Retail Truths
The Unconventional Wisdom
of Retailing
by
Chip Averwater
* * * * *
Published by
Chip Averwater
Smashwords Edition
Copyright 2012 by Chip Averwater
Cover and type design by Erica Jennings, Jennings Design
Unattributed quotations are by Chip Averwater.
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Table of Contents
When I was growing up I thought everyone tended shop. It was what every adult I knew did every day. It was what I did every day I wasn’t in school.
Although we called it “going to work,” it never seemed like work. There were some unpleasant tasks, to be sure—loading and unloading trucks, counting inventory, housekeeping. But these were more than offset by visiting with favorite customers, showing an exciting new product, creating a beautiful display, or participating in a successful promotion. I don’t remember dreading a single day.
Forty years later I’m still in love with retailing. A smoothly operating store with a steady flow of customers and healthy profits is a work of art. I still get a thrill from a big sale or a system improvement, and even enjoy poring over the numbers at month-end.
I suppose part of my infatuation is that retail has too many facets and intricacies to ever be mastered. There are thousands of lessons to learn—some critical to a store’s survival, many valuable for improving customer service or increasing the store’s profits, and others that simply make operations run smoother. Perhaps because I’ve enjoyed learning them, but also to avoid repeating my countless mistakes, I wrote many of my lessons down.
Some years ago I began gathering and polishing them. My original intention was to pass them on to my son as my father had to me and his father had to him. Perhaps it was these lessons (combined with ninety years of long hours and dogged persistence) that allowed our family musical instrument business to survive. My son would surely need them to beat the notoriously long odds facing the fourth generation.
Over the twelve years that I wrote, my co-workers unwittingly donated more lessons and examples. It seemed unfair to them (and costly to our business) not to share with them the assembled observations to which they had so generously contributed.
Then, businessmen have an irresistible urge to share their solutions—motivated, of course, more by ego than altruism. My business friends wouldn’t contain their amusement if I denied my own inclinations to this. So I’ll just admit that sharing with them a little collected common sense, much of which I took from them anyway, provided some of the inspiration for this effort.
Ultimately the thought crossed my mind that all of us retailers suffer the same afflictions, differing only in the widgets we peddle. Being not immune to the temptations of opportunity, I further expanded my purpose—to sell enough copies to pay for those I give away. Projects of unreasonable time and effort require delusions of unrealistic outcomes.
Failing in this lofty goal, I still have the immensely human and irresistible pleasure of dispensing advice—in this case with the added benefit of not requiring anyone to actually listen.
Please feel free to lie about enjoying it—or even having read it. I promise to enthusiastically acknowledge your compliment and not test your comprehension.
I was standing at the front of our musical instrument store not long ago when a boy rode up on his bike and came in. The salespeople were busy so I asked him how I could help. He asked me several questions and then said, “You mus’ be da owner here.” I smiled and said, “You’re a pretty smart little guy. How’d you know that?” He said, “Cuz you don’t know nothin’.”
It was an astute observation. I often feel that way, especially on the sales floor.
Yet I believe there are many things every surviving retailer learns.
Some are the complex concepts taught in business schools—double-entry accounting, contract law, creating financial statements, etc.
But far more are the practical insights and techniques gathered only on the frontline—negotiating with suppliers, choosing among job applicants, setting profitable prices, resolving employee disputes, sending messages to competitors, designing motivational incentive plans, firing employees, attracting bankers …. We learn these one-at-a-time, in the trenches, under-fire, and with considerable costs and consequences.
Many of my lessons were drilled into me by my father and grandfather, who hoped, for their sake and mine, I wouldn’t need to repeat them. Others were shared or offered by example by my retailer friends (and a few enemies); vicariously is cost-effective learning if we just pay attention. Most, unfortunately, I paid full price for; lessons, it seems, are more memorable and convincing when we fully appreciate their consequences.
I pass these lessons on to you now, not in the expectation that you won’t test each of them for yourself. Rather I hope only that you’ll recognize them more readily and affordably than I have.
“We are generally better persuaded by the reasons we discover ourselves than by those given to us by others.”
—Blaise Pascal
1
It looks so easy
to be so hard.
Rent a space, order some merchandise, run an ad, and operate the cash register. Anybody can do that!
Apparently not. Estimates of the retailing failure rate range as high as 95 percent. And for those who fail, not only are their hard work and long hours unrewarded but, in most cases, their precious bets—usually their life savings—are lost.
Easy work and guaranteed returns are not in the description of retail.
2
It’s not whether we can do it;
it’s whether we can do it best.
The challenge isn’t in merely offering products the public wants to buy; we’ve got to do it better than all of our competitors.
Each shopper chooses only one store for his purchase, the one he feels offers the best value—not just quality and price but convenience, selection, security, atmosphere, etc.
The winner takes all. Second place gets nothing, no matter how great the effort or how close the race.
3
Retailing isn’t one skill.
Try to define the skills of a successful retailer. We can create a list but regardless of its length it’s inevitably incomplete.
A retailer needs abilities in sales, marketing, management, accounting, advertising, purchasing, hiring, training, finance, negotiating, collection, dispute resolution, public relations, real estate, insurance, law, and much more.
Specialists such as accountants and lawyers can provide some valuable expertise. But it’s still the retailer who has to determine what advice to seek, how much he can afford, whose advice to accept, how much of it to apply, and how to balance it with other aspects of the business with which it inevitably conflicts.
We’ve gotten so much good advice through the years it’s a wonder we’re still in business.
4
So few ways to succeed
and so many ways to fail.
Ultimately there is only one way we can succeed in retail: provide products our customers want better than all of our competitors.
