While clearing out his home, US industry consultant Gordon Hecht realised there’s a fundamental difference in how retailers frame their added-value sales – and that a little terminology rethink could result in major margin gains …
Over the last few weeks my everlovin’ bride and I have been in a purging mood. For those who have not Marie Kondo’d their condo, that means moving out, throwing out, or donating anything in your home that doesn’t bring you joy or isn’t being used (aka useless).
We sorted things into three groups: items that are worn out and destined for the trash heap; others that have some cash value if we can sell them; and things that have no value to us, but could be donated to find a good home elsewhere. We learned quickly that for the last category, it’s just plain too hard to donate things these days – while it’s a noble endeavour to give to the less fortunate, most aren’t taking in used clothing, housewares or furniture.
We wanted to get the word out about our excess merchandise. You probably do the same thing and call it ‘advertising’. We forwent the traditional process of a newspaper classified ad and handwritten signs on lampposts, and posted the flotsam and jetsam on social media and our own neighbourhood website. I created several postings with photos, descriptions, measurements, with prices or marked ‘free’.
This is where it became interesting …
We started with about a half-a-dozen things priced $10-100, and half-a-dozen ‘free’ items. People who responded to the ‘for sale’ items asked one or two questions, set a time to pick up, showed up on time and paid with cash (I found it strange that most of them did not have the exact amount, even though prices were all in multiples of five – they had bigger bills and expected me to make change).
The people wanting the ‘free’ merchandise were more cavalier about getting their new treasures. They asked more questions, like if we had a non-smoking house, how many volumes were in our encyclopedia set, and if we could deliver those free goods. Almost all broke their pick-up appointments, and others texted us nasty messages when we told them the items had been claimed by someone else (why didn’t you hold it for us?).
I’m not a sociologist, and I don’t play one on TV. But it occurred to me that when you assign a value to something … it becomes valuable! Contrast that with knowing that things that are zero-cost or free have no worth and become worthless.
People who paid for stuff – new or used – were more respectful of my time and what they were getting. Freebie people couldn’t care less.
It is said that ‘free’ is the most powerful word in advertising. And since the job of advertising is to bring shoppers’ footsteps to your door and eyeballs to your website, you probably still want to use that word to drive door swings. But the job of the sales team is to convert those shoppers into customers and then raving fans. Giving away free gizmos or services may be a misstep on the ladder of success.
A profitability rule of retail is that when someone gets something for nothing, then someone else gets nothing for something. Whether it’s delivery, removal of the customer’s old items, or accessories like pillows or protectors, each has a cost to your business and a value to your shopper. They only lose their value, to your customer and your sales team, when you give them away for free.
It’s understood that the first-time closing of sales is more important today than ever. And I’m not against using bonus merchandise incentives to gain that sale – those bonuses can still have value when your sales team properly frames the inducement.
Which phrase do you think has more impact? “I’ll throw in delivery for free if you buy now,” or “I can save you time and money by including our full-service delivery, normally $99, for no extra charge on an order placed today.”
Every time your sales team discounts an item or gives merchandise away for free, they shred your profit margin. Retailers that work on a 50% margin (100% markup) gain a gross profit of $50 for every $100 they sell at retail. A -10% discount comes right off the top and reduces the gross profit from $50 to $40 or a 40% margin. A -20% discount takes the margin down to 30%. In terms of cash, a $100 discount is a discount off the gross margin.
Free merchandise giveaways have a similar effect. Think in terms of 10 to one. It takes about 10 retail dollars to make up the loss of one free merchandise dollar. Tossing in a pillow with a $20 dealer cost means you’ll have to create another sale for $200 to earn back the net profit dollars.
I’ll never say never, but giving stuff for free is a disservice to your business and merchandise. Everything in your store has a value, and giving it away for free makes it worthless and reduces the value of your brand.
Instead, why not build value, by building packages of services and products that make sense to your shoppers and lessen confusion in the selling process? Think of McDonald’s Happy Meals – the toys or books aren’t free, they are value-added inclusions.
Explain the value of each item in your store. Make sure your team knows why your delivery service costs $49-99 or more. Know the value of each accessory item, and quote the full price first.
There’s never a real need to give Sumthin’ for Nuthin’ … but if you know someone who needs 83 VHS tapes or a maroon leisure suit, I might be able to help.
Gordon Hecht is a business growth and development consultant to the retail home furnishings industry. He can be reached at Gordon.firstname.lastname@example.org.