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A view of the industry through the eyes of a chain buyer.

Printer Version

How Product Sell

... And why you need reexamine your buying habits.

by Rob Bostick and Sarah Hodsdon (February 4, 2008)

(Note: Rob is the founder of Judikins and is a member of the board of directors of the Craft & Hobby Assn.)

"With all the new products to choose from, I never buy anything twice." Does this sound like you? How about this statement: "It is easier to buy from a new company so I won't duplicate anything I already have on the shelf."

If you answered yes to the first two statements above, then I bet you are also saying, "Sales are flat. The customers are still coming in and I have lots of new stuff, but they are not buying like they used to."

I am a stamp manufacturer who also used to run a small three-store chain. Over the last few years I have been hearing statements like those above from more and more independent retailers. At first I wasn't too concerned. At one point I even thought their buying methods might have some merit. Now I am convinced that much of independent retailers' woes are due to their buying strategies.

As a manufacturer, I am constantly evaluating what is selling. Before starting on a new catalog, I look at how much of each product has sold over the last year, decide on a cut-off point and eliminate the slow sellers. With all the emphasis on the new, it always surprises to me how many of my good sellers remain good year after year. Several of my better selling stamps are more than 10 years old and my best selling stamp last year is now almost 5 years old.

Another observation I find particularly fascinating is the difference between the highs and the lows. My top selling stamp is not just a little better than most. It sells more than 10 times better than my average stamp!

The 80/20 rule

Maybe you have heard this before: "80% of your sales come from 20% of your products. It is the 80/20 rule and it is not just a wives' tale. It is based on actual statistical principals. Take a look at the graph below, it represents a years worth of stamps sales. To create the graph I've ranked all the products in my line from top seller to the worst seller and plotted the amount sold, starting with the best sellers.

Now don't think this only works for stamps. Take any collection of products and the graph will always look pretty much the same because it is based on the ways consumers make purchases.

The stocking requirement

But (and it is a big one), the 80/20 graph has one requirement. It assumes that all products are in stock at all times. Since I make stamps and can make more when I run low, I come very close to meeting this requirement. You as a store don't have that option. For you to capture all possible sales from the top 20%, it is important that you keep those fast moving products in stock at all times.

When we ran our own stores, we bought from many suppliers, but our own stamp line was always the top selling company. At first I thought this was because we designed products that naturally sold better. As much as I would have loved to believe this, I have visited other stores that also have their own line of products and it is always the same. The top selling manufacturer in each of these stores is always their own line. From this I have come to the conclusion that If you want high sales, what you pick is not nearly as important as keeping your top sellers in stock.

How the chains buy

I don't sell to too many chain stores, but they are interesting to deal with. When we first started with them, I was taken aback by their buying practices. First they shunned anything new and asked to see only my better sellers. From these they picked almost at random. In some cases they asked for samples and then rejected them because "the size didn't fit well on our shelves". Then they would set their program to run without changes or additions for two years. On the rare occasion when they would send us reports, they were not about how well our products sold but how fast and completely we shipped.

This all seemed crazy compared to the way we thought about buying for our stores. Our customers always came in asking for "what's new," so we placed a high value on having new stuff to satisfy them. A chain's two-year program could never have what's new or even what's in style.

Now I am thinking they are crazy like a fox. They have used the 80/20 rule to simplify buying to a point where a computer can do it.

How the race for the new hurts you

Everyone wants what's new, right? At least that is always the first question I get asked at trade shows. But when I look at what is selling "new" can be very hit or miss. Sometimes we are on the cutting edge and other times we are are on the bleeding edge. Thanks goodness I keep my good sellers from year to year. They keep me alive when my new look is too out there.

Which brings me to the whole point of this article. If you buy in small quantities and never reorder the same item twice, you can't have best sellers. Your sales will look like the red part of the graph below. You will be losing out on half your potential sales. Sales that don't require more inventory or more customers!

Worse yet, if you try are trying to maintain a constant inventory level, slowly over time your store will fill up with slow moving products. Think about this: you start your store with 20% of your products as top sellers. They sell out and you use the money from their sales to buy all new items. But from the new stuff you ordered only 20% of those are top sellers. Do this over and over and pretty soon your inventory is nothing but long-tail products. Your customers may continue to come in, but there will be less and less that they want to purchase.

A similar problem occurs when you are buying only from new companies. Buying from new companies may make your task of finding new products easier, but older companies have spent time weeding out their duds. Manufacturers who go over the numbers and cut away their slow sellers will, over time, make their line more attractive to your customers.

Make the numbers work for you

As retailers you can do the same and make your store sales better and better over time. The first thing you must do is identify your top 20% and make sure you keep them in stock at all times. If you have a Point of Sale (POS) computer system, learn to use its reorder features.

If you do not have a POS try this: Set up a place for each product (a shelf, slot, peg, hook, whatever) and put everything its place. If necessary, tag the place with the vendor, vendor code, and the amount you started with. Then watch the shelves, keep them straight and reorder as you run low.

Equally important is to identify those items that are not selling. You need to be proactive about getting rid of the "long tail" products to make room for the things that do sell. Create a "sale bin" and restock it frequently. Before there were small-store POS systems, we developed a simple solution for this. We had price guns that could print two lines of information on our price labels. We used the first line for the price, and on the second line we had a code for the month and year we priced the product. Periodically we would go through the shelves and pull everything older than a certain date. We dumped these into the sale bin, priced them at our cost, sold them off, and used that money for buying new stuff. This way we replaced our worst sellers with new product that 20% of which (on average) would be composed of top sellers.

When buying new products, equip yourself with the best information. This starts with an open communication between you and your suppliers. Take the initiative to move beyond asking "What's new" and learn from your vendors what their best sellers are. If your vendor has trouble identifying their top sellers, this should be a red flag.

As business owners you take risks with every choice you make. The successful owner is often one that knows when not to reinvent the wheel. Buying is hard work; you will not always be able to recognize the top sellers at first sight, but if you follow sound economic principles, and couple them with a disciplined approach to inventory management you can be successful. This is a numbers game, make them work for you!

(Note: Rob will be in the Judikins booth, #2835, at the CHA show. To read previous "Benny" entries, click on the titles in the right-hand column. To comment on Rob's suggestions, or any other industry issue, email CLN at mike@clnonline.com.)

xxx

 

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