Monday, October 13, 2014

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.

French Lick Resort

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.

Bandon Dunes

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. The hypothetical $82 to $89 shirt markup increases the margin by $14 on two shirts and provides a 'buy two and get a free hat, glove, dozen pinnacles, etc.' promotion.
Bandon Dunes