| One of the most effective ways to improve the gross | | | | are low-balling commodities to try and buy some |
| margin you earn on each sale is to focus on gross | | | | business, but there are a several thousand products |
| margin rather than markup on cost. | | | | that you sell every month that don't fall into the |
| As I have written many times, it's easy to get into a | | | | commodity category. If you experiment with what the |
| markup rut; that is, into the habit of using the same old | | | | market will bear on those products, it will help offset |
| markups over and over again to arrive at your sell | | | | the gross margin you may be losing right now on |
| prices. While this is certainly a convenient way to price | | | | commodities. |
| merchandise, it is not healthy for yours or your | | | | When I say test, I mean just that...test. If you're selling a |
| company's gross margin. | | | | non price sensitive product now for $22.49, try $22.89. |
| One of the most effective ways to optimize gross | | | | If after a week or so you don't receive any pricing |
| margin when pricing is to "think gross margin." In other | | | | resistance at $22.89, you might try $23.26, then $23.52, |
| words, think in terms of how much gross margin you | | | | etc. |
| wish to earn on a sale and price accordingly. | | | | Nine out of ten companies use arbitrary markups or |
| The way this is done, of course, is to divide the cost of | | | | gross margin calculations when they price the products |
| the product(s) you sell by the inverse of the gross | | | | they sell. These same companies are leaving gross |
| margin you wish to achieve. | | | | margin dollars on the table because they aren't paying |
| What's the inverse of the gross margin you wish to | | | | attention to the ultimate pricing criterion: what the |
| achieve? Well, here's how you calculate it: To arrive at | | | | market will bear or what a customer is willing to pay. |
| the inverse, subtract from 100 the gross margin you | | | | The better job your company does at differentiating its |
| wish to achieve. The example I used in my gross | | | | offering from its competitors' offerings, the higher price |
| margin book was 44%. | | | | the market will bear. The higher your customers |
| When you subtract 44 from 100, you get 56, which is | | | | perceive your personal value and your company's |
| the inverse. | | | | value to be, the higher price the market will bear. |
| Then divide the cost of the product by 56 and you'll | | | | Always remember that there are a lot more factors |
| arrive at the price you must sell the product for to | | | | that affect sell price than merely the cost of the |
| earn a 44% gross margin. | | | | product. If you think about it carefully, cost really should |
| If your cost were $1 and you divided $1 by 56, you'd | | | | have absolutely nothing to do with the calculation of |
| arrive at a sell price of $1.79, which would yield a gross | | | | sell price. What you sell something for should be |
| margin of 44.13%. | | | | determined by what customers will pay for it. |
| But if you really want to optimize gross margin, you | | | | Try these techniques for a few months and watch |
| need to go one step further by testing what the | | | | your gross margin improve. |
| market will bear. Right now, a lot of your competitors | | | | |