Name Your Price
Lenny Mattioli grew up in a tough Chicago neighborhood and knows a chump when he sees one. He bumped into a mess of them during his years in the mid-1960s as a mechanical engineer for Eastman Kodak Co. Every so often, he recalls, the giant company sized up the work of every engineer in Mattioli's shop in the Rochester, N.Y., headquarters and then gave each of them pretty much the same raise. To Mattioli, only a bunch of chumps would press a one-size-fits-all salary policy.
"There were lots better engineers than I was, but they didn't get a nickel more than I got," says Mattioli, still shaking his head almost 20 years later. "Kodak never gave me a hard reason to try to do a better job. What a way to run a company, huh?"
Of course, Mattioli muttered the obligatory vow, "If I ever run a business . . .," only to be jolted in 1969 by the chance to make good on it. His older brother, the owner of a small and struggling storefront television sales-and-service shop in Madison, Wis., died. It fell to Lenny Mattioli to return to the Midwest, try to liquidate the business for whatever he could get, and pay off some of his brother's six-figure debt.
But, to his surprise, he found that he liked to hustle TV sets. So he quit Kodak and quickly put the shop into the black. Then he began to build a business, American TV & Appliance of Madison Inc.
Today, the Madison flagship store is the size of several football fields, and American has opened equally vast stores in Appleton and Milwaukee, as well as in the Michigan mining town of Marquette. Its original product, TV sets, has evolved into the broader line of video components, and Mattioli has added such products as cameras, computers, stereo gear, appliances, and furniture. The company's work force has reached some 850 people. Sales for 1984 hit $160 million.
Now 41, Mattioli, chairman of the board and owner of 55% of American's stock, credits its success to an aggressive marketing strategy that rests chiefly on the ability of his salespeople to fix their pay and his profits through their performance on the floor -- the exact opposite of the system that Mattioli chafed at when he was at Kodak. "We've taken the bottom line and planted it between every salesman's ears."
The powerful commission system also gives American TV the appeal of an electronics bazaar, where the attraction is the bargaining as much as the bargains. Except on sale items, American has no fixed prices. Its advertising loudly exhorts people to "C'mon in now and negotiate your own price."
That breaks with the consumer electronics industry's standard method for setting prices. "The rule of thumb says you tie your prices to your costs," says Mattioli. "But we try to tie ours as close as we can to just how much the customers are willing to pop. We don't ask ourselves, 'Gee, what did this product cost us?' We ask, 'What will this particular customer be willing to pay for this particular product at this particular moment?' How do you establish that? Well, we give every customer a shot at setting their own price."
Consumers seem to like the challenge. Shopping is a major indoor sport in Wisconsin and Michigan, where winter comes early and stays late. Buyers pore over American's merchandise and then go nose-to-nose with the company's sales force. Its job is to hold up American's end of the bargaining.
No chump, Mattioli gives his sales force hard reasons to do hard bargaining: a commission system that is common in big-ticket industrial sales, but a rarity at this level of retail marketing. Salespeople are paid on a straight commission basis. The commission is a percentage of Mattioli's markup on each item. The higher the markup, of course, the larger the commission. But it is a sliding scale, from 15% to 22%, with higher commission rates for sales staffers with higher sales volume.
That leaves it up to each salesperson to strike a balance between making fewer sales at higher prices or more sales at lower prices. So two different salespeople can sell precisely the same product in the same store at the same time to two different customers, charging two different prices, and reap vastly different commissions.
"Our salespeople are individual entrepreneurs drawing on our inventory and taking advantage of floor traffic," says Mattioli. "I try to give them as much power as possible to control their incomes.So it comes down to the salesman's ability to turn every looker into a buyer."
The approach can sometimes backfire, however. In the Madison store, for example, shoppers complain of a seller's market, particularly on weekends, squeezing out the opportunity to haggle. In some departments, these shoppers say, customers must suffer through a long wait only to get a sell as hard as carbon steel. "If you aren't ready to buy in the first minute at their first price, then the salespeople will just break off and go wait on someone else," claims a disaffected American TV shopper. In those cases, the company's incentive structure may actually do long-term damage to its standing in the market.
Then again, some customers think that they have come up with a three-step polka to make American TV dance to their tune: First, they go to a small store where there is plenty of personal service and they get fully versed in the product they want to buy. Next, they price the product at several discount stores to find the lowest price. Then, they walk into American and ask for a price below the competition's. This way, customers translate free product information and free price savings into cash savings. Mattioli and his salespeople aren't the only entrepreneurs in this game.