Inventory and Pricing

Your selection of merchandise is what will set you apart from other stores. Your decision to go into retail was based on the desire to meet an unmet need. Don't lose your focus now and undermine all the effort that went into planning by buying any old thing. Product selection is all about positioning. It's one thing to stock every item in a category; it's quite another to selectively choose those products that enhance your reputation.

"Successful inventory forecasting and management comes from being in the business," says 20-year veteran hi-fi sales and service retailer Jim O. in Thomasville, Georgia. "There are no shortcuts or formulas. In the beginning, we went to the manufacturers' reps and asked them what the most popular items were and what was selling. Now we go to home theater forums on the Internet to see what people are talking about. We look at the market and what others are doing. There's so much competition--and the margins on fast-moving popular items are slimming down--so you have to stay alert. This is true of any type of inventory, not just ours."

Establishing Your Inventory
Here is a simple procedure to follow to help you decide which merchandise you should offer and which you should not. If you are dealing with electronics or clothing, you may wish to do your breakdown on the basis of brand names. If you are organizing a food business, simply list the food supplies you would have on hand the day you open.

We asked a motorcycle dealer to explain how he would use this model.

1. Divide your inventory into broad classifications, such as $30,000 for motorcycle hard parts.

2. Divide each broad classification into sub-classifications--for example, engine parts, wheel parts, frame parts, transmission parts, dress-up parts, drive-line parts, and tune-up parts.

3. Allocate a certain percentage of your capital to each sub-classification-for example, 20 percent engine parts, 5 percent wheel parts, 5 percent frame parts, 5 percent transmission parts, 30 percent dress-up parts, 10 percent drive-line parts, and 25 percent tune-up parts.

4. Locate resources that will sell you the products you want to stock. Read Hot Bikes magazine, the Motorcycle Dealer News Annual Buyers Guide, Thunder Press newspaper, and Easy Rider magazine. Get catalogs from Custom Chrome, Parts Unlimited, Drag Specialties and Nimco.

5. Make sure each item purchased gives you the best possible markup and that the retail prices will fit the price lines you have set for your operation. The store's target markup is 50 percent on services, 40 percent on accessories and clothing, and 35 percent on hard parts.

You only have so much money allocated for merchandise. The challenge you face is to achieve maximum sales from what you buy. By first determining how much of what you are going to buy, you discipline yourself to be discriminating and to keep your buys in balance with your overall inventory needs. Faced with an enthusiastic salesperson, an attractive deal and a hunger to buy, you need all the will you can muster to remember your priorities. Overstocking in one area at the expense of other areas is a dangerous proposition. Take your buying plan with you and stick to it.

Your Pricing Philosophy
Decide on your basic pricing philosophy: Will your prices be above the market, competitive or below the market? You may have already answered this question when you decided what kind of business and image you wanted and formulated your business plan.

Pricing for profit is vital to your business. But pricing should not be driven by profit motives at the expense of fair, ethical tactics and competition. Profits should be the result of smart business, not a means to an end. With good business relationships and products priced correctly, you will generate sufficient sales to provide the capital you need to stay in business and enjoy some profits.

In making your pricing decisions, you need to answer these questions:

  • What prices are shoppers willing to pay for the merchandise?
  • Where do you want to be in comparison with your competitors' pricing: equal, above or below?
  • What is the suggested real price proposed by the supplier?
  • What are the qualities or characteristics of the merchandise that influence a shopper's perception of quality and value-style, perishability, scarcity, richness, commodity or other?

Narrowing the decision-making process even further, give careful consideration to your specific pricing objectives:

  • Return on investment: Establish retail selling prices that will yield a specific return-of-profit percentage on your investment.
  • Maximum profit: Set prices designed to produce the highest possible profit percentage you can expect to earn on the goods you sell.
  • Sales increase: Work up prices that should produce a specified percentage increase in overall store sales. Usually this involves reducing prices to sell more merchandise.
  • Improved cash flow: Establish short-term prices to bring more sales dollars into your business.

Sometimes feelings of guilt are involved in pricing. Some price specialists claim that most consumers with limited discretionary income often have guilt feelings about buying certain items, especially non-necessities. However, if the retailer can appease these guilt feelings, the customer is more apt to buy. Therefore, consider giving incentives to buy expensive items or give a shirt or tie away with a three-piece suit.

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