List Price: Confusing, Misleading & Outdated
Retailers in the U.S.A. do not use list price. Visit the Tire Rack website and you only see the retail price for the tire, not the list price. So, why do most tire retailers in Canada use the list price?
Are you convincing the consumer that it’s a great deal with, “The tire lists for $200.00, but I will sell it to you for $140.00?” No, you are not. You are just training the consumer to ask for a big discount. Also, the consumer is never sure if they got the best deal. After all, if you gave me 30% off the list price, I may think that a better negotiator may get 40%.
Furthermore, as tires have different levels of list price and different buying discounts, you cannot give the same discount on each brand – this leads to greater confusion for the consumer and increases the feeling that he or she is “getting ripped off.”
While most of you can give the same discount on various brands such as Bridgestone, Continental, Hankook, Pirelli or Yokohama, you cannot give the same discount on a Goodyear or a Michelin, as their pricing and discount structure is radically different. Thus many consumers ask the question, “Why is my deal on Michelin or Goodyear not as good as my deal on Bridgestone or Yokohama?”
These artificially high and irrelevant list prices help create the impression with consumers that Canadian prices are too high. Stop speaking about list price to the consumer. Speak about your retail price.
What are they good for?
Today, list prices are only there to create a base for supply chain pricing discounts. They have little or no relevance to the actual retail price. Use the list price only to calculate your cost, then decide on a reasonable gross profit margin, and use this to establish your retail price to the consumer.
For example, if you want to make a 20% gross profit margin, take your cost and divide it by 80% – i.e. cost $112.00 divided by 80% = retail price $140.00 – this gives 20% gross profit margin on the $140.00 retail price. Labour, environmental fees and taxes are extra.
Learn from your “big box” competitors
Costco works with one set gross profit margin on all items storewide. Copy them. Using this method you can compare different tire brands without having to change your selling discount – whatever the tire costs you, apply your gross profit margin, and establish the retail price. This allows you to maintain a constant gross profit margin, regardless of the various brands you offer.
Sound like a lot of work? Well, it is a little extra work… but, who said that being successful in business is easy.
Want to make this pricing method easier? Focus on a smaller group of feature brands for your store. Develop a “Good, Better, Best” product screen of feature brands. Get price lists from your distributor in Excel format, showing your cost. Use Excel to automatically apply your gross profit margin to establish your retail price. You will have your own customized retail price list for each feature brand for easy reference. Focus on selling these feature brands to your consumers.
This is a proven recipe for success. Make a small investment in time, use the recipe and succeed.
Peter-James Gregory is President of Atlas Tire Wholesale Inc.