Friends...You probably know a lot about pricing. After all, you have many years’ experience doing just that. Think about this: pricing the way you know how is worth little more than one year of experience repeated over and over. You’ve probably heard the phrase that 

“it ain’t braggin’ if it's true." 

Over the years I’ve studied pricing philosophy and practices probably more than 99% of the people in our industry. I’ve learned from experts whose entire careers are focused on pricing philosophy and practices through their educational programs and reading their books. I’ve sorted through the differences between business models and their best pricing practices, and I’ve asked them raise margins, and earn more profit since the entirety of a price increase you are afraid to take would have gone directly to YOUR bottom line.

In the limited space and time I have to share what I’ve learned with you, I am going to take a high level approach to the subject rather than cutting to the specific practices and techniques without providing the basis and understanding. If you’ll give this serious thought, it will allow you to understand pricing in a different way, and integrate into your own philosophy and practices.

Low profit is a symptom of incorrect pricing practices, among other issues. The root cause of low profitability is not a pricing issue though. It is a lack of having a solid foundation of understanding of pricing practices based on a strategic business model.

It is widespread in our industry to practice cost markup and margin based pricing based on the cost of the product. One of the problems with this is that even if the markup was high enough, the understanding of value creation and thus the practice of creating value fall short. This leads to systematic shortcutting of the accepted pricing procedure. I call this “Calculator Roulette”, similar to Russian Roulette, a chance game of suicide played out by people who have a faulty mental perspective. I’m going to describe how Calculator Roulette works and you see if this isn’t exactly what you, and your staff, do at times.

Here’s how Calculator Roulette works:

One typical shortcut is that we take the price list or invoice for a particular product and then discount it because we’ll get a discount or rebate.

Sometimes we excuse ourselves from adding the freight to the cost, either through not knowing that it is a cost directly attributable to the product, or failure to accept that it is. Often adding freight is skipped because “it isn’t much”, or it is reduced “because the freight was too much and we can’t pass that much cost along and get away with it.” You’ve done it and your people have.

Then we do the math taking the cost and multiplying it by the markup factor, or maybe working from the desired margin by division. Often enough, the number that shows brings the thought, “we can’t get that for this”. So we pull the calculator trigger again with a lower multiple. No, that’s not good either. Try again and eventually we get it down to the price we feel “comfortable” will sell.

Pull the trigger enough times with enough products with this thinking and “bang” your profit is dead, as reflected in the year end P&L. In the 2014 P&L Study only five garden centers out of 70 that participated had Best Practice profitability levels. I wager, based on my understanding of how pricing is actually done, that most of the others failed to price correctly because they failed to understand the root issue.

There are several cures to this problem of low profit. They are grounded in a lack of understanding how pricing should be approached in the first place.

Fail One 

Your company culture has a counterproductive mindset based on incorrect beliefs about Pricing and Profitability.

The people in our industry (in general) have low value esteem. Many believe that this is a business that can only be driven by passion for our product and it is a violation of principle to strive for a level of profit that exceeds what we can reasonably survive on. The trouble is that this goes hand in hand with failing to acknowledge that low profit is simply and clearly not enough to pay for our long term real needs. Ouch. Sorry I know that hurts many of you. These wounds will heal when we accept them and take responsibility to prevent them from continuing.

Fail Two

Your company has no strategic business model focus.

There are four basic retail business models and three of them simply do not work well for specialty retailers.

Those that do not work are:

A. Cost-Plus - This is the practice that has been universally accepted by our industry. We can argue over whether 100%, 150% markup, or 45%, 50%, 55% or 60% mark in margin can work with or without variation between product categories. All of those are a factor based in cost. Costco is quite famous for this model. Their economies of scale, and membership fee model allow them to operate on a 15% markup. We do need to do the math along the way to ensure we’re on track, but the basis of our pricing should not be here. 