But there are countless ways we can get into trouble—uncontrolled expenses, buying mistakes, theft and fraud, unmotivated personnel, inadequate collection, poor people-management, pricing too high, pricing too low, bad product selection, ignorance of laws, too many or too few employees, inaccurate financial projections, overly optimistic expansions …. All the world conspires against a retailer.
With profits typically 1-3 percent of sales, the margin for error is frighteningly small. Every mistake is serious; combinations can be fatal.
5
The battles are decided on details.
Competition assures that differences between stores are small. Products are similar, sometimes identical; pricing is necessarily close; policies, methods, and hours are often indistinguishable.
Yet the shopper must choose. It’s her money and she’s determined to get the best value for it.
But on what criteria? With so much the same, little is left but details: location, décor, displays, signage, organization, cleanliness, knowledge and politeness of salespeople, speed of check-out, ease of return, width of aisles, background music, and a thousand other mundane—but critical—details.
6
The plan is simple;
execution is the challenge.
Knowing how a store should operate isn’t hard. Our customers can tell us that (and often do when things aren’t going smoothly). The art of retailing is getting everything right at the same time and within budget.
It’s more acrobatics than rocket science. But the acrobats are spinning too many plates to ever be perfect.
He who spins his plates most consistently wins the sale.
One of my favorite Chinese suppliers often says, “Talk doesn’t cook rice.” Nor does a retail plan operate a store.
7
A good retailer is
a compulsive improver.
Discontent is the driving force of retail. A retailer tweaks and fine-tunes his business, determined to make every feasible enhancement he can conceive or plagiarize.
Nothing exists in retail that can’t be improved: displays can be more attractive and descriptive; salespeople can know more about the products and about human relations; marketing can deliver a more stimulating message to a more promising audience; products can be more attractive and less expensive; selections can be broadened; stock-outs can be reduced; paperwork can be more efficient; handling can be reduced; shrinkage can be decreased; collections can be sped up; bad debts can be reduced; customer relationships can be broadened and deepened ….
A retailer is often tired but never bored.
8
Impatience is a virtue.
Once conceived, an improvement can’t be made soon enough; if it’s a good idea, we should have already done it. Delays are simply intolerable.
We no sooner finish one project than we undertake the next, all with a sense of emergency. (This do-it-now urgency is a great source of frustration to those we charge with implementing our seemingly endless stream of brainchildren.)
There’s pride in each accomplishment, but there’s just no time to dwell on it—we’ve discovered other imperfections and opportunities and so much remains to be done.
A psychologist once told me that motivation is a burden since a motivated person is never satisfied.
On the other hand, “Success is a journey,” and every step forward is a joy.
9
There’s no finish line.
No retailer gets all the details right. Those who claim to are either “puffing” in their advertising or sales, or fantasizing, and need a strong dose of their customers’ perceptions to shock them back to reality.
Even if it were possible, the feat would be short-lived; our competitors would quickly copy our formulas and techniques, close the gap, and require us to add new details and methods to again separate us from the pack.
Retailing is constantly evolving and improving. The best stores of ten years ago are out-of-date in today’s market.
There is no ultimate store, no ultimate service, no ultimate customer experience—and no rest for the retailer.
10
The details we miss
would have been our profit.
Expenses typically absorb 97-99 percent of retail revenue. The 1-3 percent that remains as profit is tiny by comparison (but infinitely more desirable than the sea of red numbers that are possible).
We don’t have to get all the details right, but each one we miss comes directly off the bottom line. And it doesn’t take many missed details to turn the numbers red.
“Here you have to run as fast as you can to stay where you are. If you want to get some place else, you have to run much faster.”
—Red Queen, Alice in Wonderland
11
A store is a portrait of its owner.
Perhaps most people wouldn’t consider a retail store a work of art. But a store is indeed an artistic creation, emanating from the founder’s vision, interpreted and shaped according to his talents and skills, and made inevitably unique in its innumerable details.
The individual character of a store develops and evolves gradually—the accumulation of many large and small decisions we make (or ignore) over the course of its existence.
We rarely step back during the process to recognize the creation accruing from our daily efforts. But eventually every characteristic of the store—location, décor, staff, products, displays, organization, policies, methods, marketing, etc.—has been determined, directly or indirectly, by its owner.
The owner’s vision is adopted by the staff, his priorities become the goals, his habits become the standards, and his style becomes the culture. Despite his (politically savvy) protests that many people play roles, he is indeed the producer and the product is his.
If you want to know the owner, walk through his store.
12
You must be present to win.
To be successful a retailer doesn’t have to be brilliant, highly educated, charismatic, refined, or unusually talented. But he must mind the store.
Luck, ideas, relationships and even intelligence are dwarfs in retail next to effort. The winner is almost always the most focused and dedicated. Success is the product of hard work and long hours.
Retailers who are irresistibly distracted by hobbies, personal and family problems, civic and industry associations, charities, and outside business ventures pay dearly for their diversions. A well-established store can sometimes survive a little inattention but when ignored long enough its momentum turns in the wrong direction; less-rooted stores seldom survive anything less than full focus for even short periods.
A successful retailer can usually be found in his store. An 8-hour day isn’t long enough; taking off is out of the question.
13
It’s not work when it’s fun.
A good retailer is passionate about his business. He thrives on constant improvement, delights in innovation, savors the challenges, and relishes the competition.
The store is his child and his creation, the embodiment of his ideas and beliefs. He celebrates its sales, its improvements, and its competitive victories, and agonizes over every inefficiency, lost sale, and disappointed customer.
Not every day is a win, but the losses make the wins sweeter. He sometimes goes to bed defeated but he wakes up renewed and resolved to take up the fight again.
“When you like your work, every day is a holiday.”
—Frank Tyger
Salesmanship is 90 percent preparation,
10 percent presentation.
Good salesmanship begins before the customer arrives. Salespeople need knowledge, training, and rehearsal—before helping customers.
