Variable pricing: the secret of profit

By Joe Samulin Retail Advisory Services, Inc.

TZARIABLE pricing, which I preY fer to call visual merchandising, is not new. For yean merchants have used it to increase profits.

I will lay claim to bringing the technique which can add up to more margin dollars to the attention of many large and small operations. It all began in the early '70s when I was part of the training team in the Handy Dan chain.

While we were on a routine tour of a store, some idiotic pricing jumped out at me. The 2" and 3" mending plates were priced the same. The 2" and 2-112" barrel bolts were priced the same. Zinc and brass in the same sizes were priced the same.

This kind of stupid pricing went on and on because we were mechanically applying a set departrnental margin to the manufacturer's cost. After I convinced management that large should cost more than small and that because customers prefer brass they will pay more for it, the pricing policy became "what is the value in the eye of the beholder - the customer."

Because we eyeballed items for increased margin, I gave the system the handle "visual merchandising." Some years later someone latched onto it as their idea with the "variable pricing" tag. The rule of thumb was anything under $5 was fair game. Above that level we used extreme caution on any competitively shopped item.

I used this approach to great advantage when I took over a troubled division. We took markups of over $100,000, then for the next three months gave it all back in strong lead ad items. By the end of the year we were in the black in sales and profits with a strong, low price competitive image.

I didn't think any other chain could be as dumb uN we were. but I found lots of others following the same pricing policy. I went to K-Mart to buy a molly bolt and discovercd the Ll2" and 1" priced the same. I went to Sears. The same idiocy existed. Not only was Sears making the same mistake, they were the lowest price in town and neither tiey nor the public were aware of it.

I took some pictures with the Sears price tickets in full view and used them in an article published in 1979. Three weeks later Sears and K-Mart made price adjustments and never even thanked me. In my travels I began to take pictures and slides of major chains using the same idiotic pricing and showed them in my seminars.

Now, more than 10 years later, I

Story at a Glance

How variable pricing can incrsase profits ways to apply examples of using plus margins to put more dollors on the bottom line.

find that most companies have forgotten this important avenue to more margins and profits. They have become too involved in putting out fires. Variable pricing has been relegated to "when we have time" and forgotten. Because it is a grueling process, it's easy to put on the back burner.

If you are in a non-competitive area, variable pricing will go right down to the bottom line. If you face tough competition, it can be used in a strong loss leader program to create a competitive image.

Another important point: all my business life the controller's office has come out with "at a2%o net profit you need 50 times that in sales." An additional $5,000 in sales will generate $100 in net profits.

Nonsense. If you are profitable, $5,000 in additional sales at a 30Vo margin will put $1,500 on the bottom line. If you are profitable, you have already covered all your expenses, rent, utilities, salaries and other costs. Adding sales by using plus margins will put more dollars on the bottom line and at a lot larger amount than 2Vo of t\e additional sales.

Variable pricing works for both large and small chains. Many stay alive because they practice it.