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The Math Behind a Sale

I had a vendor recently ask me to offer their items at 25% off for a month. They would split the difference of the sale off the wholesale price (12.5% discount on the cost). They figured this would be a big enough deal to drive a lot of traffic.

On the surface it looks good. 25% off a popular brand would probably drive some business. So I decided to do the math.

We’ll use a hypothetical item, but the math comes out about the same no matter how you slice it. Let’s assume two things… First, I have an item that I buy for $10 and sell for $19.99. Second, I expect to sell 10 units of this item every month.

In a typical month, my numbers would look like this:

Total Cost = $100 (10 units x $10 each)
Total Revenue = $199.90 (10 units sold x $19.99 each)
Gross Profit Dollars = $99.90 (Revenue minus Cost)

Now let’s do the math with the sale discount. My new cost is now $8.75 ($10 minus 12.5%). My new retail is $14.99 ($19.99 minus 25%)

If I sell the same 10 units the math looks like this:

Total Cost = $87.50 (10 units x $8.50 each)
Total Revenue = $149.90 (10 units sold x $19.99 each)
Gross Profit Dollars = $62.40 (Revenue minus Cost)

Even though my discount was only 25% and the company was willing to lower the cost, the same ten units I was expecting to sell yielded a 37.5% decrease in Gross Profit. Wow!

Just to make the same Gross Profit Dollars as I already expected to make, I would need to sell 16 units at these new prices.

Total Cost = $140 (16 units x $8.75 each)
Total Revenue = $239.84 (16 units sold x $14.99 each)
Gross Profit Dollars = $99.84 (Revenue minus Cost)

To make this promotion worthwhile, I would need to sell 60% more units. More importantly, those 6 extra units had to be extra sales, not just sales from next month’s expected ten units sold.

How do I sell 60% more units to new customers? I have to advertise. I have to announce the sale, create signs, post notices, change numbers in the cash register, alert the staff, order more products, schedule more staff.

Gee, by the time I do all that, I’m going to need an 80% increase in units sold to cover all the increased expenses.

It takes a lot more volume than you might think to make it up with volume as the old adage says.

-Phil Wrzesinski
www.PhilsForum.com

PS The math isn’t that hard. Do the math and see what the numbers tell you. If you believe you will definitely sell 60-80% more units at the lower price, go for it. If you believe your Transactional Customers will jump on this item, go for it. If you believe the sale will draw enough traffic that will buy other regularly priced items, then consider the lost dollars on the sale items an advertising expense. If you need to move out a dog that isn’t selling, go for it. Just do a little math first, so that you know what results you’re shooting for.

PPS If your initial profit margin is lower than 50%, your increase in units sold to make the same gross profit dollars in a sale like this goes up. Just saying…

What Do You Sell?

I don’t sell toys. I sell Play Value.

I don’t sell baby products. I sell Peace of Mind, Safety, and Love.

I don’t sell books. I sell Imagination, Travel, and Dreams.

I don’t sell hobby products. I sell Creation.

So why would I be advertising toys, baby products, books and hobbies when I should be selling Play Value, Peace of Mind, Imagination, Creation and Dreams?

Not everyone who sells toys sells Play Value. Not everyone who sells baby products sells Peace of Mind, Safety, and Love. Not everyone who sells books sells Imagination and Dreams. Not everyone who sells hobby products sells Creation.

But almost everyone who buys toys, baby products, books or hobby products wants Play Value, Peace of Mind, Imagination, Creation or Dreams.

It isn’t products that they want. It is feelings. Sell the feelings. Sell your customers what they truly want.

-Phil Wrzesinski
www.PhilsForum.com

PS This is called flipping the conversation. Flip the conversation you have about your store from the tools you sell to the projects those tools create. Don’t talk about the hammer, talk about their dream tree house that hammer will build. Don’t talk about the shoes, talk about how they will feel when they finally run that race. Don’t talk about gift ideas, talk about the smile on the recipient’s face and the hugs shared. That is how you speak to the heart of your customers.

