Free rein / 78 The supply snare

FREE REIN

While clearing out his home, US industry consultant Gordon Hecht realised there’s a fundamental difference in how retailers frame their added-value sales – and that a little terminology rethink could result in major margin gains …

WHEN YOU ASSIGN A VALUE TO SOMETHING,

IT BECOMES VALUABLE

By GORDON HECHT gordon.hecht@aol.com

My bride and I have been in a purging mood. For those who haven’t Marie Kondo’d their condo, that means moving out, throwing out, or donating anything in your home that doesn’t bring you joy or isn’t being used.

We sorted things into three groups: items that are worn out and destined for the trash; others that have some cash value if we can sell them; and things that have no value to us, but could be donated to a good home. We learned quickly that for the last category, it’s just too hard to donate things these days – most aren’t taking in used goods.

We wanted to get the word out about our excess merchandise (you probably call it ‘advertising’), so we posted the flotsam and jetsam on social media, with photos and descriptions, with prices or marked ‘free’.

This is where it became interesting. We started with half-a-dozen things priced $10-100, and half-a-dozen ‘free’ items. People who responded to the ‘for sale’ items asked one or two questions, set a time to pick up, showed up on time and paid with cash. The people wanting the ‘free’ merchandise were more cavalier. They asked more questions, and almost all broke their pick-up appointments, or sent us nasty messages when we told them the items had been claimed by someone else.

It occurred to me that when you assign a value to something, it becomes valuable. Contrast that with knowing that things that are zero-cost or free have no worth and become worthless. People who paid for stuff – new or used – were more respectful of my time and what they were getting. Freebie people couldn’t care less.

It is said that ‘free’ is the most powerful word in advertising. And since the job of advertising is to bring feet to your door and eyeballs to your website, you probably still want to use that word. But the sales team’s job is to convert those shoppers into customers, so giving away free gizmos or services may be a misstep.

A profitability rule of retail is that when someone gets something for nothing, someone else gets nothing for something. Whether it’s delivery, removal of the customer’s old items, or accessories like pillows or protectors, each has a cost to your business and a value to your shopper. They only lose their value, to your customer and your team, when you give them away for free.

Closing a sale first time is more important than ever, and I’m not against using bonus merchandise incentives to achieve it – those can still have value when properly framed. But which phrase do you think has more impact: “I’ll throw in delivery for free if you buy now”; or “I can save you time and money by including our full-service delivery, normally $99, for no extra charge on an order placed today”?

Every time you discounts an item or give merchandise away for free, you shred your profit margin. Retailers that work on a 50% margin (100% markup) gain a gross profit of $50 for every $100 they sell at retail. A -10% discount comes right off the top and reduces gross profit from $50 to $40 or a 40% margin. A -20% discount reduces the margin to 30%. In terms of cash, a $100 discount comes off the gross margin.

Free merchandise giveaways have a similar effect. Think in terms of 10 to one. It takes about 10 retail dollars to make up the loss of one free merchandise dollar. Tossing in a pillow with a $20 dealer cost means you’ll have to create another sale for $200 to earn back the net profit dollars.

Everything in your store has a value, and giving it away for free makes it worthless and reduces your brand’s value. Instead, why not build value, by building packages of services and products that make more sense to your shoppers? Think of McDonald’s Happy Meals – the toys or books aren’t free, they are value-added inclusions.

Explain the value of each item in your store. Make sure your team knows why your delivery service costs $49-99. Know the value of each accessory item, and quote the full price first. There’s never a real need to give Sumthin’ for Nuthin’ … but if you know someone who needs 83 VHS tapes or a maroon leisure suit, I might be able to help

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THE SUPPLY SNARE

Last year, the Government introduced legislation changes to help resuscitate the economy, writes Lindsay Ellis – but while many are simple, some are more complicated, with far-reaching consequences for the unwary …

THE CONTRACT A SUPPLIER RELIES ON MUST CHANGE TO PROTECT THEIR

OWN BUSINESS

BY LINDSAY ELLIS www.wrighthassall.co.uk

One of the most significant changes appears in Section 233B of the Insolvency Act 1986 (introduced by the recent Corporate Insolvency and Governance Act), which prevents businesses from terminating supply to a customer on the grounds the customer has become insolvent.

It applies to all contracts for supply of goods and (non-financial) services, but only applies to suppliers – customers can terminate contracts if a supplier becomes insolvent.

This could be a tough situation for suppliers, who are also prevented from demanding outstanding charges be paid as a condition of continuing to supply – which will go against what many will consider good business practice.

Nothing prevents a supplier from terminating a contract in the period leading up to the insolvency proceedings, or terminating after the insolvency proceeding began, for a reason not triggered by that proceeding. A supplier can also terminate their contract with the consent of the insolvency administrator or with the permission of the court – typically if continuing to supply would cause the supplier hardship.

If a customer enters a formal insolvency procedure, a supplier can wait for a new reason to end the contract (like non-payment for supplies made after the commencement of the insolvency). They may also be able to exercise other contractual rights.

A supplier may, if its contract permits, terminate for convenience, as long as supplies continue to be made during the notice period. If the existing contract is a single-purchase order, the supplier may reject new orders from the customer, particularly when the contract is structured as a framework agreement and each new order constitutes a separate contract.

Suppliers can also refuse to renew an existing contract once it has expired, and can negotiate with the insolvency officeholder to end the contract. In future, the contract a supplier relies on to regulate their relationship with customers must change to protect their own business. Considerations might include: • Reduce the contract term to ensure the supplier is not locked into supplying the customer for a considerable period in any insolvency procedure (balanced against the commercial objective of securing a long-term customer) • Structuring the contract as a framework agreement, ensuring each supply is treated as a separate contract, which allows the supplier to accept or decline orders • Tightening the payment structure, which may serve as an early warning of customers experiencing financial problems before insolvency is triggered • Requiring regular financial information from customers to assess continued solvency, including credit ratings and performance reports • As an interim step falling short of termination, a supplier could consider including a provision allowing it to suspend further supplies under the contract for repeated or lengthy periods of non-payment by the customer • Ensure the supplier can terminate for convenience, including as short a notice period as makes commercial sense

There will be suppliers impacted by the legislation changes, and, in future, choosing customers wisely may slow growth, but could protect them from the consequences of continuing to supply customers trading insolvently. Conducting deeper due diligence on a customer’s financial position before agreeing contracts and monitoring payment performance is advisable.

It will be prudent for suppliers to train those managing contracts on the impact of the changes and how to spot the warning signs, including ensuring invoices are paid on time, and possibly tightening debt collection procedures.

Every supplier must understand its contractual rights and be ready to promptly exercise them to stop supply or terminate the contract promptly if a customer starts showing clear signs of financial distress – and it would be sensible to review standard terms and conditions to ensure they offer protection against a customer’s insolvency, as far as possible