The Magic Price
gen•ius n. extraordinary intellectual and creative power.
- 81. Criteria for lowering a price.
- If the new price is at a lower margin, does the increase in volume make up for the loss of gross profit?
- If there is still a loss in gross profit after test #1, does the increase in associated sales make up for the remaining loss of gross profit?
- And finally, if there is still a loss of profit, does the customer retrieval and word of mouth make it worthwhile? This is seen as an advertising cost. For example:
- 82. Value, Performance, & Confidence. We've talked about The Advantage 'Magic' and how that is our #1 product. What makes The Advantage ‘Magic’ is the value, performance and confidence we provide our customers. Some stores provide value [BJ's Wholesale Club], some provide performance [the Speaker Shop], and some try to provide confidence [extended warranties], but no one provides all three like The Advantage - it's 'Magic'.
- 83. A triple threat. Our value is the best in America because we have the lowest every day prices on the highest quality product available. The performance of our products and services is enhanced because we are the most informative and concerned conduit to the customer. We satisfy needs. The confidence our customers have in us has earned us our remarkable reputation in large part because of the commitment we have made to Lifetime Service. The combination of all three is unbeatable.
- 84. Understand, Believe, and Sell. So, now that you know why we are 'Magic', do you understand it? Do you believe it? And, most importantly, can you sell it?
When we decided to lower the price of our Jeans from $29.90 to $19.90, we first looked at the increase in volume to see if it made up for the loss of gross profit. Since the gross profit per jean was going from $16 to $6, we would need an increase in sales of 2.7 times [16/6]. Fortunately, our sales more than tripled.
Next, we looked at associated sales. Our average associated sale with a pair of jeans was $10 [with a gross profit of $3]. This means that our actual gross profit per total sale was not $16 but rather $19, and it went down to $9, not $6. Therefore, our necessary increase in sales only needed to be 2.1 times. The bonus in this scenario was that associated sales per purchase actually went up because everyone had more left to spend and it made everything appear to be a better value. Not to mention the word of mouth. The news of great jeans at $1990 spreads a lot faster than jeans at $2990.
