Chapter One: Selling: It’s all about the profit!


Let’s start off by acknowledging the universal truth of all truths. Profit makes the world go round. No matter the country or economic system or market or product, if at the end of the day your profit doesn’t outweigh your expenses, you’re dead. Every retailer knows this. Profit good, loss bad. And the more money you charge for your product the more profit you are likely to keep.

That’s the good news. The bad news, however, is that waiting at the other end of that perfect formula is a consumer market that wants to spend as little as possible for your product. In their perfect world, paying less is the ultimate goal. For the better part of two centuries we have grappled with reconciling these two extremes.

The result has been the current and extremely dysfunctional retail world in which retailers lure customers into their stores with advertised low prices on bargain products and then attempt to extract from them the money required to make the profit needed to grow their businesses.

Every retail-based corporation from BMW to Walmart does this. The only way to get customers through your doors is to run sales. Whether it’s a 325i or a cheap flat panel LCD, deals are a part of the game, and the ones who run the most deals attract the most potential customers.

The bulk of these retailers’ budgets are devoted to the marketing departments who run the ads that produce the traffic on the showroom floor and the sales force whose job it is to turn the low-profit transaction into a lucrative one, without of course turning off and driving away the intended customers. It is a delicate and painstaking process. The same technique employed to get a customer to switch from a basic car to one that is fully loaded is the same technique used to switch him from a generic TV to a name-brand deluxe model. No BMW dealer ever wants a 328i to drive off the lot optionless, any more than a retailer wants last year’s Visio LCD to leave without a warranty, cables or surge. In a perfect world neither the customer nor the dealer are well served when this happens.

The trick is how get the customer to fork over the additional cash to purchase the needed options. It is easy to say the 328xi with all-wheel drive, built-in GPS, satellite radio, MP3 player and service support is better than the stripped-down 328i, just as it is easy to say the Panasonic TCP50V10 is far better than the basic TCP50C1. Now try and explain to the customer that the item they thought was going to cost “x” is now going to cost “x plus” without sounding like you work for a bait and switch outfit.

The problem lies both in perception and good old-fashioned consumerism. Few, if any consumer-based outlets lead with top shelf deluxe products. They may feature them occasionally in their weekly ads, but make no mistake about, at the end of the day the loss leaders or entry-level models garner most of the print. A simple look at the receipts from a Black Friday sale day is all one needs do to get a handle on how the public thinks. Consumers are driven by price, and they tend to flock to stores that have the most competitive prices. It’s that simple. For every customer who comes in looking for the very best product available there are more than a dozen who want the most for the least. Translation? Cheap is in and expensive is out. This is not rocket science. Every salesman knows it, as does his boss and his boss’s boss. Bring ‘em in low and get ‘em out high. That’s the game baby! The one’s who play it best survive; the ones who don’t go out of business.

So now that we know that it’s price that motivates the public to purchase, how do these retailers select the products that they advertise to bring in their customers. It’s important to know that virtually every retailer carries a plethora of product lines from entry level to top level. However they purchase products primarily on what they expect to move. Hence a retailer is likely to have in its inventory three to four times as many entry or mid-level product as top level. But as any first-year accounting major will tell you, inventory doesn’t pay bills, cash on hand does. So to move out this low to mid-level product, retailers will often sell them at or just over cost. The idea being that the “experienced” salesmen on the floor can “switch” some of the customers over to higher priced models, or accessorize the sale items sufficiently so as to make it a worth while transaction.

Ads that read “Limited Time Only” and “Lowest Priced Ever” and “While Supplies Last” are carefully placed so as to instill in the target market a sense of urgency. Never mind that the same models seem to be creeping up week after week with the same wording. Retailers know full well that most of the buying public does not carefully scrutinize the models, just the prices. The fact that a Columbus Day ad reads virtually identical to a Labor Day ad is superfluous and irrelevant. The whole idea is to get their attention long enough to bring them in and get them to buy from you and not your competitor.

But retailers are not stupid. They are not, contrary to the printed ad, giving away the store. The models they select to promote in their advertisements are carefully chosen so as to allow their salesforce the opportunity to step up to the higher-priced model. The Panasonic TCP50C1 may be marked at an incredibly low price, but it is not that far removed from, say the TCP50X1. Usually the difference in price is more than affordable to the customer. The same can be said of the TCP50U1. The upgrade, the TCP50S1, is within the financial reach of most customers. And so on and so on. Every loss leader is neatly placed next to its upgrade, which is, surprise, only “slightly” more expensive than the advertised piece. The customer is made to see the value of the “better” model in ways that make him or her seem stupid not to want to take advantage of the opportunity.

Now the sad truth is that in many instances the upgrade does have advantages that the lower-priced item does not have. The problem is that the customer was lured in under the pretenses that the advertised piece was the best value. The correct thing would be for the retailer to advertise the better model, but alas, the public is focused on price. It is a catch 22 situation that many responsible retailers are unable to extricate themselves from. How many potential customers would BMW get if they advertised a fully-loaded 328xi lease for $675 per month for 36 months with no money down and 15,000 miles per year? Not many, I dare say. Now what if you could get a stripped-down version of the 328i for $399 a month for 36 months? What a difference. Left out is the fine print that says that the mileage is 10,000 not 15,000; it’s an “i” instead of an “xi”, which means no all-wheel drive, and you have to pay a cap-cost reduction of $3,000 along with your first and last lease payment upfront. Not as attractive anymore is it?

The industry’s dirty little secret is that truth in advertising is an oxymoron. Nobody wants to say it and certainly nobody wants to hear it. It’s not whether retailers lie, or conveniently leave out “little” details, it’s whether they are successful at it. The painful reality is that all retailers have to live in a world where they must skirt the line between legitimate upselling and flat out bait and switch tactics. To be completely transparent means little or no traffic coming in to the showroom; to go the other way and engage in shameful conduct means earning the wrath of your customers who will inevitably find out what you’re up to and will bring their business elsewhere.