B. Promotional - This is the pricing that we are most often exposed as consumers and that heavily influences our belief and practices that we must mark up enough to cover our markdowns, discounts, coupons and clearance prices. The majority of mainstream stores including department store chains practice promotional pricing. I say that “you can’t out Kohl’s Kohl’s. They have this model down to a fine art. Just try to pay full price for anything they sell - ever. JCPenney tried to escape this rat race a few years back but failed miserably to transition (not that it couldn’t have been done successfully), and went back to playing the game they trained their customers to expect all those years - after many of their customers defected to Kohl’s and others. I can’t say that this model doesn’t “work” to drive sales volume, but it is at the expense of profitability of all of those companies if you check their annual reports. And that’s a fact.

C. Competitive Price - Big Box and Category Killer retailers heavily advertise low prices on specific items in an attempt to get customers into their stores where they “make it up on the shopping cart” that includes other items that they do not have the lowest (or low at all) prices. Walmart, The Home Depot, Lowe’s, Target, Cabella’s, Dick’s Sporting Goods, Bass Pro Shop, and just about any other retailer that puts out a weekly circular are competitive price retailers. And again, the profitability of all of them is very low and tightly managed to keep their shareholders at bay. At their scale low profitability is tolerated because of the volume.

These three strategic retail modes are large scale mass market “successes” but have been subsidized by the growth of their chains of stores. In recent years they are all struggling to hold onto same-store sales or to achieve much profit. They are struggling to keep their market share because there are now too many stores in the majority of the markets to share the consumer dollars and this is leading to buyouts, mergers, consolidation, or bankruptcy.

This leaves us with the fourth strategic business model.

D. Perceived Value-Add - This is the domain that specialty independent retailers can achieve profitability in - when they are well managed. Prices are determined by the perceived value to the consumer that can be created, rather than by the cost of the goods. (The cost of goods is still a necessary benchmark to ensure an acceptable minimum margin is exceeded.)

The Limited house of brands including Limited store, Limited Too, Victoria Secret, Bath & Body Works, Henri Bendel and numerous others provide a solid example of large scale use of this model because they play it so very well. Their stores are more refined than the other models with better infrastructure design including lighting and fixtures, as well as better merchandising, and service. We cannot buy anything in their stores except for that stores’ brand, and we cannot buy any of their brands in any other store on earth, including those their parent company owns. They still have some issues related to many of their store locations being in troubled shopping malls and Internet competition, including that from their own web stores.

So let’s look now at the other three Profit Robbing Profit Fails.

Fail Three

You focus on price first, rather than creation of perceived value. This is because you are practicing one of the first three models, or a combination that includes several of them to the degree there is no clarity.

Fail Four

You don’t know pricing techniques that drive sales and margin volume. This is because you’re allured to the practices of those first three strategic business models.

Fail Five 

You refuse to learn and change all of the above.

I’ve presented the basic foundational profit robbing pricing fails that are widespread in our industry. So what can we do?

There are particular ways to go about initiating and instituting a shift forward in your pricing, otherwise you will fail. Your staff may be resistant and will need to be led through a process to replace some of their beliefs about pricing. Owners are often the most reluctant to raise prices because of realistic fears including those of upsetting and driving customers away. Often there has been a backfire experience of increasing prices, usually doing so without correspondingly portraying an increase of perceived value. This is what I call “learning the wrong lesson” from a bad experience. Rather than learning to not try again, the correct lesson is “try again more intelligently”. We must overcome our wounds when we make a mistake and go back and figure out what we did wrong, learn the right way, and try again more intelligently.

To increase profit through pricing more intelligently we must “pay our dues” to earn the right to increase prices. Your price increases will need to be made in ways customers don’t necessarily notice. This is done by choosing to understand and stick with the Perceived Value Add strategic business model, by portraying a higher value with store atmosphere, product presentation, and services, and by implementing specific pricing presentation tactics.

I’ve been at this pricing game a while and I’m not foolish enough to believe that you’re convinced that what you’ve read here is correct, or that you’re really going to change. But if you are realizing the folly of accepting low profit without increasing prices, or at least entertaining the idea let’s talk about it and come up with a plan to get you on the path to profitability with a better defined strategic retail business model.

Your friend, 

Sid