The Spring Paint Sale
As we come into spring the weather becomes warmer, flowers blossom, customers come out of their winter hibernation and paint retailers discount paint. When you discount paint, you should increase sales. Unfortunately, you will probably not increase profits. Why? Because you will not sell enough paint to generate the same gross profit that you were making before the price cut.
Let me explain. If you achieve a margin of 25% on a line of paint that you now decide to discount by 10%, you will need to increase sales by 66.7% to make the same gross profit that you were making before the price cut. In other words, if you sold 100 tins last week, you need to sell 167 tins this week.
An overly optimistic, highly motivated paint retailer might think that this is easily achievable, and it could be if you had no competition! But in the real world, there is a good chance that as soon as you drop the price, your competition will too. So, how do we turn this potential disaster into profits? The answer’s simple – sell the add-on, such as a paint brush.
Case Study: A tin of paint that normally retails for $30 and has a margin of 25% (and therefore a cost price of $22.50) is discounted by 10%. Let’s assume that overhead expenses (rent, wages, power, etc) to run the store make up 20% of each dollar of sales. Now, if we sell a tin of paint at a price of $27 ($30 less the 10% discount of $3), we will achieve the following result:
Sale price $27
less cost price $22.50
Gross profit $4.50
less overheads ($27 x 20%) $5.40
Net loss $0.90
So, every time you sell a tin of paint, you lose nearly a dollar in net profit. But you can cover that loss by selling the paint brush. How do we do that? Either ask the customer if they need a brush, or merchandise it close to the counter. The effect on profits is unbelievable, as this example shows:
Sale price $8
less cost price $4
less overheads ($8 x 20%) $1.60
Net profit $2.40
By selling the paint brush with the paint tin, we have turned around a loss of $0.90 to a profit on the combined sale of $1.50. Remember that anyone can sell paint at a cheap price, but only the high profit retailers sell the paint brush.
A new approach to pricing
A way to make even more profit on this sale is by doing the reverse to discounting the tin of paint, i.e. increase the price of the paint brush. Some retail industries call this ‘margin management’.
When I mention this to hardware stores, I often hear cries of despair about losing sales, customers and even their business. I agree that may happen if you increase the price of those highly competitive cash cows that can make up the bulk of your turnover, i.e. paint, but what about all the other products?
Of course, there is a probability that you will lose sales in those lines that you increase the price in. The trick in margin management though is to know what percentage of sales you can afford to lose. In our first example, we were selling the paint brush for $8 after purchasing it for $4, leaving a gross profit result of $4 at a margin of 50%. Let’s say we now decide to increase the price on that paint brush by 10%, to $8.80. The table tells us that we can afford a drop in sales volume of that paint brush of 16.7% before gross profits are adversely affected.
If you do your marketing and promotion right to increase store traffic, and if you are doing your merchandising correctly, you will probably suffer no drop at all in impulse lines, add-on sale products and low sale value per unit items that are less price sensitive. Monitor your sales, and if your sales of this paint brush take a hammering, consider reducing the sale price back to the original $8.