Once upon a time, when dinosaurs still roamed the earth, making purchases for MI retail stock was a simple task. Everything cost 50 percent of what it sold for at list, and we’d mark it at list, and it would sell. It was a simple process, and as long as you sold everything you bought (preferably several times a year), life was good. If a product turned out to be hard to sell, we would have a sale, maybe end up with a low-end margin of 35 percent, and we’d make up the difference somewhere else.
I’d give a lot to see those days again, when margin was assumed to always be 50 points. I imagine you’d enjoy returning to that time for a few years, as well. Unfortunately, internet discounters started a race to the bottom, then Minimum Advertised Pricing (MAP) came about to halt the slide, and now we’ve kind of leveled out to where margins are typically in the 35-percent to 40-percent column. High-dollar items or high-demand items may net only 25 points, and we gripe about that, but we still buy and sell those products at 25-percent margin unless we can find a higher-margin alternative. Manufacturers of these low-margin items would sometimes tell us, “Hey, you can always make up the margin on accessories. Those are still 50 percent!” I actually had a rep tell me that last year, and it was apparent he hadn’t bought and sold any accessories in retail recently. Accessories are frequently in the 35-percent doldrums range now, and some hot sellers can net even less.
So, what’s a retailer to do? We need a margin of 40 points to stay open, but MAP frequently won’t support an average of 40 percent. We get bombarded with sales and bargains all the time, but many of those don’t help our bottom line. Sometimes, you have to look at the dollars per sale, not just the margins.
Sometimes, the higher margin nets fewer dollars. Take the humble headstock tuner, for example. Every rep has a version of that. Say you’re buying a name-brand headstock tuner at $11 each, and making $7 each time you sell one. That’s 40 points, and that sounds OK. But, you get a call offering a knock-off version of that tuner for only $6 each. Wow! You can sell those at a 50-point margin ($12), and that’s 10 points better! Sounds great, but now you’re losing a dollar each time you sell one. You’re making only $6 per sale, versus the $7 per sale you were making earlier. Without even getting into the discussion of “it’s harder to sell a knock-off than the name-brand,” sticking with the name-brand in this instance is the better idea, based solely on the dollars netted per item sold.
Recently, one of our reps brought by his version of mini pedals. We’ve all seen these, the skinny pedals that sell in the $35 to $50 range. There are numerous brands of these, many I’ve never heard of, and they all have funky names and do sort of the same thing. Chorus, distortion, phaser, etc. (I suspect most of them are made in the same plant.) My initial reaction was “Why would I stock a $45 unknown pedal that’s hard to sell when I have a major-name pedal for $79? If the reasoning in the paragraph above holds true, I’ll lose money selling the $40 mini pedal. Just for fun, I did the math on these particular mini pedals, and a $40 version of our $79 pedal actually netted more dollars-per-sale than the name brand, because of the low margin on the name brand, and the high margin on the mini pedal. True, it’s some weird, off-brand pedal, but the $40 version sounds pretty good, and a lot of our customers would be glad to pay $39 less just to own a new pedal. Players who would consider the $40 item aren’t looking for a vintage Tube Screamer, they’re looking for something new they can afford to play with. They might choke on $79, but not on $40. So, the knock-off might be just the ticket to transfer their money into our cash drawers.
These are situations every retailer has encountered, so why bother with these examples?
Accessories have become the lifeblood of many MI retailers. It’s harder to make money on serialized items with a 25-point margin, especially when those low-margin items are coupled with internet sellers who are hawking no sales tax, free shipping and lots of bundled accessories to sweeten the deal. Stocking a $3,000 guitar or keyboard at 25 points just isn’t all that profitable, if it sits in the store longer than a month. By comparison, the accessories that sell for 35 to almost 50 points are more affordable, easier to sell and can even qualify as impulse buys.
It’s easy to fall into the routine of just looking at margin, and miss the “dollars per item sold” calculation. Each new deal and each new product that comes along needs to be evaluated in terms of margin and dollar profit per unit sold, and then compared to what you already have in stock. If you figure out those two numbers, and neither of them works out, you don’t need the new product, no matter how attractive the price sounds. If the numbers work to your advantage, then you have to consider the more elusive variables that determine if the product is a good fit in your store or not.
What we cannot afford, though, is to off-handedly buy or deny a product without first running the margins and dollars per sale. There are tons of interesting products and variations out there, but if the numbers don’t work, those products work against you, not for you.
Happy trails.