I had a conversation with a potential customer at a trade show last week who was lamenting his decision to finally bring in a direct-import container of pottery two years ago. He walked me through his struggles step by step:
- He felt that he had grown his pottery sales to the point that he would have no trouble moving through the 1,200 or so pots that would fill the container, and placed an order for a wide range of pre-assorted pallets, which would offer him a broad spectrum of shapes, colors and sizes to fill his shelves – this was all good, he didn’t fall into the trap of ordering the cheapest goods possible, which often means getting dozens of sets of the same items.
- He prepared his pricing for the new pottery program using his standard margin structures.
- The pots arrived in good condition, he unpacked, priced and stocked the shelves.
- The pots sold like crazy – by the midway point of the season he had already moved virtually his entire container. The sell-through rates were almost double anything that he had ever experienced.
- He came back to the pottery vendor for an in-season re-fill order, and discovered that the supplier didn’t offer such a thing.
- He found an alternate source that had inventory on hand for him, and placed a huge re-order of open-stock goods, expecting his tremendous sell-through rates to continue.
- He applied his standard margins to the pots
- His pottery sales dropped to less than half of their normal level.
- He ended the season with an enormous inventory of left-over pots and no budget to reinvigorate the department.
- The following season his pottery sales stayed low – at the time of our conversation (October, about 17 months after the re-order), he was still working though pots left over from the re-stocking the previous May.
Why did his pottery sales stop in the middle of the season?
The problem wasn’t with the replacement product – the quality and variety were great. His merchandising was sound, and the product was kept clean and salable. The weather continued to be good, and his overall sales maintained – only the pottery department dropped through the floor. He couldn’t identify any other variables that had changed such as competitor specials or sales.
What went wrong?
As you would expect, when he ordered in a direct-import full container of pots, he realized significant savings from his previous pottery purchases. When he applied his standard pottery markup to the DI goods, he filled his shelves with pots that had retail prices about 60% below the levels that his customers had come to expect. He failed to recognize that the DI pricing offered the opportunity for increasing his margins – keeping his retails in the same general range as they had been would have afforded him incredibly enhanced profits.
While his customers got great prices on the imported pots, they also quickly got accustomed to the lower prices – and rebelled when the more expensive domestic goods replaced the DI pots on the shelves.
“Passing the savings along to the customer” can be an effective marketing concept, but as in this case, it can also paint you into a corner. It can change customer expectations and behavior, and leave you without any good options for rebuilding margins when circumstances change. While it can be especially effective with commodity goods or bulk items, good flower pots are sold on other merits. Quality pots are essentially a fashion item, and as such will support solid margins if your pricing strategies allow it.