PPS The smarter of you already figured this out. I’m not just talking about your marketing. I’m talking about your customer service, too. Align your services and approach to customers around their feelings and you will feel it, too. At the cash register.

I’ve Been Slimed

We all remember that scene in Ghostbusters where Bill Murray’s character comes in contact with a ghost in a hotel. A nasty little creature that leaves his character covered in icky goo.

I had that feeling last week. 
It started out harmless. A photo shoot for our church for the new directory. The photographer was good. Put the family into great poses and took some amazing shots. Then the sales pitch began.
Don’t get me wrong. I knew there would be a sales pitch. I just didn’t know it would be this greasy. It even started with a grease board. Rather than give us a sheet of options, packages and prices, the photographer started right in on the hard sell – the large framed photo with the retouching, UV-protected paper, matted design. He had a grease board where he wrote down what we thought we might like.
When we asked for a price, he kept stating he would figure that at the end. We couldn’t get to the end fast enough as he kept pushing product after product on us. 
We finally got to the end and he started to do his magic. He took another grease board and started making check marks and writing things we couldn’t see. Finally, he presented us a price starting with what we “might have paid” had we done a photo shoot somewhere else. There was a total price with little explanation. We had to keep digging to find out what each item was actually going to cost us. (Remember my Value Equation? Perceived Worth versus Actual Price)
Only after much digging did he show us the calculations on his grease board. The problem was that it was designed to make sense to him and not to us. All we were really left to do was divide the total price by the number of pictures we were getting and decide if we wanted to pay that much.
All in all, it left me feeling slimier than his grease board and not too thrilled with the company. I wouldn’t ever want to hire them or recommend them to anyone else. The pictures were great! The experience was horribly uncomfortable.
Here are three things they could have done differently that would have changed the experience for me completely.
First, be upfront about the sales pitch. Before I even scheduled my photo shoot, there should have been something telling me that this was an opportunity to get more than just a church directory photo. Even though I had gone through this before and knew there was that opportunity, it still needed to be spelled out in advance.
Second, be upfront and transparent about the pricing. Tell me the price of everything, especially when I ask. Heck, tell me the pricing before I even show up. Then I can plan for it, budget for it, and not be sitting there getting anxious about how much this might cost. Yeah, I know he is supposed to sell me. But remember that part of the transaction is earning the trust for another transaction.
Third, be honest. Don’t start your talk about costs with some mythical figure about how much it might have costed elsewhere. I don’t care about that. All I care about is if the price you are charging me is worth the value you are giving me. Most customers are savvy enough to know that the dining room set that is marked Original Price $16,500, Your Price $2499 was never worth $16,500. The only signal you are sending me is that you think I’m gullible. Not the best way to earn my trust.
Be upfront and transparent and honest. You’ll get the sale and the recommendation.
-Phil Wrzesinski
PS The obvious question is, would I have bought more or less had I known the pricing up front? I’m not sure. The only thing I know is that I probably will buy less the next time – if there even is a next time. And therein lies the problem.

Beware the Cocaine

This Thursday we are having our one and only big sales event of the year. We call it the Summer Fun Sale. My buddy, Randy, calls it the Make It Go Away Sale. Yes, it is a clearance sale where we mark all the slow moving merchandise, the dogs, down about 50%, put them on shelves in a special section right in the middle of the store, advertise the heck out of it, and turn those slow movers into cash.

When we implemented our current POS system in 1999 and discovered all the dogs we had in our merchandise, that Summer Fun Sale was huge. We set records from ’99 to ’01 for single day sales, surpassing the busiest Black Fridays and Saturdays before Christmas in fewer hours and at half price. It was crazy.

Today our buying is tighter. Our inventory is more under control. The only dogs are soft and furry and sell really well. We still have a few slow movers and we still have our Summer Fun Sale, but it will generate about 30% of the business it once did.

