The value of what you sell is not based on cost.

1. The value of what you sell is not based on cost.

For years many retailers have done what is commonly referred to as "Keystone" pricing, where the wholesale cost is simple doubled to become a price that gives a simple reasonable profit margin.

Often times, pricing of an item like this might be deemed artificially low, especially for trendy items.  I’ve heard some recent complaints from retailers about sales being down. However, in some cases their hot selling items are actually priced way too low. Therefore, on what they are selling, they aren’t making any profit.

2. Sometimes simply changing your prices by a few cents can have a profound effect on your bottom line.

Some recent studies have shown that for every 1% raise in prices, the average profit rises by 11%.

I can relate one story told to me that falls this same kind of category.

A novelty companies was having a going-out of business auction. Our customer was able to purchase  10,000 lighted gyroscopic Yo-Yo’s 50 Cents each. At the time, this particular quality, name brand item typically sold for a retail price of $19.95.

This customer figured the price was too good to pass up. The items should take up very little warehouse space, so his flooring costs would be nil.

He originally threw a number of these into a bargain bin for $1.99 each,  and of course they started selling like crazy.  When he mentioned this great buy to me, I mentioned that I thought his price was way too low. This got him thinking. He started gradually raising the price, and the item kept selling.  By Christmas time of that same year he was still selling large quantities for $19.95 each.

He sold so many of these, that he actually jump-started a trend in his area. All of kids (and many adults) had to have one of these. 

I was later told, that over a period of a couple of years he sold out all of his inventory with the overall average price being $13.95.

So based on his original investment, this translates to whopping $134,500.00 in gross profit on this buy. That’s ($139,500 Total Retail Sales – $5,000  Total Cost).

Had he kept selling these for $1.99 each, that would have only amounted to a total profit of $14,900.00. 

That’s a $119,600.00 difference in profit!

3. Conclusion.

So it seems that the value of this item to the consumer, was not based on either cost or price!

If you need assistance with evaluating your pricing structure, please contact the CCS Retail Systems Support Department.

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