Articles and News
IS YOUR PRICING STRATEGY WORKING? | April 02, 2013 (0 comments)
Merrick, NY—Determining the right pricing strategy is a delicate balance for any retailer, but even more so for a luxury store where so much of what determines price is intangible.
The right price—whether at Cartier or Costco—is never just about how much things cost, says Andrea Hill, CEO of Wisconsin-based Strategywerx. Hill is a business consultant who has spent many years in the jewelry industry as well as the high-tech industry. In an exclusive interview with The Centurion, she discussed how her company’s recent blog post about pricing affects luxury jewelers.
“It’s much more about how much added value is perceived through your offering, and the values of the buyer or company perceiving your products’ value,” she says.
At any level of retail, not just in a luxury store, the retailer has to create the shopping experience the customer wants. Personal service and a memorable experience are requirements for a luxury store, but even Costco has a value perception to fulfill. Consumers looking for price deals accept—indeed, expect—the bare-bones atmosphere of a warehouse club. A plush diamond room would be as out of place as a forklift in a jewelry store.
“Pricing strategy is part science and part art,” says Hill. The science is fairly easy: Hill says the magic number is a two-time markup (or higher), twice. The designer must be able to sell the product to the retailer for two to two-and-a-half times cost, and the retailer must in turn be able to sell it to consumers at two to two-and-a-half times what he paid for it. Anything less, and someone isn’t making enough money, Hill says bluntly.
That’s where the intangibles add up: it’s the designer’s vision, craftsmanship, marketing, training, and so forth, not just the cost of metal and stones. And it’s the retailer’s shopping experience, unique selection, and personal service, not just doubling the cost of goods and adding something for overhead.
The two-time rule doesn’t necessarily have to apply to every single product, says Hill, but she advises both designer and retail clients to analyze margin by collection/brand and by product type. It should average out in each category, not just across the board.
For a luxury jeweler, as much as they fear pricing too high in a world where consumers can price-shop anything from the comfort of their pajamas, there’s also a risk in pricing too low. While a buyer who views your product as a commodity—for example, the gold buyer who looks at the daily market price—will never pay for the added value of a fine piece of jewelry made by a talented artisan, Hill says a luxury customer is going to expect a certain level of pricing and will assume something is wrong if the price is too low.
It doesn’t mean you can’t have accessible pieces, Hill told The Centurion. “The jewelry industry got this idea that having a sale is really bad,” she said. “That’s ok if you’re 100% confident that 100% of the product you create is a winner.” But for a merchant to be successful means accepting not everything they put out is going to be successful.
“Fashion depends on the bottom feeder to clear out merchandise. With five seasons a year, that’s pretty often. In jewelry stores, it’s slower, but you still need the bottom feeders to clear out old merchandise to make room and cash for new,” Hill said.
She suggests that jewelers who sell estate jewelry put their estate jewelry case at the far back of the store—with a sale case of marked-down merchandise right next to it.
“Often, the person who shops for estate jewelry is really looking for a good price. So if the sale case is right next to it, they’re automatically going to look there as well.” But one case of clearance goods isn’t going to create the impression that your entire store is all about the deal.
Hill warns not to allow the deal-seekers to influence your pricing strategy. Where you need to be competitive is against your competitors—not against everybody who sells jewelry.
“Part of the art of a successful pricing strategy involves a lot of observation,” says Hill. It means not only shopping other jewelry stores, even hundreds of miles away, but also observe where else your customers shop. Where do they buy apparel, home furnishings, automobiles, wine, and so forth? Is it all high-end? Better to high? High-low? Or is this the one and only time you might see them in your store?
Observing shopping behavior can help benchmark your pricing strategy. Photo: Dreamstime.com
Knowing their overall shopping habits can help identify if you are, in fact, targeting the right clientele for the goods you offer or if you need to make adjustments in either the level of goods you carry or the clientele you target. Hill’s blog discusses this point.
“When someone walks into a jewelry store, they want to buy jewelry. Maybe not that minute, but they want to buy jewelry and they’re just checking to see if they want to buy it from you,” she said.
Pricing for the future luxury customer. “They don’t want traditional fine jewelry.” “They spend for bridal but nothing else.” “They won’t spend full price for anything.” “All they want to buy are electronics.”
The Millennial generation has probably caused more jeweler consternation than any other group of customers. And with the Great Recession leaving a greater proportion of Millennials than any other group unable to find career-track jobs, it may be some time before these become your primary Rolex customers.
Luxury retailer Nordstrom recently reduced price points in one of their women’s apparel departments targeted to the Millennial consumer. In this article in the Seattle Times, the retailer explained that consumers were saying “what I like I can’t afford, and what I can afford I don’t like.” To attract the fashion-forward customer who is used to shopping in disposable-fashion stores like H&M, Nordstrom introduced some lower price points, while rearranging its higher-priced luxury classics into other departments where its traditional customers can still find the pieces she’s come to depend on—and these younger shoppers can mature into.
Hill says most jewelers could do a better job of segmenting by lifestyle rather than product. Most jewelry stores, she says, typically have their loose diamond assortment, their finished jewelry assortment, watches, and bridal—and they don’t switch up the presentation often enough to interest consumers who are used to fast fashion stores that change almost daily.
“There are some inherent limitations, like security, but you still can switch around the showcases more often so it always looks like there’s something new in there.” That constant sense of newness also impacts pricing—the more “new and distinctive” you have, the more you can justify luxury pricing.
One of Hill’s retail jewelry clients recently installed a special men’s jewelry showcase that is standing height, masculine in style, (coordinating but different from the rest of the store) with a couch and a flat-screen TV nearby. Men can watch TV while their wife or partner shops, but the standing-height case says “hey, there’s something for me here,” and the setup allows the salesperson to work informally side by side with the customer.
That same store also has a very small, low-height case with a few pieces of children’s jewelry—which surprisingly catches little eyes. And in turn, that captures mothers’ and grandmothers’ wallets.
“It’s not that Millennials don’t want gold and diamonds,” says Hill. “They don’t want Grandma’s gold and diamonds.”
For example, she says, Millennials would buy silver and diamonds. Lots of retailers wouldn’t mix the two, but Millennials think, ‘well, why not?’
This is exactly the generation that would appreciate some of the avant-garde designers that luxury jewelers may have been hesitant to try in the past, says Hill. And in many cases, these designers’ products aren’t any more expensive than a comparable classic piece.
“So often, I hear retailers say ‘I can’t sell that to my customers.’ But I think it’s the retailer who’s more hesitant than the customer. Consumers have access to everything on the Internet, so if they do like the look and you don’t have it, they’ll buy it somewhere else.” You have to cultivate customers by offering what they can’t find anywhere else, she emphasized.
Millennials might be savvy shoppers who seek good prices, but it doesn’t mean they don’t love luxury. “Just because they can’t afford a Rolex now doesn’t mean they don’t want one someday,” she says. But it goes back to her earlier point about not allowing the deal-seekers to set your pricing strategy: don’t train them to expect a coupon, a sale, or a discount. Keep it mysterious, keep it unexpected, and keep it limited.
“Putting product on sale is not bad. Putting your business on sale is!”