The downside is the effect. The sale, when it was huge, was so exciting. The influx of cash was a godsend to our cashflow. The traffic, the excitement, the smiles all felt so good that when the party ended we wanted to ramp up another party and do it again. It was addictive. Like cocaine.

My dad lamented the other day that this year’s sale just won’t generate the same kind of cash it did a dozen years ago. I reminded him that we also didn’t spend as much cash on merchandise that didn’t sell. And we won’t be taking such a hit on our profit margin because of tons of markdowns, either. Short-term the sale isn’t quite what it used to be, but long-term the numbers are much better.

The hard part is the allure of the instant cash, the allure of the excitement of the big sale. Part of me wants to mark down more stuff, just to make the sale bigger. Part of me wants to give away good merchandise, products that will sell at full price, just to get the cash. Part of me has tasted the fun of a big sale and makes me want to slash prices deeper to get that taste again.

Yeah, it’s addictive.

Here’s your friendly, sober reminder. A clearance sale is a means to an end. The end is to rid yourself of merchandise that wasn’t going to sell at regular price. Plain and simple. Turn the dogs into cash. Don’t give away the workhorse, too, just to make the sale bigger. Only the dogs.

Some years you have more dogs, some you have less. Resist the call of the cocaine to make this sale bigger and better than ever. Don’t ever measure your clearance sale to a previous year. Make it only about moving out this year’s dogs.

You’ve been warned.

-Phil Wrzesinski
www.PhilsForum.com

PS We prefer a big, one-time clearance sale of select items over a year-round clearance room or sale rack or a blanket percentage off everything. The sale rack only trains people to wait for the markdown. The blanket percentage off everything means you’ll sell more of your good merchandise at prices lower than necessary without getting rid of the dead-weight products. Those kinds of sales feel good, but so does morphine and cocaine. The big sale gets all your Transactional Customers in at once to move out the goods you want to move and gets you a shot in the arm of some cash. Just be aware of the side effects.

Selling in a Showrooming World

Information wants to be free.
Everyone has a smartphone.
Much of what you sell can be purchased online – often for less.
It has never been easier for a customer to do all the research herself, scan a barcode, and get the best possible price.

How are you going to compete?

By doing what you’re supposed to be doing anyway – meeting the customer where she is, and giving her exactly what she wants when she wants it.

Yeah, we call that selling.

I spoke to a roomful of baby product sellers last week about this topic and spelled out a few simple ways to help you close the sale. My notes from that talk are now available in the Freebies section of my website.

Check out my latest ebook – Selling in a Showrooming World. Yes, it is FREE (see the opening statement above). Share it with all your retail friends and start selling (again).

-Phil Wrzesinski
www.PhilsForum.com

PS After you read Selling in a Showrooming World, go back and read Customer Service: From Weak to WOW! and Staff Meetings Everyone Wants to Attend.  Then, if you don’t think you can train your staff to close the sale, you might want to consider buying the book Hiring and the Potter’s Wheel and get yourself a staff that is a work of art.

I Did Some Showrooming

Showrooming (verb): The act of going into a store to see a product and collect information, then buying it from a different source cheaper.

It is the new bad thing that will be the demise of brick & mortar stores trying to compete with Internet warehouses with low overhead in tax-friendly states with minimum wage order pickers. It is the new approach by Amazon to steal your customers away.

Except it is not all that new.

People have been shopping around for a better price for years. Customers have been going into stores to see items, get information, and get advice only to turn around and buy the item somewhere else cheaper ever since the day the second caveman opened a competing spear store. Grog undercut Brug’s prices and showrooming began.

It just hasn’t been as brazen until now. We all have experienced the customer who asked us questions, picked our brains, then snapped a pic of the barcode and left. That customer is no different than the catalog shopper of the last century, no different than Brug’s brother-in-law who went to Grog’s store first.

