The Real Cost of Cheap

If you run any type of retail business, cost will play a major part in your everyday life. Everything from negotiating the price of product you purchase to how much you pay for your phone lines.  Business owners are constantly trying to work out what the right prices are for your business. One consistent theme in your mind will be, “Is the cheap option the right one?”

“When you pay too much, you lose a little money — that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot — it can’t be done.” This quote by John Ruskin is as true now as when he wrote it over 100 years ago

Price is not an indicator of quality or a guarantee of an outcome. But when we talk about low price, does that mean low cost? For many products, the initial cost does not equate to the eventual cost, nor does it show the total cost of ownership over time. When all factors are taken in to consideration, cheap things can be much more expensive than they first appear.

Aim High

When it comes to deciding which products to stock in your shop, the instinct may be to offer cheaper product to your customers. I often hear retailers say that their customers simply do not buy anything “expensive” from them. If that’s your view, then it may be worth taking the time to re-evaluate.

Let’s consider this scenario.  A £10 t-shirt is a pretty low price. However, if you only wear it once because it doesn’t wash well, or you find you don’t like it that much, is it still ‘low cost’? Is it good value? A £100 t-shirt is quite expensive but if you love it and wear it a lot, isn’t that good value?  If you wore it once a week for a year, that would calculate at less than £5 per wear. If we base value on cost per wear, the £10 t-shirt actually costs twice as much.

Sell Smart

This is the sales message you need in order to sell higher priced items to your customers.  Marketing and your conversations around any higher price points should focus on why those products cost more. Understanding the key features and benefits of a higher priced product will mean the whole team is able to pass that knowledge on to the customer.

When it comes to the pricing of the everyday services that help to run your business, a low-cost-only focus is also unlikely to work in a long-term relationship. There’s often a greater cost to bear that might not be obvious at first.

Lawnmowers. If you have a choice between an 18” and a 23” lawnmower, but the price of the 23” is twice the other, you’d think the 18” is half the price. However, on any given lawn the 23” is going to cut 28% more grass for every lap walked, meaning the job will be a good deal quicker. If it takes you an hour to cut the lawn with the 18”, the 23” mower will save you nearly quarter of an hour. What is that worth? For some, quarter of an hour a week might have little value, but over a period of a year that’s nearly a full working day. If that time was used productively, that could pay for the difference in cost in the first year!

Lawn mowers and t-shirts are simple everyday items but, when it comes to EPOS systems, things can get a bit more complex. Here at XPOS, we are often asked why our solutions cost X when a competitor might cost ½ X. That ignores the first point: there are many systems that cost 3X or 4X but no one ever questions those.

“EPOS” can often be used to describe the most basic electronic POS machines through to advanced retail management solutions.  It’s such a generic term that direct comparisons are incredibly difficult and half price is most certainly NOT better.  In fact, I wager that the ½ X system is probably costing you £000’s a year more than it should do because, as John Ruskin said, “the thing you bought was incapable of doing the thing it was bought for”.

Not Just a Till

The first thing is to work out why you need an EPOS. For some, it’s just a till: a box to put money in.  For those customers, there’s no point in looking any further and the cheapest EPOS will do that for you. However, retailers with aspirations to manage their business need to think bigger and better.

Essentially, where EPOS systems differ is in the processes they can provide: the amount of work required to achieve those processes and the information they give out to help refine the processes. The upfront cost of a system is often based around the processes and, usually, the cheaper the system, the more limited the options.

With any system, there’s the upfront cost, but you should also take into account the running costs and the non-associated costs which might include:

  • the cost of labels
  • the cost of miss-identified products
  • the cost of excess stock
  • the cost of loading products in to the system
  • the cost of incorrect orders
  • the cost of incorrect payments
  • the cost of chasing account balances
  • the cost of poor margins
  • the cost of your book keeper
  • the cost of card payments
  • and finally, and probably most importantly, the cost of lost sales.

Any EPOS system can deliver all these costs in to the business – some will even do them cheaply for you. Very few will provide you with the right processes, work or information to avoid these issues.

Product Power

One area in particular, which might seem very basic but can result in a huge amount of cost to a retail business, is entering product data.

Initially, the cost of entering data might appear to be the “man hours” to type in products data and, to a certain extent, that’s true.  If the average retailer runs a fairly standard setup, with an average amount of stock, they’ll probably be spending 3 to 4 hours a week managing product data, orders and stock. In fact, many people will spend much more time than this.  However, there will be those retailers that don’t allocate time to this, and believe it to be a “waste of time and money”. They don’t want a complicated product setup: “I just want to have a code for shoes…”.

Here, what’s being missed is all the work that’s ISN’T being done and the resulting impact. If you don’t identify size and colour in your product descriptions, you’re wasting valuable cash. 

Avoiding Dead Stock

The average pro shop has over £16,000 worth of dead stock.  We identify this as stock that’s been sitting in the shop for more than a year. It’s often stock that’s the wrong size, wrong colour or just the wrong product and could have been avoided with better ordering and analysis. When you’re opting for a low-price EPOS system, be sure to factor in the extra £16,000 worth of wasted stock.

Over the last few years, we’ve seen this number come down considerably across our own retailers with shops that have embraced XCODES – our centralised product database which helps to reduce stock levels and increase stock turns.  On average, I estimate our retailers reduce dead stock by £8,000 per year: all extra money that adds to the bottom line but is not considered in the monthly cost. If you saved £8,000 over 3 years, that’s £222 per month!

Cost Saving Solutions

The cost saving from using XCODES over entering your own product data is considerable. I would estimate it saves the average retailer at least 2 hours a week. That’s day a month. For golf pros who coach, this is £300 of teaching time a month.

Another area to consider is labels. If your products come in to the shop with barcodes on (and most do now), why bother using labels? Supermarkets stopped that decades ago. The time and cost taken to print labels and stick them on to products is considerable. I would imagine that’s £1,000 per year in time that could be easily avoided. XCODES enables you to simply scan in the product (or, even better, receive the order) and put the item out to sell, without having to think about labelling.

If you don’t know what sizes you sell, how do you know what sizes to order? You can’t rely on the brands to help you as they’re only telling you what you ordered in the past.  How many times have you walked in to a shop and seen a basket of gloves, or row of shirts, left over at the end of the season, in sizes that are not going to shift. Each one of those items costs the business cash and needs to be added to the cost of running a system.  XCODES products come with full product data including colours and sizes.  What’s more, the detailed reports in XPOS provide the insights that retailers need to ensure they’re only ordering what their customers will buy.

When considering a low-price option, are you really taking on board all of the costs. Saving £40 a month on the upfront cost cannot be justified if the actual cost could to the business more harm in time and a lost margin of £500 a month. As they say, “retail is detail and the devil is in the detail”. That low price might not be what it cracked up to be.

To find out how XPOS can save your retail business money, contact matt.peace@crossovertec.co.uk for a free demo. For more information about XCODES visit www.crossovertec.co.uk

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