Unfortunately, retail seldom allows time and expense for that ideal. Too often our salespeople get their training on the sales floor, searching for information and answers beside our customers, and learning their communication skills from their mistakes.
15
Tricks and gimmicks don’t sell;
knowledge and communication do.
The fast-talking, back-slapping salesman stereotype might have been accurate at one time, but it isn’t appropriate today. Tricking and cajoling customers into buying products they don’t need just doesn’t work. Customers are too smart to be tricked, refund policies ensure those sales don’t stay sold, and such a store’s reputation and trade would quickly deteriorate.
The art of retail selling is straightforward:
* Create rapport with the customer
* Collect information to define his need
* Match the need to appropriate products
* Communicate the options and differences
* Maintain focus on the decision
* Facilitate the financial transaction
* Ensure satisfaction
It really isn’t any more complicated than that—but that doesn’t mean it’s easy.
16
Expecting to get the sale
is half of getting it.
Confidence is contagious; unfortunately, so is lack of confidence.
A relaxed and assured manner fosters trust and communication. Customers subconsciously sense a salesperson’s attitude and assume it’s based on his confidence in his products and recommendations.
Conversations tend to mesh in style, attitude, and focus. When a customer perceives a salesperson’s expectation that the conversation will culminate in a sale, he tends to adopt that expectation himself.
Confidence goes a long way in explaining how a salesperson can “get on a roll” and why busy salespeople typically have higher closing ratios.
Whatever the product or environment, knowledge and confidence have always led the way in sales. A salesman who lacks either is just a clerk.
17
Confidence must be earned.
Some self-confidence is innate in personalities. Most is earned through study and practice.
The first step for a salesperson is learning the products. He has to be familiar enough with features and benefits to make quick summary comparisons and accurately match products with customer needs.
Then he has to practice his presentation of this information (preferably not on customers) until it becomes second nature.
A salesperson who knows and believes in the product and can present the information comfortably is naturally confident.
Every time we send a salesman for concentrated product training, his sales of the product jump to a new level.
The products haven’t changed—only his understanding and confidence have. And they are highly persuasive to a customer with a product need.
18
Knowledge speaks,
wisdom listens.
Great salespeople are easy to spot; they listen when their customers speak. They know that what the customer says is more important than what they say. And when they listen they learn what the customer needs and will buy.
Listening builds trust and lowers customers’ apprehension, defensiveness, and resistance. Customers’ reluctance to talk to salespeople is due largely to salespeople’s reputation (sometimes deserved) for being more interested in selling what they have than what the customer needs or wants. Asking and listening attentively is the obvious solution.
But listening requires discipline and self-restraint. When a strong sales point comes to mind, we’re naturally eager to present it. A good salesperson resists that urge until the timing is right. When a customer speaks, he stops what he’s saying—often mid-sentence—no matter how important his thought. He knows a customer who is talking isn’t listening. If the idea is important, it will get better consideration if he holds it for a more receptive moment.
19
The best communication
is a relationship.
Customers buy from salespeople they know and like. They listen to them, they trust them, and they want to do business with them.
Good salespeople are aware of this and work hard to build personal relationships. They get customers’ names and use them often. They make their own name easy for customers to remember by repeating it, offering a similarity (“Chip, like a potato chip or a computer chip”), inserting it in conversation, wearing a nametag, giving business cards, writing it on sales literature, etc.
They look for commonalities and connections—people, occupations, schools, hobbies, backgrounds, children. They keep a file of customer information and study it often so they recognize and remember their customers when they return and can easily make conversation.
And after a sale they follow up to ensure their customer is happy. A buyer doesn’t become a previous customer but a friend, key influencer, and future customer.
Among the best salespeople I’ve worked with through the years, a common denominator has been a dependable memory (or system) for names and faces, a warm and welcoming manner, and an eagerness to listen and help.
20
There is no magic close.
Retail salespeople sometimes talk about “closing” as though what the salesperson says at the end of the conversation makes everything that came before it irrelevant. “He’s getting customers; he just doesn’t know how to close them.”
There is no secret combination of words or mystic phrase that causes customers to buy indiscriminately. A customer buys when all the pieces are in place: he has a need, the need is correctly identified, suitable products are shown, he believes a product matches his need, he feels the price is fair, the money is available ….
True, once an appropriate product is identified, the salesperson should maintain focus on a decision and ask what else needs to be done to facilitate the sale. Many customers need that encouragement.
However, if any of the requisite steps haven’t been adequately completed, there is no (legal) phrase that will make the customer buy. The problem is not in the “close” but in the steps that came before it.
21
A return policy is a tool,
not a rule.
The purpose of a return policy is to encourage sales, not to limit when and how customers can return something they’re unhappy with. “Take it with you. If you don’t like it, you can bring it back.”
Smart retailers don’t reluctantly offer return policies—they promote and advertise them. Not only do such policies create more sales, but if a customer is unhappy with a purchase, we don’t want him to keep it and be continually reminded of the bad experience with our store.
We have to forget about the few who abuse a return policy and focus on those who buy more because of the reassurance. The cost of a return is negligible if the merchandise isn’t damaged. And even those who buy intending to return often don’t get around to it or change their minds and keep the product.
In the ‘80s a chain of electronics stores, McDuff’s, had its salespeople greet customers at the door with a printed copy of their liberal return policy and low price guarantee. Presumably they recognized that those two policies eliminated most hesitancy to purchase.
22
Be-backs don’t come back.
A rookie counts “be backs” as future sales; veterans recognize them as missed sales.
“I’ll be back” is what customers say to extricate themselves from the situation without disappointing the salesperson. Even those customers who believe they’ll come back seldom do; they get distracted, lose their motivation, find other options, or simply procrastinate.
