Pricing Strategy
Pricing By Demand Instead of By Purchase Price
By Steven Pollack
Mar 12, 2006, 17:56

Don't consider your dog inventory to be savings

Everyone makes mistakes when buying inventory.  Some items sell consistently well while others move slowly.  Many retailers have a hard time discounting the slow movers and dropping the item from inventory. They feel that because the item is still in stock and may eventually sell at the desired price then the accumulated inventory is like a savings account. If you consider your poor selling items as savings, however, you have invested your life’s work in a poor investment.

What happens is that over time your inventory mix gets choked with the accumulated poor sellers.  You inventory is composed of items past customers avoided in favor of better sellers.

Jewelers do this all the time. They buy a parcel of (5) one carat diamonds and apply a standard markup to them all.  They sell the three nice cuts fast, then sell the average cut in a normal time, and the poorly cut diamond sits in their inventory as "savings". Over time, the dealer's inventory consists of these poorly cut stones but is supposedly worth $100K.   In reality, however, it is worth less than that because the $100K represents the book value and not the market value.

The better method is to sell the premium stones at a premium price, the average stone at an average price, and the poorly cut stone at a discount. It averages out to a normal profit but keeps all the money in play so you can purchase the next parcels of five diamonds.  The need for this system becomes even more critical when the inventory is subject to spoilage like clothing.  At the beginning of the season people pay a premium but by the end of the season the retailer is looking at carrying these off season items for six months in storage.  Worse, the items can go out of style before the next season and may never sell. 

Large retailers already implement this system of selling high at the beginning of the season and discounting to liquidation at the end of the season.  Even if your goods are not seasonal, your cash flow and turnover will benefit by selling the best goods at a premium and the dogs at a discount until liquidated.

Don't let your dogs become your savings.