Gordon Woolf's Blog

How can they sell at 50% off?

As I write this the end-of-year sales are on and it seems every store in catalogs and on TV is advertising "50% off". How can this be legitimate? Does it mean I paid too much at any other time of the year?

My answers are: Yes, and Maybe.

Let us look at how retailing works. The retailer buys either from a manufacturer or a distributor. There will be standard discounts which will vary according to the trade and type of product. Basically it will also depend on how quickly the items are expected to sell and the risk if they remain unsold. For example, a newspaper or milk may be sold to the retailer on "sale-or-return" so effectively the retailer only pays for what they have sold, while the distributor takes back the day-old newspapers or the week-old milk. The retailer is expected to pay quickly but will always get a credit for the returns, often before the account has to be paid. That can mean they do not have any capital tied up but the percentage profit they make, whether calculated on the price paid by them (the cost price) or the price paid by the customer (retail price) is small.

On the other extreme, in the fashion industry, as it was traditionally, the stock changes either twice or four times a year, and has to be ordered well in advance of the changing season. When prices were stable the clothing store would bundle up the winter clothes as summer approached and store them until next winter. But fashions change and changes were encouraged by the trade, so the fashion end of the retail market would expect to sell the new season's clothes at a big mark up, at least double the price they paid to the distributor.

They would know that not everything would sell quickly but they needed stock in their store through the season. Their takings would become less as the season progressed and it was normal to offer discounts and, at the end of the season to sell whatever was left in a clearance, often at half price or less. That would mean they made no profit on the last items sold, maybe even made a small loss. But overall there would be a normal profit, provided they made the right decisions when they made the initial order. As an example, let's say they bought 100 dresses at $10 each. That's $1000 paid out. If the first 50 sell at $20, that's their cost back, and the remaining sales, let's say they all only sold in the clearance, at $10 (which is "at cost" or a genuine 50% off what they had been selling for, then overall they have made a gross profit of $500 on that original $1000. Out of that they have to pay all the expenses of running the shop.

The retailer buys most stock knowing that they are going to have to discount in the end so they buy on the basis that they must make a certain average margin across sales of the entire stock. Then they make guesses, based on experience, about how much of the stock they will be able to sell at "full price" and how much at various discounts. They then set up their "full price" (which might be +100% or even more of the wholesale purchase price) and their various discounts to give them -- on average -- the margin or gross profit they must make on selling the entire stock.

Now it starts to get complicated, because we have to cope with the opposing forces of increasing production costs, a rising currency conversion rate, changes in fashion and whether there will be a new, improved version of the product coming soon. With rising inflation and/or a falling dollar it will not cost $1000 to replace what cost they bought previously. It may cost $1050 or $1100, and those extra dollars have to come out of the profit from the previous season.

If changes are the other way, and the replacement equivalent will cost $900 or $950 then it may seem that retailer is doing better and has more than his $500 overall profit. We tend to have a well informed public and if it is an electronic product instead which is being cleared at "50% off" then even that apparently huge discount may not be enough, and so discounts rise even higher. The superceded TV or tablet may have to be almost given away once an announcement of the new version has been made. Much better to have sold it for whatever the retailer could get a few weeks earlier.

Things get even more complicated when a distributor offers increased discounts according to the quantity purchased. The savvy retailer needs to make a lot of calculations and include some informed guesswork to decide whether the extra discount is worth the added risk. If the extra discount is sufficient, then the retailer has to decide whether the incentive to the customer should be offered when he buys or after he has sold his expected number of items at what is now an additional profit. This decision may also be affected by whether the product has a use-by date.

Manufacturers make mistakes, especially with variations such as flavours or colours. They may make arrangements to advertise a "special" and give the retailer an incentive to have greater stocks at that time. The retailer with cash reserves may buy then knowing that he'll sell more "on special" and have sufficient left bought at the better price to cover normal sales for a period thereafter. This will not work if the manufacturer has packed the "special" with different wording, such as a date-limited competition.

My real estate friend was fond of saying "there's a price for everything". The skill was finding that price. To the savvy customer who does not mind having last season's electronic gear or fashion, and the product with an expired competition date may be at an attractive price in a clearance store.

If we are to continue to have suppliers in the future, whether on-line or physical stores, then it is not the profit on any individual item which matters, it is whether the retailer is making sufficient overall to pay for the replacement stock plus all the other costs, including a wage for the retailer, and thus progress into the next trading cycle.

This brief summary does not cover all the reasons why you can legitimately find products at "50% off", but I have a couple of further warnings: Beware statements such as "up to 50% off" where many items may be at full price or at a much lesser discount, and beware the second or third tier chain trick of have legitimate branded products packaged without a normal accessory or tool and compared with the price of the full item "elsewhere".