When a customer says he’ll be back or asks for a card, we should ask if we’ve shown him the correct product, answered his questions, and provided enough information. If he answers yes, he’ll typically say he just needs to think about it, which translates as “I’m not yet convinced that this is the right product or best price.” If he is receptive to further discussion, we should continue asking questions and providing information.
If the customer declines to continue the conversation, we can offer to send him some literature, collect some additional information for him, or call him if it goes on sale.
23
Follow-up is the great divide
between average and outstanding salesmen.
Following up means staying in touch with prospective buyers, calling, mailing, or emailing with additional information, keeping the purchase active in the customer’s mind, and providing whatever help the customer needs to make his decision.
For big ticket merchandise, it’s virtually impossible to be a top salesperson without consistent follow-up. It can as much as double or triple sales.
A salesperson should always have a helpful reason for calling or mailing—collected more information about the product, availability, options, or pricing; located an alternative product they might be interested in; an invitation to a coming event; an upcoming sale …. Reasons are abundant when the salesman has determination.
Our piano department stages a variety of follow-up contests. In one they set a goal of six follow-up calls per day per salesperson. Each person who doesn’t make his six calls in a day puts a dollar in the pot. The company puts in $10 for the week. At the end of the week the salesperson with the most follow-up calls gets 60 percent of the pot, the second most 40 percent. The amount of money isn’t the attraction; it’s the pride (or dishonor) of the outcome.
Not surprisingly, the winner each week almost always has the highest sales too.
24
“Satisfied” is a slow way
to build business.
Surveys of retail customers often list “satisfied” as the highest possible rating of a retail experience. It’s no wonder unhappy customers tell more people about their experiences than happy customers.
Customers are at best "satisfied" because companies almost never do more than they promise.
We don’t need satisfied customers; we need customers who are surprised and impressed.
Salespeople have lots of opportunities to exceed a customer’s expectations: help him with his initial use of the product, send a thank you note, add a bow and a card to a delivery, estimate 2-week order delivery and deliver in 10 days, refer someone to the customer in his business ….
I once hired a landscaper to build a wall and terrace. When he finished he proudly showed me some steps he had added that weren’t part of our agreement. He told me he liked to give his customers more than he promised so they’d remember him.
It’s been more than twenty years but I still remember his name and have recommended him to many people. I suspect he’s recovered the costs of those steps many times over.
25
Just because they don’t complain
doesn’t mean they’re happy.
Customers don’t like to be complainers. Some would rather stew in their dissatisfaction, tell their friends and neighbors about it and swear off any further business with us than tell us they’re unhappy.
A retailer can’t afford many unhappy customers. His market is his community. He depends on relationships and his reputation in the community for continuing business.
Many smart retailers take no chances; they contact their customers and ask if they’re happy.
26
Complaints are opportunities
to create loyal customers.
Ever notice that our most loyal customers are often those who once had a complaint that we resolved? (Should we screw up more often just so we can fix it?)
A little attention usually makes up for a mistake, and our concern and determination to make it right demonstrate our standards and trustworthiness. The resulting relationship is a bond competitors can’t easily break.
A local violin teacher gave us fits for a while. She laid out precise specifications for the instruments we rented to her students and expected each instrument to come with some unusual accessories and music.
We were happy to accommodate, of course. But if any of our salespeople in any of our stores didn’t catch that a renter was her student or overlooked any detail, I was sure to get a scorching phone call and extensive scolding.
To make things more challenging, this teacher refused to set foot in our stores or have a civil phone conversation. She wanted nothing to do with us and seemed hell-bent on proving our stupidity to everyone.
After a couple of months of this, I bought a country ham and a Christmas card and knocked on her door. I had to introduce myself as we’d never met. She was taken completely off-guard and asked several times why I was bringing her a ham. I said it was to thank her for her patience—a poor choice of words since she obviously had none, but she accepted the ham just the same.
From that day forward she was one of our most loyal music teachers, sending innumerable customers to us with specific lists of merchandise to rent or buy (most of which exceeded the cost of a ham). When she retired we felt it all the way to the bottom line.
27
A satisfaction guarantee
is an insurance policy on your reputation.
Making sure our customers are happy isn’t just good ethics, it’s good economics. A dissatisfied customer is costly as he’ll likely influence many other potential customers.
Unhappy customers often imagine the store will resist a remedy or refund. Anticipation of a battle sometimes builds enough that the salesperson can sense the animosity when the customer finally reports the problem.
Other customers who fear an unpleasant confrontation never bring the problem to our attention. Instead they resign themselves to the faulty product and are reminded of their “mistake” every time they see or use it.
Satisfaction guarantees help us head off hard feelings and encourage unhappy customers to allow us to resolve the problem.
Some years ago we proposed implementing a generous satisfaction policy—so generous that it raised the concerns of the managers and salespeople. They felt some customers would take advantage of it by buying new instruments to use for weekend gigs and returning them used. As a result we couldn’t develop a consensus to adopt it.
Finally, without any announcement, we adjusted the software to print the new policy on the bottom of every receipt. It took the staff a couple of weeks to notice it; when they did, we told them we were just trying it,
We’ve been trying it for years. It’s become part of most sales presentations and I suspect the salespeople would resist any suggestion to give it up.
Pricing is the delicate balance
between making sales and making a profit.
Every retailer is torn between selling for less to create sales and selling for more to create profits. Survival depends on finding the narrow ground between.
But that thin space isn’t always clear. The price at which profits disappear isn’t just the wholesale cost—it must include a share of the many individual expenses incurred by the business.
Even when we know where our prices should stop, our competitors often don’t. Sometimes they’re too inexperienced to recognize it; sometimes they miscalculate it; most often they simply don’t do the math. They eventually succumb to their lack of profitability, but it matters little since they’re soon replaced by another with all the same lessons to learn.
