Pricing to Compensote for Services Rendered

On a subject as difficult and involved as pricing to compensate for services rendered, it would seem to me that pricing of merchandise must be tailored to trt the individual operation of each yard, depending on the type of service it renders'

A small yard serving largely the Do-ItYourself trade and small carpenter contractors would obviously stafr a difierent type of personnel than t}le larger yard catering to volume operation in that they would not have outside salesmen-estimating clerks-Plan Department-larg:e Accounts Receivable-Credit Departmentsetc.

Doing mostly a cash and carry business, overhead in such an operation can be held to a minimum and the percentage of markup established accordingly. Ilowever, Iwant to talk about the averag:e size yards such ab ttre ones we operate where we sell bot} large and small orders, and offer to you for whatever it is worth the method we are using to price merchandise primarily lumber.

One of our holpful employes has euggested the bestway to do thls ls to ltqutilate your competltor; however, after serlous conelderatlon, we have abandoned thts ltlea ln favor of one more Pra,ctlcal.

The key to business survival for retail lumber yards is profit-planning. During the last ten years, profits have declined approximately 85/o while the industry was enjoying the largest sales volume in its history. Owners of rg.tpil lumber yards are well aware of the need for something that will strengthen profits.

Profit-planning is a fundamental basic approach to the operation of a business in most other industries. It is not generally understood or practiced in the retail lumber business because it hasn't been necessary. Price and profit stability can only come from within a company. The more active maangement becomes in profit-planning' and i1 the creation of price structures that will accomplish profit goals, the better overall price stmcture and profits will be.

We lumbermen must acquire knowledge and understanding of how to price the merchandise we sell under the many varying conditions in which we operate our businesses. Only when lumbermen individually and as a group have the proper understanding of tlre pricing principles and the ability to apply these principles to their various conditions of business operations will we have an increase in the profit of our industry.

In the Southern California market, and especially the Los Angeles area, the competition is extremely acute. The good old days when there was one lumber yard serving a community and marking up SOVo was simple. The home owners-the farmersthe small contractor all paid the same price and were satisfied.

Then when another dealer moved in' the two got their heads together and agreed on a price. Ttris didn't work for long'

Aside from being illegal, tlte dealers would give discounts to bring the customers to their stores, and so the rat race was on. Today we do not find just one competitorbut many-and those who hope to survive must be just a little more efrcient and fig'ure ways of cutting costs in handling material-marketing and pricing their mer-

By R. L. "Bud" Schuler, Monoger Anowoh Lumber & Mtrteriols Go., Pqcoimo

chandise to compensate for services rendered.

When our competitor down the street cuts prices-we have a problem on our hands. We know that if we sell at his price we will lose money or break even, at the best. We find ourselves on the horns of a 'dilemma-whether to lose our customer or lose our proflt. fn our yard we try to compensate for the loss on the cut item by boosting the price on some other related item. The question then is which item to boost and how much.

F'irst, we must think of the item's turnover and the cost of selling it.

Will selling this item help sell something else ?

How much gross profit we want on the item and on the total sale.

Can it be incorlrorated in a package sale effecting a saving on handling ?

Today, the ever-rising costs of running a lumber yard make it mandatory that every consideration be given in pricing lumber and-in fact-all related items. Many a dealer has learned, to his sorrow, that costs are getting close to the traditional % gross profit. fn most yard operations there are four types of sales:

F or example-ff you buy lumber at $100 and mark it up the traditional 50Vo, your list price is $150. The contractor gets his LOlo ott list so he pays $135. This leaves you $35 on the sale, or 25.9/o gross profit.

But the cost of running your lumber yard is getting higher and in many yards is approaching 22Vo of sales. Therefore, on that $135 sale your cost of doing business was $29.70 to cover payroll-trucks-insurance---+tc. Instead of making $35.00, you actually cleared $5.30 before ta:<es. A very slim profit indeed.

Obviously, if somehow you could have sold that contractor at a higher markupsay glr/s%o-you could have done much better, and so the $64,000 question is how to increase your gross profit.

Retail lumber yard operators are engaged in several kinds of businesses. We are at the same time so called retailers and wholesalers selling to consumer on one hand and to contractors on the other. As an industry we have erred in considering all of these businesses in which we are engaged as one business. We say that our cost of operation is "so much." What we mean when we say this is that our overall eost of operation is so much for all the various types of businesses in which we are engaged.

1. Small retail sales over the countersay under $50.00.

2. Latget sales in the same way--sa.y $50 to $150.00.

3. Jobs to contractors-remodeling and small home builders-say $150 to 61,000.00.

4. Volume sales to large contractors and tracts.

We must realize that there is a difrerent cost of service on each of these four types of sales. This calls for four different price lists. One for each of the four differential groups. Where a dealers' cost of doing business may be 227o as ar average cost of selling all types of sales, the cost will be much higher on the over-the-counter sale. For this reason it makes sense to set selling prices according to the type of salenot the type of customer.

The profit goal the dealer sets for each group is the yield he wants the sales group to average. Going a little farther---the dealers know that the turnover of an item times the profit per unit sold will give the total profit he can expect from sales of the items.

A dealer also knows that when he reduces a selling price he can flgure the decrease in profit that he will have. To make up for the lower profit he must raise the profit yield of other items in that group. To do this he raises the selling price of the items he feels can take a higher price.