Those customers are simply Transactional Customers. They look at each shopping event as a singular activity. They do all the research they can on the product, then they go off on a hunt to find the best price. If you don’t have the best price, you don’t make the sale.

I’ve done it. You have, too. You have looked at an item in a store then bought it elsewhere cheaper. We all have a Transactional side in our shopping habits on certain categories.

I think where the frustration lies is that we believe that just because she entered our store, she is our customer. No she isn’t! She isn’t your customer until she decides to make a purchase from you. It is up to you to get her to that point. And even when she makes that purchase, she still isn’t your customer. You have to earn it over and over and over again.

So if we want to combat this new (old) threat, the first step is to recognize that she is not your customer until the transaction is completed. She never was and won’t be unless you get her to buy. It is called closing the sale and it is something we all need to improve.

Of course, closing the sale has changed since Grog’s day. Let’s quit complaining about showrooming and start learning new ways to close the sale. Okay?

-Phil Wrzesinski
www.PhilsForum.com

PS I talk a little about closing the sale in my free download Customer Service: From Weak to WOW!  I am doing a presentation on Selling in a Showrooming World at the ABC Spring Educational Conference in a couple weeks.  Look for the free eBook to land sometime after that.

What Does Your Customer Want to Know?

How much product knowledge is enough product knowledge? Simple. Ask yourself…

What does the customer what to know?

Then make a list for each product.

The customer wants to know (in no particular order)…

  • How much does it cost?
  • Where was it made?
  • What materials is it made out of?
  • Why it will solve her problem?
  • What makes it different from all the others in its category?
  • How long will it last?
  • What other options and accessories are available?
  • How soon can she have it?
  • Will she have to put it together?
  • Why should she buy it from you?

Make a sheet that answers all those questions for everything you sell and your staff will have the product knowledge they need.

-Phil Wrzesinski
www.PhilsForum.com

PS The hard part is getting to know the customer well enough to be able to answer the right unspoken question. Which one of those questions is the most important to her? Answer that one first and you have a far better shot at making the sale.

Trust is Broken

Does it frost you that people shopping online are significantly more willing to trust an anonymous customer “review” than what your well-trained sales staff might say about a particular product?

According to Nielsen, although 92% of people surveyed will trust word-of-mouth from friends and relatives, online reviews are close behind at 70%. No form of advertising from the store could even break 50%.

Yet, according to research, 10% of all online reviews are fake.

Still the customer is more willing to trust anonymous customers online than they will trust the store. And it is easy to see why.  Just look at this picture.

This was the sign outside of an Eddie Bauer store at Briarwood Mall in Ann Arbor. We all know “Exclusions Apply”. In fact, if the sign hadn’t said that at the bottom, we all would have still thought it anyway because exclusions always seem to apply. All the claims made by stores these days are outrageous to get your attention and then filled with so many exclusions and fine print disclaimers that the original deal isn’t any deal at all. Heck, every time a radio ad comes on with some special offer, almost half of the ad is filled with some guy speaking the legalese terms and conditions so fast you couldn’t understand them anyway.

Even if you haven’t personally done this in your store, you are the benefactor of a culture where exclusions always apply and every deal is far less than it is advertised. Nothing is what it seems and there is always some loophole hidden somewhere. In other words, you have to reap what a whole bunch of sloppy, lazy marketers have sown.

There is a way to counter this. There is a way to build back the trust that has been broken for so long.

Tell the truth.

If there is a disclaimer, don’t make the claim. If there is an exception, tell it right up front.  Imagine how much more believable and how much more excitement that same sign might have generated if it said…

“150 different items marked 40% off original price!”  

The original way, you walked in already defeated, just knowing the item you wanted would be part of the exclusion. This new way you walked in with excitement wondering which one of the 150 items would be something you wanted. Two signs that basically say the same thing. One creates disillusionment, one creates excitement. Why do so many stores get it wrong? Sloppy, lazy marketers. Don’t be one.