You should also consider reasons for purchasing other than price. Will the place you are buying from help if you have problems? Or just be willing to show you how a device works, or set it up as well as delivering it? Price isn't everything.

Gordon Woolf is a co-author of Success in Store: How to start or buy a retail business, enjoy running it and make money, available from Amazon and The Worsley Press.
 

Learning to be a shopkeeper the French way

"A Pound of Paper" by John Baxter is subtitled "Confessions of a book addict", but is more than a memoir of a collector and "runner" in the secondhand book market, it is worthy reading for anyone cocerned with retailing.

In a late chapter in the book, after he had moved to France John Baxter particularly compares French ways of doing business as a retailer with those of other countries he has lived and worked in -- Australia, England, the USA etc.-- but I see those not so much as nationalistic descroptions but rather comparisons between different types of retailing. And I suspect that many customers would rather do business with those who play retailing "the French way".

I quote...

When Napoleon called England "a nation of shopkeepers", he wasn't only sneering at their lack of military style; he was expressing the general scorn of all right-thinking Gaulois for anyone who buys and sells for a living....the blood of emperors flows in their veins.This puts a different complexion on the world of commerce in France. It explains, for instance, the less-than-cordial reaction of a café owner when a foreigner walks in, takes a table and waves for a menu. The café owner isn't in business. This place is his home, where he may, if it suits him, serve you a cup of coffee...

There is more, but I wonder whether we in other countries have lost the respect we should have for the small retailer.

It is not completely lost; on Sunday morning I instinctively asked the local café owner if we were not too late for breakfast at 11.30 (and of course we were not!) And I am still a little sad that the mobile phone repairer who asked another customer to show me how a feature of my phone worked; I gained an acquaintance that day and we still nod in passing even though the store has given way to a big franchise business. In the new store such a happening would be unthinkable.

I do not believe this is just nostalgia. We need the level of shopkeeping where we do not just deal on price, the store where the two sides of a deal can be conducted with friendship and an acknowledgement that there should be a fair deal at a fair price.

An anglo-saxon suggesting we could learn from the French way of shopkeeping? I wonder what Napoleon would say?

*A Pound of Paper" by John Baxter, published by Doubleday, 2002

The need to make a profit

The radio caller was critical of banks, which is not unusual, but she put it in a somewhat odd way: 'I have to pay them interest, but what do they actually DO (for me?)'.

This may be partly the reason for the current Occupy movements around the world. To some youngsters it may just seem that if their parents run out of money, they just have to go to "the hole in the wall', but to those parents does it also seem that if they can buy computers, washing machines, furniture and so much more on "48 months interest free", why should the banks charge interest. After all they are only giving you money for a while, not goods permanently.

I know that doesn't make sense, but it kinda sounds logical.

The reason for the demonstrations that I have sympathy with is that it is no longer true that the rich are getting richer and the poor are getting poorer -- it is, some people have pointed out with figures and graphs, that the super-rich are getting richer, and that the rich and the poor are getting poorer.

I could claim that some of my best friends are millionaires, which is not quite true but I have known a couple well enough to visit their homes and have them visit mine. I don't envy them. Sure they make more money than I ever had but they do have to work unusual and long hours and the stress level is more than I would want, even though as a newspaper editor I once flourished on stressful work.

But we now have company directors who get pay increases by the millions and yet manage to do similar work for several companies at the same time. If their individual jobs were at the stress level of "my" millionaires, they'd have been dead long ago.

That's what I mean by things getting less fair. And therefore in general terms the Occupy movement has my moral support.

I'm not particularly blaming the chain store owner with his 48-months interest free and similar offers. The one I have in mind has said that people are stupid to accept some of the offers made in his stores as they don't suit everyone.

It is necessary for businesses to make a profit in order to reinvest but there is a big difference between making a fair profit and making the most that you can. Is the first aim of company directors to make the most profit for their shareholders or a profit which will ensure that the company continues to be viable into the future? Customers are important too, with the rest of the community needing at least a little consideration occasionally.

I don't think the unfairness claim can be made against more than a small number of the people who run companies -- it just seems like that sometimes.

Worst-case scenario: plan for it

In your business or even in life in general, have you worked out a worst-case scenario? It should be essential but I suspect too many people are unwilling to face the prospect of things going wrong.

Insurance salespeople will encourage you to consider what might happen if you had a fire, but few take it further than that, and the effects are often not those you can insure against.

Several recent reactions to changes in government policies, changes in the dollar exchange rate and surveys showing changes in consumer buying habits lead me to wonder yet again whether many business people ever work out what they'll do if things start to go wrong.

Those good at selling often overestimate their ability to sell -- but worst case is not always a lack of sales. As in the example I gave in the book Success in Store, it is also possible for a worst case to be caused by sales being too good. (Do you have access to funds to buy what you have sold, or, in a manufacturing business, the cash and/or credit to buy the raw materials?)