Ultimately only those retailers survive who correctly estimate the balance point and have the discipline to maintain it despite competitors’ miscalculations.
29
Pricing is science in theory,
art in practice.
Every businessperson and economics student is familiar with the price/demand curve—as prices go down sales go up; as prices go up sales go down. Theoretically it’s possible, given a perfectly controlled retail environment and time to experiment, to determine the point on the curve at which price and sales create maximum profit.
But ideal conditions and time to experiment come true only in textbooks. In the real world we take our best guesses: “I think customers will be willing to pay this much for this product.” “Considering all of our costs, I don’t think we can sell it for less than this.”
We assume that our guesses were pretty close when we make a net profit, but we can never know how close. Only experience and feel for the market keep us within a profitable range.
30
The right price isn’t
a multiple of wholesale.
Some retailers have a sense for pricing that both enhances their profits and creates customers. Others price according to an old and unsophisticated rule of thumb—fixed percentage markup from wholesale.
Percentage markup assumes that all of the expenses of a sale are determined by the product’s wholesale cost. While a few are (cost of capital, insurance, etc.), far more are functions of labor, occupancy, support, and all the other expenses of retail.
Pricing correctly means individually and by feel, with consideration given to the total expenses of the sale, customers’ price sensitivity, competitive options, and the sale’s potential contribution to other business.
Only occasionally and by coincidence should markup percentages match.
Larry Thomas, former co-president of the Guitar Center chain, offered his trainees an anecdote: You find a $10 bill on the street. It cost you nothing. If someone offers you $5 for it, should you take it? Why not?
31
The last few percentage points
are the profit.
According to the US Economic Census, the net profit of a retailer after everyone and everything else are paid is typically 1-3 percent of total sales.
When we’re too aggressive in our pricing, give unnecessary discounts, or make any of the myriad mistakes in buying and selling, a sale easily turns into a loss—and the loss isn’t limited to the 1-3 percent we hoped to make. We dig deeply into our back pockets to pay for every mistake we make.
A rookie retailer doesn’t sense the price of his mistakes as he makes them—they’re obscured in an ocean of transactions. But after a few year-ends in which he contemplates miniscule or negative returns for his year of labor, his mistakes take on painful new meaning.
32
Volume feeds egos,
profit feeds families.
Chasing sales becomes so habitual and impulsive for retailers that we sometimes forget that the goal is not making more sales but making a profit. The two don’t necessarily go together—when we price too low they’re inversely related.
Many business fables tell of retailers being “busy until the day we went out of business.” No matter how many times we’ve heard the lesson, the irony of losing money while making sales continues to surprise and amuse us.
A wise retailer doesn’t set goals only for the top line of the financial statement; he focuses equal attention on the critical lines below. Only the combination determines whether and how his efforts are rewarded.
33
Wholesale is the cost of the merchandise,
not the cost of the sale.
The price paid the manufacturer is only the first of many expenses in a transaction. Sales can’t be made without expenses for rent, salaries, advertising, utilities, telephones, freight, maintenance, taxes ….
Just because a sale has a gross margin doesn’t mean it’s profitable. Unless the price covers all of the sale’s expenses we take money out of our pockets to make it.
34
Which sales
should bear the operating expenses?
Many salesmen and some managers subscribe to the notion of incremental sales and profits: “Our expenses are fixed so we should accept every sale that has a positive gross margin.”
It would be nice to fix expenses; unfortunately increases in sales require increases in personnel, space, inventory, handling, and virtually every other expense of doing business. The increases aren’t always in a smooth progression, but they’re depressingly reliable. (If our expenses don’t increase on one extra sale, on which sale do they?)
In highly competitive retail fields like new-car sales, savvy shoppers are often able to negotiate deals that avoid their share of costs, and dealers make it up on unwary buyers. The public recognizes the innate unfairness of this and the dealer’s (and the industry’s) reputation suffers.
Every sale incurs operating expenses and its price should be sufficient to cover them plus a fair contribution to profit.
35
A good retailer is an avid mathematician.
A retailer needs a clear idea of his costs in every sale, service, and activity his store engages in. The information is critical not only in setting prices but in deciding what to stock, what to promote, and where to channel the store’s investment and efforts.
A “feel” for costs is never accurate; a business has too many expenses to remember and we chronically underestimate them. (Otherwise we wouldn’t complain so unpleasantly when the bills come in.)
For a true understanding of costs, we have to periodically sit down with a spreadsheet and divide the whole list of expenses across our sales of products and services. Only then do our costs become clear.
36
There is always someone
to ensure we’re not the low price.
Weaker competitors instinctively know they’ll be the customers’ choice only if they offer lower prices. Many simply set their prices below the other stores as a matter of habit. Instead of understanding their costs they grasp at every potential sale and cross their fingers that there will be a little profit left when the dust settles.
It’s futile and suicidal to try to price below these competitors—when you drop your price, they drop theirs further.
Most of us have been tempted to help them destroy their pesky businesses by pushing prices lower. It’s a pleasant daydream but a costly and usually ineffective tactic. New competitors would quickly fill the void like the never-ending swarm of mosquitoes from the forest. And prices often become entrenched at the lower levels and are difficult to restore to reasonableness.
Differentiation is almost always a better strategy—offer better products and services that customers are willing to pay more for.
It’s sometimes possible (and often satisfying) to confuse your competitors and frustrate their efforts to underprice you.
One of our managers routinely printed higher price-lists before the beginning of each back-to-school season and sent copies to our competitors’ favorite customers and allies.
He released his real pricelist only on the first day of the season. Competitors who caught it then could either scramble to reset their prices and revise their advertising or stay with their higher pricing.
