What determines what pricing a retail store sets? A common question....

I am asked all the time by customers "Is your pricing correct? How can you be that much lower than my local dealer?" Had that conversation today with a lady from Long Island on some Bradington Young pieces. And I had another one with another customer today from California that said her Hancock and Moore dealer went out of business, and she asked me why are so many furniture stores going under? So here's my take on things, and it all has to do with the cost of running a business.

Overhead. First and foremost, this is the big nut. Your overhead is your fixed expenses every month, the rent (or mortgage), taxes, licenses, payroll, truck loan, utilities. Just like the costs of your home, these pretty much do not vary from month to month. Many, many stores - in fact most of them that fail - this is what kills them. They take on too much financial committment, and have too much overhead, mostly in rent or payroll. My store is not in an ideal location in Virginia, in fact, its in the low-income part of the county. However the rent is 1/4 of where I would like to be and where I would get more floor traffic. Low rent means you can survive tougher times such as this month (January) when the stock market is shaken and bad weather is going to shut down the stores for many days. That overhead cost continues in good times and bad. Payroll is another big cost. I don't have any employees so not much in the way of Worker's Comp insurance, FICA and Medicare, no 401K plan and ho heath insurance.

Profit Margins. All retail businesses run on profit margins, which is a percentage added to the wholesale cost of the goods to arrive at a retail price. As your overhead goes up, the profit margin must increase to cover expenses, or if you stay with a lower profit margin it has to he high volume (think Costco). But High Volume alone is not your savior, it requires more work to handle more transactions, more payroll to process, and even perhaps more trucks and storage space to handle the goods. A healthy retail furniture operation needs around a 40% Gross Profit Margin to not be in danger of going under, and it can go as low as 32 % or so if you can gain quantity on sales. One with high fixed costs will need 50 % GPM or more.

Debt Service. Commercial loans used to finance a business run an average of around 7% to 9%. That has to be paid out of every sale.

The above all contribute to the mark-up a dealer feels they need to make on an given item and thus the selling price. They also are a factor in determining the cost of goods the dealer is carrying. If for example, I have a high quality sofa such as a Hancock and Moore at $ 4,000, and the store in the trendy, cool and hip part of town has a sofa that looks similar but is Chinese made selling for $ 3,500, what does the consumer think? Most will say they can save $ 500 and get the Chinese one, because it came from a trendy new store next to a Starbucks and they had an in-store decorator to assist them with the perfect choice, whereas the store like mine is in a part of town they don't often drive to and there's just one guy there running the place...its a little old-fashioned. Now what that consumer doesn't see is that Chinese sofa cost that store $ 1,100 and they're selling it for $ 3,500 ($ 2,400 profit), and the old school guy paid H&M 3,100 for that $ 4,000 sofa ($ 900 profit). The Chinese unit is in the landfill in less than 5 years and the H&M goes 30 years, but they don't find out about that until quite a few months of ownership have passed.

To get back to my point, I run as lean an operation as humanly possible, no fancy storefront and no employees, and zero debt service. That allows me to run more aggressive margins and hence a lower price point than many other dealers. Its not that the other store is gouging you or ripping you off, they're not. They just have high overhead and have to charge what they do to stay in business. It's just the math of it all.

I've been doing this business for thirty years now, in boom times and bad. I have always wanted to have a storefront in the best part of town but that overhead cost always keeps me at bay. I have seen dozens of stores collapse when they upgrade themselves and then sales don't materialize as they think they will. It happens to many. Watching so many collapse in the business keeps me humble and small. That in turn lets me offer less aggressive markups, which benefit the price shoppers. And that is why you see a price disparity between a dealer that is charging more. I am full-service and as knowledgeable as any one out there in the product lines I carry, and I don't play games on pricing. You will never see " 70% off sale!" sign in neon orange in my store and if I am able to get a good price on something I pass that onto my customers rather than using deals as margin builders.

Many years ago Renny Barnes of CL BARNES FURNITURE came in my store. He had (5) large stores in the region, each one eight times larger than mine. He looked around and then introduced himself and said matter-of-factly. "Your business model is all wrong, did you know that?"

Bristling, I said "How do you figure?"

Renny continued with "You have top-of-the-line product and sell it under prevailing prices, you're leaving money on the table and lots of it".

I countered with "I've been in your stores as well and you have low-end product that you sell at high prices. Doesn't that bother you that you are taking advantage of your customers? How do you maintain a loyal customer base?"

He said "I don't need or care about customer loyalty. I only got to get them once, and then someone new will come along and I'll get them as well."

I said "I sleep better at night doing it my way." And he said "I sleep just fine, too"...and after that he went on his way.

CL BARNES FURNITURE went belly-up in 2007. So much for his business model!

So that explains a little about how pricing is set by a dealer. Ones that sell below a sustainable margin are flash-in-the-pans and usually disappear in a few years. There are always upstarts who try being the lowest person around and them self-implode when obligations cannot be met with profits. But don't be too hard on your local dealer if they price a bit higher - they may have a nicer store then mine and have to pay for that!

I appreciate and enjoyed your explanation on pricing and overall retail business management. I would say you have a great mixture on practicality and a principled approach with an overarching focus on customer delight, customer service as well as product knowledge. Your ongoing efforts of sharing your experience and knowledge via this fantastic forum serve to prove a dedication to the furniture business and it's customers. I don't know to what degree you have enhanced your business results by 'incremental' sales, 'leveraging' your investment beyond 'foot traffic' revenue but my guess is you have extensive internet-based sales. Congratulations on being an excellent example of dedication and hard work paying off for you and your customers!

Thanks!

I was so tempted not to long ago to move into a new storefront in a brand new shopping center - same size as what I have now (5,000 s.f.) But the rent was 4 times what I am now paying. $ 23,000 a month. I would need to raise my retail pricing to accommodate that overhead and increase sales by at least 40% to cover that. And if I increased sales by 40% I could no longer handle the volume by myself which meant I needed a full time employee at about $ 60,000 a year when taxes and insurance are figured in. That would mean another increase in margins to cover that salary. Now I'm not a discounter any more buy a mainline retailer with a pretty store. And if sales go bad in a mini-depression/recession for four to five months, I'm out of business. So in spite of the beautiful new storefront, I decided to stay put. I think most people in the Washington DC area are willing to destination drive to get to my current store and would rather have a 15 % savings in their pocket rather than a pretty new store.

Jack Glasheen, principal owner of the H&M Companies until a few months ago had a conversation about my storefront when he was here in person. I asked him - since he's the smartest man I know in the furniture industry - if he thought I would do better to move into an upscale location. He said "Don't do it, it causes too many stores to fail. What you have here is perfect, don't change a thing". So I didn't!