You've probably heard the story about the guy selling pencils on the street. A kind-hearted passer by approaches and asks how much a pen costs and he says, '£100.' The questioner is stunned and says, 'You’re not going to sell many pencil at that price!' and the guy replies, 'Yeah, but I only have to sell one a day to meet my daily quota!'
That's a bad example of a high profit strategy – it's a bad example because that strategy doesn't work for low cost, commonly available products. However, if the pencils came from Elton John's desk where they were used to write music and lyrics, he'd have a much higher likelihood of making a sale!
Here are the three approaches you might choose to use:
- High Volume Strategy
A higher volume of sales yields greater profit in the long-run, even if the profit per listing is less. This strategy is great for bulk items.
- High Profit Strategy
A greater profit per sale yields greater overall profit in the long run, even if the rate of sales is lower. This strategy is great for small inventories or more unique items.
- Balanced Strategy
This strategy strikes a balance between increasing conversion rate and earning more per sale in order to get the greatest profit in the long run. This strategy works when you have a mix of goods or can differentiate common goods in some compelling way.
High Volume Sales
The high volume strategy allows you to sell a large volume quickly, relying on the smaller profit per item to add up due to volume. This strategy works if you paid well below the market price for each item and you have a large inventory to sell.
The key with high volume sales is lowering the price (because your cost was low) to sell rapidly. Your price needs to be below usual competitive pricing but include enough cushion so that you cover your costs and achieve profitability.
Leather belts usually cost £20 retail and £10 wholesale so your margin per belt is £10. You typically sell 100 leather belts per month for a monthly margin of £1000 which is satisfactory.
You have the opportunity to buy leather belts at liquidation for £5/belt but you will need to buy 500 belts. You can afford to purchase the inventory if you can get the cash back out of the inventory quickly enough to use for other business purposes.
You go to the marketplace with these belts at a price of £10/belt, a 50% discount over typical pricing and a reduction in margin from £10 to £5/belt. You sell the 500 belts at a retained margin of £2,500, a nice bump in cash and profit for you, even though you reduced your margin on a per belt basis.
High Profit Sales
This strategy is used best for low volume sales where your profit margins really matter. This strategy can work if you have something unusual to sell or you are selling your product when it is not normally available, for example. In the online auction world, this strategy is usually a fixed price selling strategy for something that is in enough demand that you don't need to subject your product to the ups and downs of the marketplace.
For example, you have acquired the hottest electronic device of the upcoming holiday season. You have purchased them wholesale for £75 each and they normally retail for £150. However, because pre-season anticipation has pushed up demand, there is a scarcity of product available. You can go to market with a £250 price tag and expect to get it or sell at auction and see how high the market will push the price. This strategy has been very effective for those who anticipated the 2006 Nintendo DS Lite craze or the 2007 rush for Wiis.
A balanced strategy is either pricing your products somewhere in the middle between pricing under the other two strategies or using both ends of the spectrum when it makes sense such as volume pricing when you happen to acquire a lot of product through a liquidation and high profit pricing when you get an unusual variant of product or you have stock when demand is high and availability is low.
Whichever strategy you find yourself most comfortable with, make sure you always account for your profitability and stock turnaround. Having a rapid cash flow is one of the most important secrets of a successful retail business. By turning around your cash quickly you can easily absorb products which don’t sell as well as you had expected, which happens even to the best; you can even easily absorb losses, provided of course your yearly portfolio includes some strong winners. You should also consider that you are not limited by any one of the above strategies; choosing a hybrid approach could be your best risk leveler.