How to Compete on Price
The accepted wisdom is you can't do it anymore -- but it's wrong
The marketing gurus are getting better. Their accepted wisdom these days is that you no can longer compete solely on price. Customers -- either retail or wholesale -- need more, they say: service, speedy delivery, marketing support. Competing on price is pass.
There is some truth to the experts' observations. But not much.
It's fair to say price is now probably the least effective arrow in your marketing quiver. Jaded consumers don't believe words like "manufacturer's list price," "discount," or even "sale" anymore. Heck, you don't believe them when you're out shopping, so why should anyone else?
But this doesn't mean that you can't compete on price. You can. But you have to be smart about it. For one thing, you can't be inconsistent. If you're cheap one day, expensive the next, and in the middle every other Thursday, you'll just confuse people. (Does Sears come to mind?) And you can't get around that problem by holding sales or giving rebates. All that does -- as Detroit's carmakers have learned the hard way -- is condition people to wait for the sale (or rebate) before they buy.
No, if you are going to compete on price, it must drive every other decision you make.
It does at Jan Bell Marketing Inc., a jewelry distributor.
Price and price only fuels the Sunrise, Fla.-based company, which gets most of its $181 million in revenues from selling private-label jewelry to the nation's wholesale clubs. Jan Bell's gold chains and earrings, tennis bracelets, and rings wholesale for about a third of what other manufacturers charge.
To understand how Jan Bell is able to sell for less and still make more -- it turned in 8.8% net profit margins last year, compared with the 5% recorded by other jewelry manufacturers -- you need to examine everything the company does to produce its jewelry. It's not one big idea that allows it to pull off this pricing strategy. Rather, at each step along the way Jan Bell does at least one small thing that allows it to cut costs.
Begin your examination with how the company buys its raw materials. Not surprisingly, purchases are made in bulk, but it's important to note when and how those bulks are bought. For one thing, Jan Bell buys its gold, diamonds, and other precious stones direct from the source. There are no middlemen marking up the goods.
For another, it always pays cash. (Four public offerings, which have raised a total of $137 million, have helped there.) "If you don't ask your suppliers to be your banker, they're willing to shave somewhere between 3% and 5% off the purchase price," says company cofounder and cochairman Isaac Arguetty.
And unlike most other jewelry manufacturers, Jan Bell spends that cash throughout the year. Since most retailers buy jewelry in the fourth quarter -- in anticipation of the holidays -- manufacturers usually start to buy their raw material somewhere around August or September. "We're probably able to save 10% or 15% by being in the market year round," says cofounder and cochairman Alan H. Lipton.
But you can't buy early and still keep costs down if you're forced to carry a lot of inventory. So Jan Bell immediately converts its gold and diamonds into jewelry that will sell quickly -- a gold chain that can be given at confirmations; a diamond bracelet that's perfect for just about every imaginable occasion. "We're going for tonnage," says Lipton. There are no one-of-a-kind $25,000 necklaces sitting in the company vault collecting dust -- and carrying costs.
But Cartier, Tiffany, and their kith and kin like to display expensive and unique jewelry. So Jan Bell's decision to produce high-volume items limits its market. Some 80% of company revenues come from the likes of Sam's Wholesale Club and Pace Membership Warehouse.
Those places pride themselves on buying cheaply -- since they, too, compete on price. To meet its customers' pricing requirements and still turn a profit, Jan Bell needs to have minimal overhead -- and does. Selling and general and administrative expenses are 4.4% of revenues, less than half of what they were five years ago, and are probably among the lowest in the country.
To further help keep costs down, Jan Bell contracts out almost all of its assembly work. Almost, but not all. About 8% is done in house. "By doing some of the work ourselves, we know what it costs to produce the product," says Arguetty. "This way we know exactly what outside contractors should be charging us."
Jan Bell has no huge inventories or trucking fleets to maintain. The finished goods its contractors produce are logged in, inspected, and shipped out by Federal Express within 48 hours of their arrival, since production is based on anticipated sales to the price clubs. Should raw materials start stacking up, they're offered to other jewelry manufacturers -- at cost plus 15%.
The result of the slavish devotion to price is a six-year-old company whose sales and earnings have increased steadily since its founding. In 1989 Jan Bell reported income of $16 million, up 55% on sales that rose 51%.
The question is how long can you keep turning out those results, especially when your strategy of being the lowest-cost supplier leaves little room for error. General Motors can afford to give $2,000 (or more) back on a $20,000 car that isn't moving. If you're working on tiny margins, you can't.
And with more and more retailers deciding to fight on battlefields other than price, Jan Bell's market -- like that of any other company, retail or wholesale, that competes on price -- grows more limited by the day. Indeed, The Price Co. recently told Jan Bell it intends to reevaluate its jewelry business, and Costco Wholesale, another major customer, is looking to set up its own jewelry-buying division. To expand its market, Jan Bell now has turnkey retailing programs at Sears Outlet Division stores, Toys "R" Us, Kids "R" Us, and Staples.
In short, the gurus came close. Pricing is not, as they would have you believe, an impossible marketing strategy. Just a very tricky one. But Jan Bell's staggering growth in compound annual sales (65%) and earnings (86%) since 1984 shows it can be done -- if you are totally committed to it.
EVERYDAY LOW PRICES
Here is the real way to create them
General Motors can't compete on price. Neither, it seems, can your local department store. Jan Bell Marketing Inc. can. Here's how:
* Price governs everything. The decision to sell at the lowest possible cost controls every decision the company makes -- from buying (in bulk) to advertising (it doesn't; it adds to costs) to the kinds of people it sells to (retailers who operate on low margins).
* Subcontract wherever possible. The lower your fixed costs, the higher your margins can be. Jan Bell contracts out most of its assembly work.
* But know your costs. Jan Bell doesn't contract out everything. It makes a representative sampling of its line. That way it knows what each item really costs, and exactly what contractors should charge.
* You can't get fancy. If you are competing on price, you can't afford to have inventory sitting around. That means your line must be designed to move quickly. Leave the carefully aged filet mignon to somebody else; sell hamburger.
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