This method of balancing his selling price to maintain the average profit goal for the group will equalize the over-all gross profit.

In practice, the dealer sets up his sales in groups according to the cost of selling each. He makes up a price list for €ach group. Within each price he makes adjustments on the selling prices of individual items so that when the profit yields for all sales are combined, he will average the profit goal he has set for the group.

For example, he may feel that the best selling price he can g'et on one item in a group yields 75c/a gross profit. At the same time he may have another item in the same g:roup that he can sell for 700c/o ptofit. When he combines the sales and profits from the two items, he can see if they wiII average the profit goal he has established. If not, he will adjust the selling price of the high profit items until he gets the proflt he wants. tr'or example-Suppose you are operating a lumber yard with an overhead ot 2|o/o to sales-your yard operates in all four of the basic categories of the lumber business. It is possible that it could break down as follows:

Therefore, each sa,le is classified according to the group into which it falls and applies the proper price. It is the type of salo, not the type of customer that governs the price he bills.

Because of the several types of business we cannot justify average markup as it will not allow us to make a profitable competitive price for the volume or wholesale transaction for which we must compete, nor wiU it give us a price which is high enough to return a proper profit on our retail service sales.

Such an approach does not give us a true picture of our operations--which we get when we consider the costs that apply to each part of the operation. Average cost of doing business and average markup do not help us in determining what we should charge for an item of merchandising in any specific instance.

Selling to the large contractor at a discounted price may result in a very profitable business as long as purchases in volume and other factors involved in the sale are proper. When he makes a small purchase involving consumer sale services, he should pay the consumer prices, because the elements of the large volume sale are not involved.

The size of the order a,nd the numbor and type of services we render should determlne the markup we make-not who the customor may tre, The a,mount of service we give in relation to the size of the sale should be our standard of measurement.

For example-If the Jones Construction Co. buys one door and wants it charged and delivered, the service costs the dealer the same as if the sale u'ere made to the home owner. Therefore, the two sales are in the same group and are billed at the same price.

And if Mr. Homeowner buys 50 squares of roofing, the dealer's cost of service can be no more than the same sale to Jones Construction Co. The two sales are in the silne g'roup and are billed at the same price.

Estimatingplan servicesfinancingadvertising-the size of the order-and many, many more services are offered by the lumber yards to their customers. It is possible for a customer to receive all or almost none of these services. It is therefore reasonable to conclude that the price must be varied to fit the particular conditions of the sale and the services given.

70c/o for large or project sales-15/2 for contractor sales-207a for small contractors who build additions and do repair work-and 35Vo for consumer and strictly small sales. Therefore, lumber costing $100 per thousand-the selling price would have to be $114-$125-$747-and $182 per thousand, respectively, for each of the four categories of sales made by this yard.

That is a considerable variation in the Drice of lumber. If. on the other hand. we use the average approach and assume the averag:e overhead to be 20c/c with 10% net proflt to sales desired (which is more net profit than the average yard is now getting) we would require a 30/o gross profit. The necessary markup to return this gross would be approximately 43(/r. Hence the selling price of lumber costing $100 per thousand v,'ould be $143 per thousand. A price of $143 will not sell many 2 x 4's on projects.

It is too high for the contractor who builds several houses a year. It would not be high enough for over-the-counter sales.

So we simply take the price of lumber in the yard a,ftor all opera,ting costs are removed, a,nalyze the cost of services, add a fair prico for service and mark up a,ccording to the type and size of sale.

We are now employing this method of pricing at the Anawalt Lumber and Materials Co. and are convinced that it is at least a step in the right direction.

By rhe NRLDA

GOOD MATERIALS IIANDLING IS NO LONGER, R,EGARDED AS A NECESSARY EVIL BUT AS A POWER,FUL FORCD FOR. COMPANY SUCCESS. There is no question as to whether the MaterialsHandling function does or d6ss nsf-61 should or should not*exist in any one retail yard. This function does exist in every dealer's operation.

The handling' of materials is a major problem in every retail yard, regardless of size. Yet, well over half of the dealers in the country have made no attempt to mechanize their handling: and, apparently, are overlooking the fact that, to maintain their position in their industry today and in the future, they must take advantage of the cost cutting possibilities inherent in modern Materials Handling.

There is no mystery behind our industry's move towards modern Materials-Handling methods. Thousands of dealers have had substantial reductions in operating costs by eliminating much of their handhandling while increasing the speed of the flow of material.

They have increased their usable storage space without enlarg'ing their facilities. They have increased productivity of their Iabor as well as safety. They have reduced damag'e to the products they stock, which has increased the salability of the products. They have bettered customer service.

Retail lumber dealers, like members of other industries, cannot stand still. We have to keep moving ahead to keep up with the demands of the times or the world will pass us by. Mechanization is the only way by which the small retailer can keep his costs in line and expand his service without investing heavily in new facilities.

Iluman muscles are being replaced by mechanical muscles in all industries, with the result that labor turnover is unusually high in non-mechanized yards. In these days of "easy living," laborers are being attracted to the jobs where they are provided the muscles to do their work and where it will be safer to work.

It only takes a few bumps, smashed fingers, or sore backs to make a man want to move on to a job where there is less likelihood of accidents.

All of this indicates that there is no longer a choice. Materials Handling is not only our industry's biggest opportunity, it is our biggest necessity. If nothing else makes it a necessity, competition will.