are harder to spot. A simple, very important mathematical equation called Gross Margin Return On Investment (GMROI) does the trick. GMROI basically is a measurement of how much money you make on the money you invest in your inventory. The formula is this:

GMROI = Gross Profit divided by Average Inventory at Cost

And Gross Profit is simply Sales x Profit Margin.

So you really only need three numbers to figure out your GMROI
1) Gross Sales
2) Profit Margin
3) Average Inventory at Cost.

I use a monthly average inventory and yearly sales, but you can choose to measure however you want. Also, you can use this formula on a single item, on a group of items, on a whole department or even on the whole store. I track GMROI very carefully for the whole store, each department, and each vendor, but I use it on individual items when a product I really like doesn’t seem to be pulling it’s weight.

Here’s a hypothetical situation to put it into numbers:

Gross Sales = $5,000/year
Profit Margin = 40%
Gross Profit = $2,000 ($5,000 x 40%)
Average Inventory = $1,200/month
GMROI = 167% ($2,000/$1,200)

That means for every dollar I invested in this product over the course of a year, I made $1.67. If your GMROI falls below 100% then you are losing money on that product.

Calculate the GMROI for your store, for each department, and then for each product you don’t think is selling well. Compare the product GMROI to the department and overall store. You’ll have a quick idea of how well that product stacks up and if it’s helping or hurting your cash flow.

If your GMROI is below 100% it’s a no-brainer. If it’s between 100-150%, you’ve got some serious work to do. Depending on your industry you may need a GMROI well over 200% to be successful. Only you can really know what you need to succeed. Fortunately, there are only three variables to manipulate.
1) Sales – sell more product and your GMROI rises
2) Profit Margin – raise your prices while selling the same dollars and your GMROI rises
3) Average Inventory – keep a smaller, tighter inventory and your GMROI rises.

Take the example above and play with the numbers. One by one, raise the sales, raise the profit margin and lower the inventory. See how a 10% shift in any one of those numbers affects your GMROI. You’ll find that a 10% decrease in inventory has the highest impact and thus the best results for your cash flow. And how do you cut the inventory? By getting rid of the dogs. They aren’t helping sales anyway.

Just do what I do. Identify them, pull them from the floor, mark them half off and have a big sale once or twice a year (not too often, you don’t want to train your customers to wait for the next sale). Invite all your transactional shoppers in for the big event and watch those puppies fly out the door. Turn the dogs into cash and invest that cash in the products that give you the best GMROI.

Yeah, you gotta do some math. But believe me, it’s worth it!

-Phil