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Every Friday, I post a small insight into running Curio City and/or Blue Hills Editorial Services. My most recent posts are directly below. You can also start with the first post, or use the subject labels to the right to home in on particular topics. Feel free to comment on anything that interests you.
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Friday, September 15, 2006

The Neverlate Dilemma

Consider the Neverlate clock.

It’s a great item during back-to-school season. But the economics are difficult. Each clock costs $18 plus about $2 freight, if I can afford $960 to reach their 12-case discount (48 clocks). Because my open-to-buy is chronically struggling back up to zero, I have to go for their 3-case minimum instead, and pay $22 apiece.

The Manufacturer’s Suggested Retail Price (MSRP) is $34.99. To me, “.99” price points mean sale items, so I use $34.95. That four-cent difference happens to make me the cheapest vendor on the internet, and lately I have sold a goodly number. Each sale brings in $12.95 ($34.95 retail minus $22 cost). Profit! Right?

I wish it were that simple.

My cost structure requires a 50% average markup. 50 cents of every dollar goes toward replacing merchandise; the other 50 cents covers all of my other costs (or will, when I'm profitable). When I sell a Neverlate, only $17.48 goes back into my OTB. Because the clocks cost me $22, my OTB actually declines by $4.52 (the $22 cost minus the $17.48 infusion) every time I sell one. That’s another way of saying that I take a $4.52 loss.

When sales are broad-based, some of my merchandise that costs less than 50% of retail makes up the difference. But when an item like the Neverlate surges, as it did last month, I have a real problem.

This is a pickle, George. This is a pickle.

I know of five other web retailers selling this thing. Their price points are $34.98, $34.99, $39.95, $39.99, and $44.99. It’s tempting to simply raise my retail. But with two other online stores underselling me, I’d never sell another one. Only bricks-and-mortar stores can get away with price gouging (because in-store consumers can’t easily comparison shop). You can bet that the $44.99 retailer is not selling any clocks online.

When I went to reorder recently, I learned that the supply is limited; soon everyone will run out. I immediately raised my price to $39.95. And as expected, sales immediately stopped. Hooray! I'm no longer losing money on Neverlates.

That's obviously self-defeating.

What to do?

First, I’m going to have to cough up the $960 to get my cost down to $20 apiece. That cuts the loss from $4.52 to $2.52. I’ll have to risk getting stuck with 48 of these things if sales drop off when the back-to-school season ends. Second, I can inflate the weight by a few ounces to nick people a little bit extra on shipping. It goes against my own policy, and I hate doing it; but I’m desperate here. Let’s say that I can recoup another $0.52 that way and reduce the loss to $2 apiece.

By squeezing my budget mercilessly, I increased my OTB percentage from 50 to 50.75%. Now each sale replenishes $17.74 instead of $17.48. The gap is down to $1.74. I can’t figure out how to make that last $1.74 go away. I’ll have to absorb it, and make it up on other products.

After considerable deliberation, I decided that building volume is more important to my business than maximizing revenue per sale. So I dropped my price to $34.99. Now I'm tied for second-lowest price, with the difference being only a penny. The manufacturer sold me two more cases (eight clocks) from his limited supply. That gives me a total of 12 more in stock between today and the time the supply returns to normal in November. If I can sell all 12 between now and then, I’ll assume that the demand is sufficient to justify placing the big 48-piece reorder next time. If the item dies on me despite my loss-leader pricing, then I will instead try to trickle them out at the 39.95 retail.

Footnote: More than half of my recent Neverlate customers have paid an extra $2 for giftwrapping. If only I could get everyone to buy giftwrapping, I’d be all set.

(Update, August 2007: I've restored the original version of this post. It replaces a bowdlerized version that removed all price specifics at the vendor’s request. Since I decided to sever communication with that vendor after he removed my page link -- and especially because the post didn’t make sense when purged of numbers -- I have replaced the censored version.

(Ultimately, I ended up marking my stock down a couple of bucks to clear it out. At this writing, I’m down to four left. Thanks to its already inadequate markup, I just about broke even on this product. That’s too bad; it was a nice clock. I actually bought one of the last copies for myself.)

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