37
He who underestimates
his costs gets the sale.
When multiple retailers are pitted against one another in price wars and bidding, there’s almost always one who misjudges his expenses and “wins” the sale at an unprofitable price.
A little thought and calculation might allow him to discover his errors. Most, however, never separate their low-margin sales and expenses from the rest, and repeat their mistakes as long as their other sales can support their errors.
Many seasoned retailers don’t bother to bid against naïve competitors—they feel their time is better spent elsewhere.
38
Sensible pricing is the responsibility
of the market leader.
Unless the players in a market are strongly differentiated, only the leader can afford to initiate new pricing. Stores without positive differentiation must fall in line below him.
As a result the market leader has a critical responsibility to understand his costs and adjust his prices as necessary. Obsession with the pricing of those behind him only sets off a death spiral.
Low margin sales take potentially profitable sales off the market. They set precedents with our customers, our salespeople, and our competitors. When we refuse them, we sometimes get the deals at more logical prices.
39
Reputations are made on price sensitive items,
margins on the rest.
Price sensitive items are those bought frequently and advertised often. In a grocery store they might be bread, milk, and soft drinks; in a musical instrument store they include strings, reeds, and picks. Because customers buy them often, price differences are more apparent.
Pricing these items low creates a value image for the store. Higher margins on other merchandise allow the store to cover its expenses, stay in business, and occasionally even make a profit.
(If you have trouble reconciling this idea with the idea that each sale should cover its own expenses, think of price-sensitive items as an advertising and promotion expense.)
40
It won’t sell if it’s not on sale.
Customers have become so accustomed to sales that many won’t make a significant purchase unless the product is on sale.
Some furniture and clothing stores schedule only brief intervals between sales which they use to catch up, restock, organize, and collect prospects for the next sale. Many department stores end one sale only as the next begins.
(Consumer protection laws prohibit posting a “regular price” next to the sale price unless you can show that you actually sell the product at the regular price on occasion.)
But if merchandise is always “on sale,” is a sale really a sale? Shoppers apparently don’t ponder the question too long; most are grateful to have purchase rationalization so conveniently provided.
41
Holding onto inventory mistakes
only makes them more costly.
Buying mistakes, technology and fashion evolution, and other demand changes cause dead inventory to accumulate and threaten to bury us.
Typically we recognize the problem but resist the solution. We hold onto our mistakes, irrationally hoping customers will appear looking for just such outdated, overpriced merchandise and bail us out of our problems. Occasionally it happens, but seldom is it worth the holding costs (investment, space, insurance, shrinkage, missed opportunity, etc.).
A product’s value is determined by the market. What we paid for the product is not a factor in what it will sell for and should not influence our willingness to sell it for what it’s worth now. It’s almost always more profitable to move it out and put the investment and floor space to more productive use.
Our cost is a criterion in whether we stock the item again and what we would pay for it, but not in what we can sell this item for. The mistake was in buying; trying to make up for it in selling only makes the mistake more costly.
42
Margins are neither guaranteed
nor restricted.
For some reason we tend to think our prices should fall within a sacred range of markup. Pricing above that range stirs guilt; having to take a reduction from it makes us feel cheated.
Consider that the value of a house is what it will sell for in the market. The price the owner paid for it some years ago isn’t relevant. Buyers compare and choose from the houses available; if a house is priced competitively, it sells; if it’s priced too high, it remains on the market. How the seller comes out is not a consideration in the buyer’s decision.
When a product suddenly becomes obsolete, the manufacturer lowers its suggested price, or a competitor slashes its market price, our inventory cost is not our customers’ concern. If we want to sell the product, we have to price it to the current market.
Similarly, when we make a special purchase, find an advantageous source, import directly, or buy in large quantities, our selling price shouldn’t be determined by our cost. We can, if we like, pass the savings on to our customers in the hopes of making additional sales. Or we can ask the market price—and make up for some of those sales in which we took a loss or short margin.
Profit is not immoral.
Some people feel that selling something for more than was paid for it is somehow dishonest—that a company can be profitable only by ripping off its customers.
They view every transaction as a zero-sum game: one party wins only when the other loses. They don’t recognize that in a good transaction both parties benefit—both get something they would rather have than what they gave to get it.
A shopper chooses the best value available to him to meet his particular need. The store that anticipated the need and met it more attractively than its competitors gets the sale. The store’s profit isn’t due to ripping the customer off; it’s the store’s payment (and incentive) for anticipating and meeting the customer’s need.
If the customer is unhappy with his purchase, he’ll stop buying from the store. If the store is unhappy with its profit, it will stop selling the product or serving the market. But if both are satisfied, they’ll continue doing business together.
Profit is far from immoral. It’s the most effective and efficient economic incentive yet devised and has created for all of us the highest standards of living the world has ever known.
“Some regard private enterprise as if it were a predatory tiger to be shot. Others look upon it as a cow that they can milk. Only a handful see it for what it really is—the strong horse that pulls the whole cart.”
—Winston Churchill
44
A retailer deserves payment
for his work, too.
No one expects a painter to paint his house for the cost of the paint, a yardman to mow his lawn for the cost of the gasoline, or a carpenter to build his house for the cost of the lumber. Nor should anyone expect a retailer to tend a store for the cost of the merchandise.
Retailers and their salespeople have families to support and bills to pay too. Profit on their sales is their income—the only source of revenue to pay for the services they provide.
Profit is to a retailer what a wage is to a workman, a tip to a waiter, and a salary to a school teacher.
45
Our profit isn’t a criterion
in our customer’s decision.
When a customer needs a product, he compares the offerings in the market and selects the best value for his money. If he perceives our offer to be the best available to him, he buys from us. What we paid for the merchandise isn’t a factor in his choice.
