Tuesday, July 21, 2009

Buy less, sell for more.

"I don't understand why stores would raise prices in the midst of a slowdown," my customer said.

"Oh," I answered, "Let me explain it to you."

I could see the mild alarm in his eyes as he realized I was going to explain, but it was too late to escape.

We were talking about Magic cards, and how there weren't any deals to be had. (This was before there was any information about shortages...)

"Here's how it works. A couple of years ago, I would've ordered around 10 boxes of a new release. My cost of goods would've been around 750.00 for all ten boxes. I would have sold the first 6 boxes for about 100.00, for a profit of 25.00 a box. I probably would've sold 2 boxes by the pack for full price, for a profit of 70.00 a box. I would've sold the last two boxes for 110.00 for a profit of 35.00 a box.

"For a total profit of 360.00; or a 31% markup. Not great, but acceptable.

"Compare this to the newest wave. I got 6 boxes in at 75.00. My total cost of goods was 450.00. I will sell the first three boxes for 125.00, for a profit of 50.00 each. I will sell three boxes by the pack for a profit of 70.00, each.

"For a total profit of 360.00; or a 45% markup. Much more acceptable.

"I take only 450.00 out of my cash flow; and take only a little more than half the risk; and I only take up half the space and do roughly half the transactions to make exactly the same amount of profit."

The real question is, why would I do it the first way?

The answer is -- to keep the game flowing, and to keep our store in the running. After the initial burst of business, I might sell twice as much product over the next three months at full price, which is where the real profits come in.

The current shortage of Magic also points out another reason to order more at first, but try to sell it for less. You have quantity in stock in case shortages develop. This is rare, and not a great reason, but it happens. Like it has just happened. But even in this instance, I was able to garner enough product after becoming aware of the shortage that I didn't lose anything by buying less initially.

Actually, even the example in the paragraph above isn't completely right. By having my boxes for 125.00 for the last 6 days, I probably guaranteed that I wouldn't sell any. Now that I know there is a shortage, I take them off the market so I can sell them for full retail price by the pack.

So my profit margin suddenly jumps to nearly 47%. I make a 560.00 profit, on my initial investment of 640.00 for 8 boxes.

A long time ago, I learned that it is more important to have the product in stock than to lower the price.

I will probably have the following conversation many times in the coming week.

"How come your Magic is full price? I can get it for 100.00 a box."

"Sounds like a great deal. Why don't you do that?"

"Oh, well, they are out. Right now...but....."

"Why didn't you say so? I have really, really cheap prices on the product I'm out of..."

Confused look in the customer's eyes. "Well, where is it?"

"I'm out of it. But I do have this product for full price...."

Grumble, grumble. "Give me four packs...."

Still, if you have any doubts, the solution is actually opposite of what most people would expect. Firm up your prices, and order less product.

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