Wednesday, April 28, 2010

Pricing - the Pariah

Any discussion of pricing or markup formula at most golf facilities is best avoided for two reasons.

1. There doesn’t seem to be any two pro shops that markup product quite the same.
2. There seems to be some sort of hallowed reverence at most shops regarding the markup formula that is employed – perhaps because of some noteworthy history as to its inception.

Retailers everywhere are experiencing shrinking sales and more price conscious customers. This being the case it is more important than ever to make the most of each sale without trying to make so much so as to lose the sale and so I felt it time to touch on the pariah.

The principles that I want to apply here will be in an effort to price goods as to what the “market will bear” (MWB) keeping in mind always that price is not all we are selling (we are selling service, 'the experience', etc.) and that promotions are probably a better first markdown than the typical twenty percent.

Here is a typical occurrence and some math and definitions. UPS drops off a delivery of one hundred shirts. An assistant enters the goods into inventory and prints price stickers. The shirts cost $38 each and there is a $3 logo charge = $41 per shirt. The markup formula at this hypothetical shop is keystone – 100% of the wholesale price. The shirt will retail for $82. The gross margin is the percentage of the sale resulting from the markup. In this case: $41 divided by $82 gives a gross margin of 50%.

The principle of “market will bear” (MWB) applied here is a simple round-up process that is a result of asking the question “Will the consumer who will pay $82 pay $85? Depending on the shop and the knit involved this could be taken up a notch to “Will the member who will pay $85 for this golf shirt pay $89?”

Applying this principle to our delivery of 100 shirts produces the following:

$82 minus $41 = $41
$41 multiplied by 100 shirts = $4100

$85 minus $41 = $44
$44 x 100 = $4400

$89 minus $41 = $48
$48 x 100 = $4800 or an increase of 4% gross margin and an improvement of 17% markup over the standard formula.

It takes 1219 unit sales at $82 to produce $100,000 in revenue: at $85 - 1176 units and at $89 – 1123 units respectively. The increase in profit per $100,000 in sales depending on the extent to which the round-up principle can be viably applied could be as much as $4000 on almost one hundred less sales.

This is not necessarily practical when vendors pre-ticket their goods with suggested retails and that is one of the reasons it is always a good idea to be on the lookout for new lines that are not so well known. It is also the reason that building your own brand with quality private label goods should be considered as part of your selection. The other obvious way to increase initial markup is obviously to make a portion of the shirt buy off-price.

The bottom line is similarly affected when markdowns are reduced. The typical first markdowns of 20% are being acknowledged by retail experts as not working in today’s climate, certainly not being anywhere near as meaningful as they were a couple of years ago. A promotion on the same group of goods is an alternative worthy of an example. Consider the following:


The aged shirts are merchandised separately from the rest of the selection. The shorts were purchased specifically for the promotion at $16 a pair. I like this particular promo for a couple of different reasons.

1. It is perfect for any period of time between Memorial Day and Labor Day, particularly effective for Father’s Day.
2. There are a lot of customers who have taken to buying their season’s shorts at outlets.
3. Nothing beats free.

Using the $89 Shirt - here is the math:

Promotion - Retail

Shirt 1 $89
Shirt2 $89

Total sale $178

Promotion – Cost of Goods

Shirt 1 $41
Shirt 2 $41
Short $16
Total cost $98

Margin on sale = $80

Gross Profit – 45%

Markup - 82%


Again using the $89 shirt a 20% off sale yields the following:

Sale shirt -
$89 minus 20% = $71.20

Margin on sale – $30.20

Gross Profit - 42%

Markup – 74%

In this example we get rid of three times as many units per sale with the promotion, said another way it takes 1/3 as many sales to move the same number of units. This is also a great way to rejuvenate your bottoms business and the promotional short sold at $39 when the promotion is over is a nice margin generator also.

Assuming we could reduce the total markdown on our shirt business of $100,000 by 3% by staging promotions instead of running sales we would be adding approximately $3000 to the bottom line. Promotions are also more customer friendly in that the customer does not have to calculate the price and if marketed and displayed properly should certainly be more attractive, customer friendly and more fun.

The above examples may or may not be strategies that could be meaningful to your operation but whatever your pricing policy the overriding principles do not change. Creatively increasing your initial markup (IMU) or reducing your annual markdown (MD) by the smallest of percentage points can make a huge difference to your business’s success.

A good way to introduce my services to prospective clients is to let me spend a typical day. Since I work per-diem, this is an easy proposal. I can develop a buy plan in the morning, merchandise in the afternoon and have a staff service seminar early evening after the shop closes. Anyone interested in discussing such a day and getting to know me and what I do can call me at 443-309-3005 or contact me at to discuss details.

There is a very enterprising Assistant Golf Professional by the name of Brain Doback who has put together an informative blog that addresses the many hats worn by his peer group. Brian has become a friend who shares the philosophy that you can't have too much information. Take a look at Pay it Forward Golf. The link is to the right in "Sites to Visit".