Sales are an indication a retailer is providing a valuable service—a better value than otherwise available in the market. If he’s able to make a profit in the process, he’s earned it. It allows and encourages him to provide the service.
Knowledgeable people understand the necessity and fairness of profits. Those who don’t should be a source of embarrassment to themselves, not to us.
“Profit…(is) a vote of confidence from society that what is offered by the firm is valued.”
—Konosuke Matsushita
46
Profit is the fraction that sometimes remains
after everyone else is paid.
A retailer’s largest expense is to his manufacturers for the merchandise he sells—typically 55-75 percent of sales income, according to the 2007 US Economic Census. He pays his employees 12-20 percent of sales, plus benefits of 2-4 percent of sales. Then there’s rent, utilities, and insurance, amounting to 3-8% of sales. Telephones, advertising, office supplies, computers and equipment, accounting, and a hundred other miscellaneous expenses typically take 8-14 percent. And then there are the unexpected expenses, the only surprise being which ones and how much.
Will there be anything left? That’s the question that deprives a retailer of significant sleep. It creates his notorious obsession with expenses and earns him his reputation as “frugal,” “scrooge,” “tight bastard,” and some less printable.
If sales are good and a retailer manages expenses carefully, he might achieve the 1-3 percent net profit the Economic Census says is average (before the government takes as much as half).
When things don’t go as well, he works for free or takes a loss. And, as many unsuccessful retailers can attest, while competition and taxes restrict profits, the losses have no limits.
47
Profit is not a luxury.
A business that doesn’t make a profit isn’t a business long.
Profit allows us to continue our work. It lets us take care of our customers as both we and they think they should be. It allows us to pay competitive wages and offer health and retirement benefits. Profit lets us maintain and improve the workplace.
Ironically those who feel a business shouldn’t earn a profit are the ones who feel most cheated when an unprofitable company cuts wages and benefits or goes out of business, leaving employees without work.
“It is a socialist idea that making a profit is a vice; I consider the real vice is making losses.”
—Winston Churchill
48
Profit is the sum
of a thousand little improvements.
On rare occasions a product is so desirable and competition so limited that a store can turn a profit regardless of how well it executes. Some of us stand in long lines to get the latest electronics, newest video game, or hot Christmas toy because it’s the only way to get something we want badly. But those situations are rare and short-lived.
In the normal retail world, having the product is only the starting line of the competition and gets us nowhere close to break-even. Turning the bottom line from red to black requires a combination of many little details—effective advertising, convenient location, attractive displays, knowledgeable salespeople, visible signage, reliable systems, quick checkout ….
The formula isn’t secret. It just requires continuous attention, hard work, and persistence.
49
Profits are for growth,
not vacations and extravagance.
A store needs profit not so the owners or investors can buy yachts and winter in the Caribbean but to grow inventories, expand locations, add personnel, upgrade systems, improve facilities ….
A successful business grows, with or without management’s consent. Products and services that appeal to existing customers attract more customers. Stopping a retail store from growing is as difficult as holding a boat still in a current—you’re always moving, forward or backward. In retailing, backward is dangerous; forward is preferable but expensive—it requires profits.
50
Profit makes a better workplace.
Profit allows a store to pay higher wages, provide better benefits and perks, afford new technologies, and create a more comfortable and attractive work environment.
Profit relieves constant performance pressures and avoids looming threats of layoffs and dismissals; it gives management and employees latitude to try innovative ideas and promotions and to expand into new opportunities and products. It affords the personnel and equipment needed to serve customers well and create a base of customers who respect and appreciate the store and its employees.
Creating a good workplace is much easier when we have profits to work with.
51
Profit is every employee’s business.
Managers who assume employees aren’t interested in or can’t handle profit information underestimate their people. It would be a poor employee who never gave a thought to the store’s need to sell for more than what it pays.
Without access to actual numbers employees envision the store’s gross margin to be mostly net profit, and they assume the owner takes it home—profoundly wrong data for decision making as well as for engendering commitment.
With the exception of individual payroll information (which everyone expects to be confidential but rarely is), a P&L contains few numbers that are critically sensitive. Employees can not only understand income and expense items but can directly influence many of them.
Retail doesn’t get rave reviews.
Most shoppers agree that the typical retail experience isn’t good. Many say they hate to shop—stores are crowded, parking is distant, help is rarely available, lines are long, salespeople don’t know the products ….
It’s strange and unfortunate that retail can’t rate better satisfaction, especially considering the army of talented business people focused on it. Maybe it’s that consumers experience retailing almost daily and become highly discriminating in their standards. Or perhaps they see excellent examples of particular aspects of retailing individually, but rarely does any retailer get it all right at once.
More likely it’s that a store with ideal facilities and an abundance of top quality salespeople is too expensive to be competitive.
Whatever the reason, a retailer can expect little sympathy from his customers. Their patience is thin, their budgets stretched, and they are ever-conscious of their power to take their business elsewhere.
53
They crave the low price
but curse the poor service.
Most shoppers subconsciously recognize the realities of price/service trade-offs—they can have low prices or they can have good service, but not both.
Great service in retailing isn’t a secret formula—it’s mostly a matter of the quantity and quality of employees. A retailer who wants to improve service simply hires more and better people. And all would, if price competition didn’t constrain expenses. The challenge is in finding the balance between service and price that appeals to customers.
When customers choose a store they’re choosing the service and amenities they’re willing to pay for. But just having to choose is frustrating. Everyone wants to believe they can get low prices without compromises in service. Occasionally it works out; often it leads to disappointment and dissatisfaction.
54
Expectations rise with every contact.
The last experience is the new standard.
