Protecting Your Prices

True story: A few years ago, when his market was hit hard by recession and discount competition, a Southern upscale jeweler decided to fight fire with fire—he became a discount jeweler himself. Within a year, the economic situation improved … but not for the jeweler. He couldn't recoup his credibility with the customers he lost when he cut prices, and he found he had to carry lower-quality goods to compete, though he never really undercut the price cutters. In the end, his use of discounting to compete put him out of business.

That is an example of what not to do with one's pricing strategy in tough economic times, say business experts and successful jewelers.

"If you reduce your merchandise price points in response to tough economic times, you create a self-fulfilling prophecy and ensure a decrease in sales volume," says Lori Askew, a managing partner in Vantage Group, a leading consulting firm to the jewelry industry.

"If you say, 'It's a recession, people won't spend as much,' and you lower your selling prices to bring them in, you will drive your own sales down."

Nature's law. "To every action there is an opposite and equal reaction. It's a law of nature," declares John Michaels, chairman and chief executive officer of Michaels Jewelers, a 12-store chain in Connecticut and one of the country's most successful jewelers. "If you make changes in your pricing in bad times, you'll confuse your customers and screw yourself up financially.

"A fundamental change in pricing strategy alters the image of who you are and how you are perceived by customers, and you can't recoup that," he warns.

Michaels knows well how a retail jeweler can be buffeted. In the past decade alone, his 127-year-old family firm has had to withstand the economic impacts of the shutdown of the region's defense industry, the end of a major building boom, and several local bank mergers and closings. But rather than cut prices or use discounts, Michaels Jewelers endured and thrived by using the following alternatives to support its pricing strategy in tough times:

• Cut costs. "Look at your financial statement, starting with the biggest expenses that have potential for significant reductions," says Michaels.
  "Look at rent. If you own your building, can you afford not to pay yourself the rent? Are there capital items you can put off, such as new carpeting or that new GemScope? Look at your phone bill. Does your store really need seven lines?
  "Look at health benefits. Are your sales associates sharing in rising costs of health insurance, or are you bearing that 100%? Look at security. Try to make a deal with your security provider to freeze costs for a couple years."
  It isn't just big expenses that are controllable. "Turn all lights out at night and only turn half on while you set up the store in the morning," says Michaels. "Instead of custom-printed jewelry service forms, use Jewelers of America's stock forms. Sometimes you can get the same thing from less expensive sources, such as boxes made overseas. But be careful in how and what you change—like cutting expenses or changing stationery—because a radical change affects your store's image, as perceived by customers."
• Spotlight product. To boost sales, Michaels ran more merchandise-related programs. "We changed our advertising [to focus on product]," says Michaels. "We did away with image-only advertising—although every ad is an image ad if done right! We made promotions more product-oriented but combined product with immediacy, to give people reasons to come in now. For example, we had a pearl special for June, which included a display of $1 million worth of pearl jewelry, a chance to 'Meet the Pearl Grower,'and a drawing for a free strand of freshwater pearls."
• Shop competitors. Rather than discount prices, "we shopped our competition," says Michaels. "Of course, you can't base what you do only on what they do. You need to know what are your strengths [as a jeweler] and differentiation [in the market from your competitors] and focus on them. But you don't work in a vacuum. Your customers talk to your competitors, and you need to know what they are hearing.
  "Most of the time [after comparing], there is no direct change, but when we found the competition was more than 5% under us on a product, we tailored our merchandise appropriately. That occurred mainly with loss leaders, like gold chains, bangles, or bracelets. They would sell something, for example, for $79, and we would have the same thing for $85. So we matched prices on the competition's loss leaders." A good rule of thumb, he adds, is to check competition every six months.
• Price matching. Michaels Jewelers added a year-round policy of "market price guarantees."
  "It's no good being known in your market as high-priced," he says. "So we'll match the price on any item, if a customer can demonstrate—through ads, receipts, or the item itself—that they got it at a lower price elsewhere."
  This is a customer-driven, in-store policy, not one promoted in advertising or signage. But "this isn't just a matter of one-on-one comparisons in pricing in the market," says Michaels. Price differences often give the jeweler a chance to enumerate value-added features of a product that justify a higher price, such as workmanship, lifetime battery replacement, a three-year warranty on watch movements, or a lifetime guarantee (which some gold jewelry vendors provide). "Your pricing structure should reflect value-added features, and you need to be able to explain that, if necessary, to customers," he says.
  Even when there is a credible difference in price, though, a jeweler doesn't need to simply pay the difference in cash. He can offer store credit or a percentage-off on the next purchase. It can even become a promotional tool. Michaels, for example, at one point offered a "120% price guarantee"—meaning he paid the price difference plus 20%. In actuality, that cost the store little but it earned big benefits in customer good will.
• Market share. "Look at your annual share of your state or local market, as we do," says Michaels. "Use annual data from your state or city sales tax department. That includes the total sales of jewelry products [based onuniversal product category codes] in the market for the year, total taxable sales, and the sales tax itself.
  "Compare these with your own results and evaluate your annual market share and its change over a few years," he says. "Most important is the direction you're going. The economy may be going down, but are you losing market share? A review of the data shows you that—and whether you need to do something.
  "For example, if there were $10 million in taxable jewelry sales in your city last year, and you did $2 million, then you were 20% of the market. But if your share this year is 16%, then something has happened."
• Customer perception. On another occasion, Michaels Jewelers did a market survey and found "we were perceived by customers as being high-priced.
  "We've successfully fought that with advertised monthly specials of quality products at modest prices in their category [usually between $39 and $1,299, depending on the product]," says Michaels.
  The ads for the monthly specials—in newspapers, in-store signage, statement stuffers, or direct mail—focus on one item, subtly reminding customers they can get affordably priced quality items at Michaels.
  "We use classy 'tombstone'ads—meaning lots of white space—to promote the merchandise, and just the word 'Special,'" says Michaels. And the specials aren't old or slow-moving inventory. "These are fast-movers," he says. "We want to attract people with merchandise that sells, so we're always looking [to buy] something special.
  "We don't mark down or use discount prices. We negotiate with suppliers, make special buys where we can pass savings on to customers, buy in significant quantities, and/or take shorter margins, usually under keystone."
• Margins. It's important, too, to examine your margins and make appropriate changes, say John Michaels and other jewelers and business experts. Michaels, for example, "looked closely at our margins, not only to selectively match loss leaders but also to see where we could get more [margin], as in estate jewelry or with fine colored gems, and increased those 5% to 10%."
  "Add another point or two on items that always sell well, whether the market is down or up," says C. Steven Hegg, senior vice president of Business Resource Services, Seattle, Wash. Hegg's company develops financial programs, products, and services for independent businesses. "It will be unnoticed by most people, and those who can afford it won't flinch. However, be sure you know the [extent of] price sensitivity in your market."
  "Don't weaken margins of proven sellers," agrees retail consultant and veteran jeweler Janice Mack, a partner in Performance Concepts Inc., a jewelry retail management consultancy in Olympia, Wash. "Instead, adjust your fast turners up a little more. If you have a 2.7 margin for fast-selling earrings, maybe you can get 2.9. On the other hand, soften some that turn more slowly to boost their business."
  "Be sure, too, your staff understands the difference between 'markup'and 'margin,'adds Hegg. "There has been a tendency in recent years to give margin away through across-the-counter discounts or throwing in another piece of jewelry to make a sale. So, talk with your staff about your sales strategy, and how to work with people without giving away margin."