OPERAIING OPPORTUNITIES

WALLY LYNCH Paid Associates PO. Box 741623 Dallas. Tx.75243

I N AUGUST and September, this colI umn discussed Art Hood's 20 things to do before cutting prices. The response has been enormous, as letters and calls continue to pour in. And the number one question concerns the twentieth item on the listoffset a concession, which mentioned compensatory pricing. Compensatory pricing means that other sales must be made at a sufficiently higher-than-average markup to offset profit loss on sales leading to slippage or leakage of net profit. The loss of profit could have come from discounts, meeting competition, under pricing or providing uncompensated services to the customer.

The formula is simple and direct. Combine the percentage of profit desired with the cost of doing business as a percentage of sales to calculate the required gross margin. For example: DESIRED PROFIT COST OF DOING BUSINESS 210lo GROSS MARGIN NEEDED 300/o Slippage and leakage is what we call today the difference between planned and realized (or maintained) margins. When you budget 300/o gross margin and price for it without factoring in slippage and leakage, you will come up short of your target margin and profit. The idea is to measure the differences identified in previous years and include it in the formula. It now looks like this:

DESIRED PROFIT 9olt NET PROFIT LEAKAGE 5o/o COST OF DOING BUSINESS 2I% GROSS MARGIN NEEDED 35o/o

An additional ingredient in compensatory pricing is a varying price point for the same item depending upon the service costs involved in selling that item. Also, margins are varied from the average for all items depending upon services required to complete the sale.

Full service dealers will recosnize shingles and wallboard as classic examples of like items requiring multiple prices. One price is for take with, another price for delivery and still another for custom placement. Yet it doesn't end here. It also seeks to recognize pricing requirements for carloads shipped direct at one extreme and a twelfth of a dozen for cash taken with by the customer at the other extreme.

Free Offer

Art Hood's list of competitive services and ways competitors can chisel and skimp on them is available to those who send a stamped, self-addressed envelope to WallY Lynch, Paid Associates, P.O. Box 141623. Dallas. Tx. 75243

The specific pricing by item approach, after these preliminaries, is similar to today's variable pricing. In a lesser known yet more sophisticated vein, compensatory pricing is also much like direct profit profitability pricing (DPP) widely used in grocery retailing.

Art Hood was not only ahead of his time in our industry, he probably also provided the rationale for many dealers to abandon unprofitable activities for money making substitutes.