April 25, 2018

Raise Prices on New Items

I spent the past three days explaining how marketers nuke businesses with discounts, promotions, and free shipping. As a marketer you likely disagree with me ... the merchants messed up or Amazon took your lunch money or whatever and you are simply responding to adjacent issues. You may be right. Of course, if the only tools in your toolbox are discounts, promotions, and free shipping ... well, then you are stuck. Brilliant marketers with low-cost / no-cost marketing programs have a lot more they can do to grow the business.

So the next thing that happens is that the CFO goes after the merchandising team to boost gross margins. You can't raise prices on existing items, so new merchandise takes the stage. Two things happen.
  1. Prices increase. If a comparable new item used to sell for $35.00 with a $17.50 cost of goods, then the new item sells for $42.50 with a $17.50 cost of goods, boosting gross margins up to $25.00 instead of $17.50. Problem solved!
  2. Quality decreases. On some widgets, the item is still $35.00 but the quality is worse, yielding a cost of goods of $15.00 and gross margins of $20.00 per item.
The strategy rolls out.

It takes a year to truly see what is happening ... but the early returns are not promising.
  • Net items, which represent 25% of company volume, are selling 20% worse than prior year (due to higher price points).
  • Total sales are down 5% as a consequence.
  • The CFO is even more angry.
  • The marketer responds by moving to 40% off (on all items, even the items that are still selling at an acceptable level), further nuking the brand in the process.
Tomorrow I'll discuss why I just spent four days on this topic, ok?

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