A lot of this is done with a spreadsheet. Just take the figures a bit further to the extremes. Yes sales in the convenience store we bought were poor, and even our own mishandling of customers might have been unable to make them worse, but what if road works started in the street outside and took way longer than were planned? I've seen that happen to others, and after putting off the staff and allowing for the lack of a need to buy stock, the overheads were still at a level which drew on all resources. (In the case I'm thinking of, the local authority was prepared to make a substantial contribution to promoting the strip shopping area when the work was done, but the businesses still had to get through to that point.)

The advertisement rate calculator included with my book How to Start and Produce a Magazine or Newsletter makes it easy to work out what would happen to income if a periodical publisher found all orders coming in for full pages instead of a mix of small and medium ads. But that is the kind of calculation which should be done with any business. I'm sure you've heard the joke about the business owner who admits that they are losing a dollar on every sale "but we make up for it in volume".

Retailers in Australia are currently trumpeting the benefits of a high dollar in lowering prices on imported goods, especially electronics. But have they worked out what they'd do if, over say a three or six month period, the dollar conversion rate dropped to half its present level -- which was where it was only a few years ago.

Computer retailers used to stock computers. Now few do outside of the demo stock on the floor. Not only did they learn to cope with price fluctuations but also with continuing upgrades in specifications. But a lot of stores went broke or closed because it was just too hard to cope.

In another field I went through some basic costings with a couple planning a restaurant. If successful it would have been a goldmine, but the most likely scenario was that they would be working their butts off for less than a living wage. Then I discovered that none of their forecasts included the cost of borrowing the admittedly fairly small sum they would have needed to get started. So, unless they started with queues outside their door on the first days they would have been going backwards slowly but certainly.

So think now of what could go wrong, and what effect it will have. If you cannot cope with that, you will be unlikely to cope with success.

How to work out what to charge for ads

Magazines provide a fascinating problem for anyone interesting in the mathematics of costing production. That's because there are so many variables.

Think of this: you plan a new magazine and you follow the usual practice of giving discounts for larger advertisements. Or maybe you work it out the other way: $500 for a full page, $260 for a half, $150 for a quarter, $80 for an eighth-page. Now you reckon that most of your ads will be small sizes, but then in come the orders for full pages and someone asking what's your discount for a double page spread (a "truck" they may call it). Instead of celebrating you suddenly realize that instead of getting upwards of $650 a page, you are giving discounts below $500.

That truck is driving straight through all your cost estimates, accompanied by a dozen Humvees. You may save a little on the time of putting one ad on a page instead of placing 6 or 8 little ones, but you may also find that the advertisers or their agents are ultra critical on proofs and the quality of the final job. Then you realize that those full page advertisers placed orders for 3 or 6 or even 12 months and your revenue is disappearing fast. Your costs may be going down a little, but they'll still want to keep changing their copy.

Fortunately there is a calculator around to help. The Adrates calculator is not completely free - it comes as a free download with copies of How to Start and Produce a Magazine or Newsletter and is an Excel spreadsheet that lets you do all those what-of calculations before you start telling people what your rates are (or helps you work out what they will have to become if you already have a publication).

Enter your suggested full page rate and the percentage extra you will charge for smaller ads and the discount you will give for series ads. Guess the percentages you may get in series bookings (you can play around with all these figures as much as you like) and the spreadsheet will give you a guide to what your rate card might look like.

Then, and this is the clever part, it will tell you, based on what percentage of pages you intend to devote to ads, how many pages of ads you will need. Then you can enter all kinds of combinations of the sizes they might be. If you go over the total it will tell you and it will give a cumulative total as you enter the numbers of ads.

Finally it gives you the total income at full rates, and then, the really important figure: based on your previously entered proportions of repeat ads, it gives your likely revenue per issue. And that is the figure which may come as a shock.

Of course you can then work out what happens if you get an extra full page. Sure, the revenue will shoot up but there is the calculation this spreadsheet does not do for you: what effect does it have on your printing and other production costs (especially if it takes you into the next postage category and you have a lot of mail subscribers).

This isn't a magic solution, but it will help with calculations that every magazine and newsletter publisher has to do at some stage, even if it is on the back of an envelope.

The book is available from Worsley Press or from Amazon, at US$26.95 and there's a lot more help than just this spreadsheet.

But first, have a look at the Adrates file (Download Adrates) which shows how the spreadsheet works.

 

Planning for success

Any would be publisher is usually exhorted on the various discussion lists to "do a business plan".

I've sometimes joined that exhortation but when I was writing Success in Store: How to Start or Buy a Retail Business, Enjoy Running It and Make Money, I told my co-author that I've never had a business plan.