Attentive salespeople make an impression today, but if they’re not available tomorrow it’s not only a missed opportunity—the customer feels slighted. New displays and fresh décor impress a customer on the first visit or two but soon are hardly noticed; when décor deteriorates, the store is perceived in decline. A consistent record of having what the customer needs only makes a stock-out more disappointing.
In retail, maintaining service, systems and facilities isn’t enough. Only continuous improvement keeps customers.
55
No retailer ever won
a battle with a customer.
OK, it’s true—customers are sometimes just wrong. They misunderstand products, what a store can do, how business is done, or what pricing is realistic. Sometimes they seem totally unreasonable.
But even when our logic is flawless and our facts undeniable, presenting them doesn’t get the results we want. If we show customers they’re wrong or how much they don’t know, we only embarrass them and increase their unhappiness with us.
It’s almost always more productive to swallow our pride, apologize for the perceived injustice, and make it “right.” Our win is getting the business and keeping the customer.
56
A jilted customer
makes revenge a mission.
It’s hardly worth any price to have a customer mad at us. He goes out of his way, not just to get even, but to inflict considerably more damage on us than he feels we’ve caused him.
The problem is typically that the customer feels neglected and disrespected by an impersonal and uncaring business. He assumes, rightly or wrongly, that getting its attention will be difficult, and anticipation of this frustration builds animosity even before he seeks resolution. And because he perceives the enemy as larger than he is, he believes the “justice” he exacts must be multiplied to be felt.
The solution is usually as simple as taking time to show him that our business consists of real people and our people do care about him and his transaction.
57
Happy customers come and go;
unhappy customers accumulate.
Satisfied customers might do business with us again. We’ve proven ourselves a trustworthy source, even if only one of many.
Dissatisfied customers have longer memories and look for opportunities to warn others away. They’re expensive enemies to have.
It’s usually worthwhile to actively look for unhappy customers, open a dialog, and try to make up with them. Often a little attention turns them into equally vocal advocates.
Schaeffer Brothers Piano in Southern California ran regular classified ads offering cash rewards to anyone who could find a dissatisfied Schaeffer customer.
58
Complaints are signs our customers care
and want us to do better.
When a customer complains it often means many others feel the same way but don’t bother to tell us—instead they take their business elsewhere. Consequently one complaint represents an opportunity to improve service to many customers.
We should welcome those few who take the initiative to tell us what needs improvement. It’s information we vitally need and, although it might not be pleasant to receive it, these customers are going out of their way to help us.
59
Customers love social causes
but they buy value.
“Buy American.” “Boycott companies that underpay laborers.” “Buy from companies that protect the environment.” “Support our local businesses.”
Everyone empathizes with a good cause. But when it comes to our money, there’s a cause we hold dearer: getting the best value.
Many social causes deserve our support—indeed our survival may even depend on them. But ultimately the decision whether or not to support them is the consumer’s, not the retailer’s. If we attempt to choose for our customers, they’ll simply follow their preferences elsewhere.
Despite Wal-Mart’s extraordinary success in retailing, bad publicity regularly haunts them for sourcing from low-wage areas, lopsided price negotiating with suppliers, displacement of local retailers, etc. As a society we’re torn between the social effects of their price efficiency and the savings they bring us as consumers.
Regardless of the often-expressed social concerns, Wal-Mart remains the world’s leading retailer. We disdain the killing but we eat the meat.
60
“I know you have to make a profit;
I just don’t want you to make it on me.”
This is often said with a smile, but not really in jest. It doesn’t occur to them that they’re really saying, “I'd like you to do some work for me, but I don't want to pay you for it. Put it on the next guy’s bill."
Despite the vague understanding that a store sells its merchandise for more than it paid for it, few outside of retailing comprehend and accept the need for this. Profit is regarded more as a windfall to a business than a necessity, finagled rather than earned, and something to be resisted by every savvy consumer.
61
A sales presentation is not the place
to give a business education.
Understanding is the key to relationships. However, most customers’ understanding of business is so limited that any discussion of it is counterproductive. It raises so many new questions that the relationship goes backward instead of forward.
Explaining wholesale costs is almost never an effective price-negotiating technique. Although most customers recognize that merchandise has a wholesale cost, they aren’t always convinced that a sale must cover it, and few indeed comprehend the breadth of expenses that a store incurs or the need for each sale to contribute to them.
In most cases we do best listening thoroughly to our customer’s expectations and exploring for an option acceptable to both parties. It’s not necessary for the customer to understand our side to be happy with his.
A lady who sold us a used trumpet got seller’s remorse and came back to demand her trumpet back.
In an accusatory tone she told me that she knew we were going to sell her trumpet for more than we had given her. When I agreed she froze. It seemed she had prepared an elaborate argument to expose the fact that we were making a profit on our sales.
I offered to give her the trumpet back and we discussed what she could probably sell it for and what efforts it would require. She decided she was better off selling it to us.
I doubt she’ll ever be comfortable with us making a profit on her transaction, but she did assess, correctly I believe, how she would come out best.
62
A businessman who matches
the stereotype has no customers.
TV and movies portray businessmen as ruthless and untrustworthy. A less savvy person attempting to deal with them is sure to get burned.
The stereotype is particularly ironic considering that every experienced businessman has learned the value and necessity of customer satisfaction and on-going relationships. A lopsided deal is more costly for the retailer than the customer since any further business becomes unlikely. No market is so large that unethical transactions don’t come back to haunt their purveyors.
Business people who abuse their partners and customers soon run out of people to do business with.
“Many persons have an idea that one cannot be in business and lead an upright life, whereas the truth is that no one succeeds in business to any great extent who misleads and misrepresents.”
—John Wannamaker
63
A low price won’t excuse us
from service and problems.
No matter how good a price we give an old friend, a relative, or a tough customer, we’ll still be expected to take care of any problems, defects, and unforeseen labor and expenses that arise.