How Bad Plant Pricing Can Hurt A Good Retailer
When Greenhouse Grower RETAILING sent a pricing survey to the industry, we put the most important question at the top of our survey: How do you calculate plant prices?
One of the experts we recruited to help make sense of the responses, Dr. Charlie Hall (Texas A&M), looked at all the ways plant retailers say they calculate plant prices. At first glance, the methods were all over the board, but Dr. Hall sifted through the replies and was able to sort them into four main groups.
46%: Markup. The cost of a plant multiplied to reach a sales price. So a 2x markup multiplies the plant cost by two.
18%: Margin (or gross margin). Percentage between the sales price and the plant’s cost.
10% Competition. Plant prices at competitors’ sets your own price benchmarks.
8%: Market value. Whatever price the plant can realistically bring in, regardless of its wholesale cost.
Another 17% skipped this question.
How We Rank the Pricing Methods (from least to most effective)
So long as your prices cover your expenses and give you a bit of profit, does it really matter how you arrive at the price?
Not all pricing is created equal. Here’s how three of our advisors (consultants Steve Bailey, Ian Baldwin, and Sid Raisch) ranked the most common pricing methods:
1. Market Value. The supreme model for pricing? Market value. This model forces the retailer to focus on quality. Is the plant branded and supported by an advertising campaign? Is it better quality or larger than other similar plants? Then customers will pay more.
If the margin percentage falls below what you need to support the perceived value, Baldwin says, then you know the plant is not worth carrying.
2. Margin Percentage. Margin, which is sales minus the cost of goods sold, works better than markups because it gives a clearer picture of the finances involved.
3. Markup. Our advisory group feels the markup method has inherent weaknesses. It’s a format that doesn’t easily fit in with profit and loss statements (P&L), Bailey says, so owners often have to convert their pricing to margin percentages in order to compare expenses and revenue.
Another weakness is that markup percentages look higher than margin percentages. Technically, that’s not a problem. But psychologically, it can be. Markup percentages can give retailers the false impression they bring in more money than they do.
Here’s a chart to illustrate that:
4. Competition. Basing your prices on your competitor’s gives them control over your store. What if they price plants in a way that ultimately loses money? You will be following them off that cliff.
Another problem is there are too many unknowns. The competitors may have gotten a deal from their suppliers, or their cost structures are different from yours.
And it doesn’t take quality into account. If either the plant or the plant store itself is of a different quality, then why should the prices be the same?
Editor’s note: Greenhouse Grower RETAILING asked growers and retailers to share their pricing methods in a survey sent out in mid June 2016. Of the 363 responses, 202 are from those whose primary business is plant retail.