The formula is simple… No disclaimer, no exclusions = truth and honesty = more believable = more trustworthy = more excitement = more sales.

-Phil Wrzesinski
www.PhilsForum.com

PS This is just the first measure toward building trust. Be truthful and honest in your advertising and marketing. Then teach your sales staff to be truthful and honest in their presentations. You’ll stand out in the crowd of exclusions and disclaimers.

Fair and Square

My wife is frustrated (and thankfully, it is not my fault). She used to love going to JC Penney. Well, love might be a strong word for someone who finds shopping a chore. But now she finds that JCP rarely makes it on her list. And she is not alone. JC Penney just reported that same-store sales fell a whopping 26.1%!

Many are blaming their new Fair and Square pricing policy.

My wife is one of them.

She says it is neither Fair nor Square. As she pointed out to me last night, our prices are Fair and Square. They are clearly marked on every package. There are no misleading header cards on the racks. There are no surprises at the register. There are no gimmicks, exclusions, mark-it-up-to-mark-it-down contrived sales. There are no hidden fees, add-ons, hoops or loopholes. The price you see is the price you pay.

That is what JC Penney promised us when they launched this new pricing policy at the beginning of the year. The problem isn’t in the policy. The problem is they failed to deliver what they promised.

Many pundits will wrongly claim that customers want sales and deals and JCP’s failure is because they aren’t offering enough deals. I will argue that their failure is because they didn’t actually make their prices Fair and Square. Every time my wife went in, the prices were not clearly marked, some items had no price at all!  The header cards rarely matched the price on the product and even less the price at the register. The prices seemed to fluctuate faster than the stock market.

Before you listen to the pundits try to tell you that customers only want sales and discounts, understand that many retailers are quite successful offering pricing that is fair, clearly marked, and not jumping all over the place. JC Penney promised us that back in January. Empty promises lead to empty stores.

-Phil Wrzesinski
www.PhilsForum.com

PS There is a Fair and Square pricing policy that keeps your customers happy and your margins strong enough to be profitable. Download the free eBook Pricing for Profit here.

Don’t Marry Your Inventory

I had a buyer who insisted that he had to keep 24 pieces of a particular item in stock.  It was a “must have” item, he told me time and time again.  Fortunately, we have a POS system that tracks the sales of these “must haves”.  In the previous 18 months he had sold exactly one.

I define “must haves” as items people come in asking for by name.  If your customer walks through the front door and says, “Where is…?”, that is a must have.  If you bought 24 of an item and 18 months later you still have 23, that is a must go.

The problem we often run into is two-fold.  First, we believe strongly in the products we buy.  If we didn’t we wouldn’t (shouldn’t?) buy them in the first place.  Second, we don’t like to admit our mistakes.  So we end up marrying our inventory, sticking with them far longer than we should, hoping things will work out.

Don’t marry your inventory.  Instead think of your relationship with your inventory as more of a foster parent trying to find each item its forever home.  Your inventory is supposed to leave you – the quicker, the better!  Your inventory needs to move on, create new relationships.  Your job is to help it go.  Some of your inventory is so good at meeting new people that it goes easily and often.  Some takes time (and discounting).

So accept that you will make buying mistakes.  We all do.  Accept that your inventory is not your partner.  Change the relationship dynamic and do what you have to do to move it out.  Pack the bags and smile every time you place your inventory in a new home.  The good news is that there will always be more inventory to replace the ones you sent away.

-Phil Wrzesinski
www.PhilsForum.com

PS  Not sure if you have married your inventory?  Check out my e-Book Inventory Management (free download) and do a little math to see if your inventory levels are where they should be.

PPS  How long should you hold onto something before you discount it?  It depends on the type of product you carry and the type of retailer you are. I have retail friends who give a product 30 days to prove their worth.  I know other retailers who give it one quarter or season.  I like to give my toys one Christmas to find their forever home on their own before I step in to help.  It all depends on the product and type of store.