He then took me through how I'd started a couple of businesses, and justified his own "always have a business plan" position. He claimed I'd had quite a detailed plan in each instance -- it was just that I had not written it down! So, as a writer, the one thing I've never written down, is my plan for success. However, more of those businesses have gone according to plan than those which have not.

You will need a formal plan if you are going to borrow money. However, even then a business plan can be drawn up on the back of an envelope.

A nice restaurant I used to go to had paper tablecloths and marker pens in a glass on every table because the owner said her original business plan was drawn up over a meal in another restaurant and she had to appeal to the manager of that restaurant for some paper to write it down.

It also helps to include, in advance, what you will consider to be failure. ("I will have failed if I do not publish two books in the first six months, sell 1000 copies or not be within a few hundred dollars of breaking even in the second six months").

Too many people struggle on because they attempt to justify the changed cicumstances.

There's no reason why a "business" plan can't be that within 12 months "I will have published Uncle Joe's memoir, sold 20 copies and he'd added me to his will".

You could probably carry that one in your head.

In search of funding

Maybe it's a little out of the normal run of production problems, but I had a reader recently point out that one of the major production problems for a small newspaper can be to have the funds to go on producing the paper.

That's a good point. I have come across newspapers that have received arts council and local education grants for things like running an arts page or a page (and sometimes a lot more) for one or more local schools -- especially if they involve the students doing most of the preparation work (I've been paid a few times to go along to schools and explain how a newspaper is put together).

I've also seen schools and other organisations divert funds they used to produce a newsletter to a newspaper which agrees to run a regular column.

However, in general, appeals for "support" don't seem to work in the long term -- much better is to encourage people to show their support by placing paid classifieds whenever they have something to say, something to sell, or someone to thank.

For a local publication, or one which serves a very specialised field where a number of people agree that they would lose substantially (either economically or socially) if the publication ceased, there could be an argument for a "Friends of ..." organisation that maybe gives some benefit such as discounts of some kind that don't cost the publisher anything.

You can also chase local politicians for inclusion on government advertising budgets, though this money seems to be getting much harder to get.

I have to admit that this isn't covered in any great depth in my book How to Start and Produce a Magazine or Newsletter although that does cover  much about setting ad rates, selling ads and considering the general economics of publishing.

Why is debt supposed to be good?

Why is debt supposed to be good? I had an accounts program for my business once which would warn me, whenever I did a "health check" on the business, that my level of debt in comparison to capital was "below an acceptable ratio". I did not take any action at that time, but have since noticed that the software company is now out of business. Debt is not necessarily bad, but there does seem to have been an assumption leading up to the present crisis that companies should have debt to optimise their profits. Now many of those businesses which had followed that trend are scurrying to replace debt with capital. I had four mailings from companies last week suggesting how I could benefit from buying additional shares in various lots from $500 to $10,000. They seem to have discovered that it takes only 100 small shareholders with $10,000 each to give them a million, 10,000 to give them a billion. One even suggested that I might like to reinvest dividends in new shares -- something I used to do but which most companies had stopped offering, presumably feeling that all those little transactions were not worth bothering with when they could go out to world investment banks and funds to borrow. I have to disappoint them. I started slowly converting from shares to cash around two years ago and am not planning to go back just yet. However, I am still reinvesting dividends with those companies where I have kept shares following the basic principle that Warren Buffett espoused of buying shares only if you'd want to buy the company if only you had enough money. But what of the smaller business? Basic principles remain as they always have. If you can buy something and then sell it for more and cover the total of your costs, including your own living costs, then you have a good business. Whether it is a market stall, an agency, a magazine, a newspaper or whatever, then a good business will survive. Some may have to adapt, but, for example, I continue to puzzle over why people will spend hundreds of dollars on a coffee maker for their own kitchen when for that they can buy hundreds of expertly made espressos and cappuccinos from friendly locals in their own high street. When families do not have the funds or security to go on an overseas holiday, they may well spend more on a coffee and cake and the occasional meal at a local bistro. And a business which starts now, offering goods and services which people want, will be ready to show its expertise when the good times return. That is, provided the business does not borrow beyond its means. Debt is for use when money is needed short term, such as for a new commercial coffee machine which will immediately boost daily turnover, or for other equipment or even premises which will continue to have a value greater than the amount borrowed. Just as a home mortgage remains a good debt provided you can meet the repayments and know that at worst you can sell up and have enough for the rental deposit on an alternative place to live, then debt is good for business if it is kept within similar bounds and you still make a profit after paying the interest charges. I mention in one of my books the colleague who sold his car replacing it with a new one on lease in order to get cash back to buy a piece of equipment. And that was someone who had worked in the finance and banking industry... who obviously did not know the difference between good and bad debt.