Lessons From Gasoline Pricing

Frank Dallahan -- JCK Online, 7/1/2006 2:00:00 AM

The run-up of precious- metals prices and the subsequent falloff cause no end of trouble for jewelry businesses. Most manufacturers have models to adjust prices as the price of gold fluctuates, but the retail world doesn’t move so fast. In contrast, the hated producers and refiners of oil know there is great value in adjusting prices quickly.

During the last dramatic rise in the world price of gold, many manufacturers and retailers learned painful pricing lessons. As my grandmother said, “Experience keeps a dear school, but fools will learn in no other.” In 1980 the price of gold soared to $800 an ounce and over the next couple of years fell back to $400–$500. I was running the Kurt Gutmann jewelry business at the time and was one of those taught in the “experience school.” As the price of gold fell, our pricing system didn’t work well. Margins fell through the floor. Of course, on the way up margins were good. We instituted a new system that used price ranges, and that solved the problems.

Unfortunately, at the retail level, when gold is rising or falling, retailers face two decisions: pricing and reordering. For some, pricing involves a fundamental question of honesty. How can you raise prices for something you purchased when gold cost $400 an ounce even if gold is now selling for $650? Some retailers opted to give customers the benefit of $400 gold prices. That decision, however, came home to roost when the question of reordering the piece was considered. At that point, the price of the same product increased proportionately to a much higher level based on the higher gold price. For specific, individual products, the question may be academic. When viewed from a macro position, however, the store owner is faced with a serious investment decision that sees his/her inventory investment rising dramatically— assuming the same level of product style and quality.

The oil producers and gasoline retailers figured out that current prices have to reflect current costs. Perhaps the retail jewelry industry should consider a similar pricing model. Rather than basing prices on historic costs, base them on replacement costs. This is, I realize, a radical idea. But, when confronted with the market realities of fluctuating gold, platinum, and silver prices, it’s a question that should be considered carefully, because at the end of each decision is a potentially painful consequence. It might be better to adopt a pricing model for merchandise—where the cost of the metal is significant—that reflects the current market. The logistics of this method may be difficult, but the pain of replacing inventory at the higher cost levels may be worse.

There is a considerable advantage to pricing goods to market. The pricing mechanism effectively works for oil, gasoline, and a whole host of other commodities, so why not in jewelry? The profit-monger oil companies notwithstanding.

frankdallahan@comcast.net