De-Evolution In The Market: Part 2
Retailer Pricing Strategies Lead To Undoing
Image: Diki / Adobe Stock
Ladies and gentlemen, lend me your ears! In part one of this article (“Are We In A De-Evolution?”), we waxed eloquently about the troubles manufacturers cause to retailers with their general business practices and — more specifically — how they position and price products for the entire retail ecosystem. As the saying goes, though, there are always two sides to every coin. So, retailers, it’s your turn to have the spotlight cast upon you.
Balance Between Price & Volume
Being a former shop owner, I fundamentally understand the challenges of creating a balance between price point vs. sales volume. Price your product too low and even if you sell 1,000 units, you still may not post healthy profits. On the flip side, price your products too high (to create a larger margin) and you end up selling so few you still don’t create enough profits to pay your business expenses. It takes an ever-present eye on the horizon to find out just where that sweet spot is to produce optimized profitability.
The problem: we often get caught up in focusing on the wrong facet of our business. As mentioned in part one of this article, the firearm industry is currently in a state of pre-COVID price structure while trying to manage a post-COVID expense burden.
Based on the examination of dozens of businesses since the start of 2024, there is a massive incompatibility here, and a “race to the bottom” pricing strategy will only harm a business more than it can help. So yes, manufacturer Minimum Advertised Pricing (MAP) is, by and large, often the “Market Price” of goods we sell within our industry. It, unfortunately, is set by the manufacturers, not the retailers. However, pricing products at MAP is a choice — not an obligation.
Let’s look at this from a different perspective.
In your community, I would wager you could canvass a dozen or so restaurants and find the range of prices for a simple cheeseburger. In my marketplace, the range is from $6.69 to $22 for a simple, no-frills quarter-pound cheeseburger. Sure, there might be subtle differences in sauce, bun and toppings, but at the end of the day each facility justifies its price not based on what is being served — but where and, more importantly, how it is being served.
Each restaurant has a very different operational expense, which is how their pricing is determined. A fancy sit-down restaurant could never post profits at fast-food pricing, nor could a fast-food establishment sell enough burgers if they priced them at $22. The pricing of products is a consequence of operational expense and every facility should fundamentally know what that is, how it impacts the profits they need to generate and by extension, dictate their pricing strategy.
The Product Bundles Consequence
Speaking of pricing strategy, I was able to bear witness — all too often — during my time in the distribution channel of this industry of how many (if not most) retailers manage their shelf pricing based on their cost of goods and not on their operational expenses.
During that time, the distributor I worked for fought tooth and nail, on behalf of the retailers, to try and get the manufacturers to liberate some extra margin potential from their pockets into the retailer’s. This, for those of you around long enough, was the dawn of the “Buy X get one free” product bundles. Often it was “Buy 9 get 1 free” or “Buy 6 get 1 free” or something similar.
Let’s take a closer look at the “Buy 9 get 1 free” example.
The manufacturer offers this opportunity to engage with retailers. A nine-for-one promotion essentially gives the retailer the opportunity to — if they hold their normal shelf price — gain an extra 8% margin (if the original asking price was set at 20% margin). This is huge and can turn the tide of a product being a loss leader (a product, at its asking price, produces no profits) into something that creates profitability.
In execution though, history bears out a very different story. In watching market data — specifically selling prices, nearly to the day — when these manufacturers shipped the “free goods bundle” to retailers, the market asking price for those products dropped by, you guessed it, 8%!
What this means is retailers were “dollar cost averaging” the goods they received, slapping on their normal margin and tossing them out on the shelves, prideful they now had a price better than the shop across town.
Unfortunately, the reality is the real winners were the manufacturer (as they sold more product), the distributor (for the same reason) and the consumer because they were able to purchase at a lower price. But the retailer actually made less money.
Yes, that’s right, less money. Let’s do the math …
Replacement unit cost: $500
Normal margin: 20%
Retail shelf price: $625
Profit per unit: $125
Buy 9 Get 1 Free Bundle.
Dollar Cost Average unit cost: $450
Normal margin: 20%
Retail shelf price: $562.50
Profit per unit: $112.50
Buy 9 Get 1 Free Bundle while holding price.
Dollar Cost Average unit cost: $450
New margin: 28%
Retail shelf price: $625
Profit per unit: $174
When you run the numbers, it only takes the sale of six or seven units, if you hold shelf price, to equate to the profits generated by all 10 units if you drop your shelf price to maintain the 20% margin profile. After you sell the seventh unit (if you hold your regular price), those three extra units will produce an extra $609 in profit. This is over 50% more profits!
The problem: Most retailers don’t do this. Time and time again when we examine where market price shifts right after these programs ship clearly indicates retailers were happier handing that extra profit potential to the consumer based on the misguided ideal “lowest price is best.”
It’s no wonder manufacturers don’t hand away this extra profitability often. I’ve heard said more than once behind boardroom doors “If the retailers are just going to hand those extra profits to the consumers, we may as well keep it for ourselves!” And, the manufacturers aren’t wrong in this sentiment.
Change Of Focus Needed
This is just one example of many highlighting how retailers focus more on market price instead of operational efficiency, fundamentally understanding their operational expenses and using this knowledge to set their pricing strategy.
The real way to fix all this mess, specified in both articles of this series, is to start with retailers truly understanding the margins and profits they need to generate to be a strong, healthy and viable network. Then, they need to clearly communicate this up through the ranks until this knowledge is known, at its core, through every facet of this industry. This way we can all create an ecosystem where retailers aren’t being an exploited workforce.
In addition, the manufacturers need to be willing to listen and understand the operational retail expenses of a post-COVID world and see where solutions might exist.
If we can do this — sooner than later — we’ll shed a century-old mindset and evolve into a far healthier industry. It’s within reach — and it starts today!
