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The Price Is Right (Or Is It?)

An adequate return depends on accurate cost accounting & the right pricing strategies

By Gerry Davies

Pricing is simple, right? You add up your costs and then pick a number that you believe is competitive enough to entice buyers and make a profit.

If only it were so simple.

The reality is that for some in the jewelry industry—especially smaller and less-experienced companies—pricing doesn’t completely account for costs because they don’t have a clear picture of what their costs are. As for selecting a price, market experts say that the purpose of pricing is to maximize profits—a goal that requires a more sophisticated approach than simply matching your competitor’s prices. (Indeed, some experts say that competing on price in hopes of making a profit on volume is to engage in a race to the bottom where profits are scarce and survival a challenge.)

Do you really know your costs? Do you practice pricing tactics and strategies that maximize profits? Compare what you’re doing with the following information and advice from people within and outside the industry.

A Trip Down the Cost-Accounting Trail

Most manufacturers have a decent grasp of their direct production costs: shop labor, including wages and benefits; gold, silver, and other metals; gemstones; and contract services, such as casting or CAD/CAM. They may account, too, for the cost of equipment and energy used in production.

If companies fall short in their cost accounting, it’s likely to be in the area collectively referred to as overhead. Though they may not be directly linked to production, overhead costs are necessary to doing business and, more important, they come out of the bottom line just as the cost of gold does.

Consider whether your pricing reflects:

"The most neglected or under-calculated area is usually the overhead expense," says Michael David Sturlin, a designer in Scottsdale, Arizona, who also teaches marketing at the Revere Academy of Jewelry Arts in San Francisco. "Making a thorough and accurate assessment of the totality of the overhead costs is essential in developing a reliable pricing formula.

"Categorizing all of the associated costs is a good way to begin," he says. "The more systematic the categories are, the more functional the system will be. Things like photography, printing, marketing and advertising, promotional campaigns, insurance—all of these need to be included in the overhead expense and attributed in correct proportion to every product."

The proportion of the overhead attributed to a particular item is related to the hours required to produce it, Sturlin says. "For example: Based on 2,000 hours in the production year [40-hour week, 50 weeks per year], the annual overhead costs are divided by 2,000 to determine the overhead cost per hour. Every item has a labor cost and an overhead cost. If an item requires five hours of labor to produce, it also uses five hours of proportional overhead."

Sturlin also advises what he calls "strategic" cost accounting for capital investment in materials: including a profit margin to provide for inventory growth. "If we sell an item without a material profit and we take the material cost out from the proceeds to reinvest," he says, "we can only replace the item with one new item. If we realize a profit on the materials themselves, we can then dedicate that profit toward additional materials to increase the inventory. As an example, if we have a 50 percent profit margin on materials, every time we sell an item we can replace it with 1.5 new items."

Sturlin’s pricing formula would look like this:

            Labor Cost

          Materials Cost (Materials x Markup)


          = Product Cost


            Product Cost

          Profit Margin

          = Selling Price

Getting the Price You Want (and Need)

Even established companies may struggle to set the right price. Pricing and marketing experts suggest a variety of tactics and strategies to both cut back on the guesswork and fetch prices that make products comfortably profitable.

Know your intangible value, market it, and include it in the price. Pam Danziger, president of Unity Marketing, a marketing consulting firm in Stevens, Pennsylvania, says consumers are driven by a passion for value, but that the value they perceive isn’t determined solely by price. Reputation, design quality and uniqueness, attention to detail, beauty, fashion trends, and rarity are obvious value influences, as are the quality of craftsmanship and materials.

If you’re selling jewelry whose value extends beyond its basic costs, you should analyze what attributes add value and reflect them in your marketing—and your price. Sturlin, known for his signature hand-crocheted jewelry, emphasizes several value-added aspects of his work: the labor-intensive nature of his crocheted pieces, the significant time investment that he makes in each piece, the high value of his materials, and "a very specific technique I use for which I have international acclaim." He believes the awards he’s earned from the World Gold Council and American Jewelry Design Council also add value to his work.

The emotion that a product’s attributes inspire in consumers—an intangible influenced by marketing—can affect buyers much more than the tangible consumer drivers: need, features, and affordability.

"Emotion touches off and interacts with each of the tangible features," Danziger says. "High emotion, such as a passion for a particular type of item, can spark need. High emotion can enhance the perception of product features, whether it is a favorite brand one feels emotional about, or a favorite color, designer, and so on, to make the item more desired.

"Affordability is strongly influenced by emotion. What people really want, they are willing to pay a lot of money for."

John Hogan and Thomas Nagle of the Strategic Pricing Group in Marlborough,   Massachusetts, extend that thought into business-to-business sales. Estimating the value a product creates for a consumer "requires intimate knowledge of the customer’s needs," Hogan and Nagle write. "This deep understanding of needs can then be used to translate a product’s features into customer benefits, which are then translated into a value estimate. In business markets, the value estimate centers on the economic impact a product or service has on the customer’s costs and revenues."

Stand up for what you’re worth. Once you’ve established the value of your jewelry, stick to your guns. Nagle says demands for discounts, often in exchange for larger-volume purchases, are inevitable, but that you’ll benefit from maintaining set prices. He offers several reasons:

The key to this strategy, he says, is understanding the value of your product and being able to communicate it. "Poor communication of value results in higher price sensitivity and more intense price negotiations," Hogan and Nagle write.

Develop a reputation for walking away from a bad deal. Nagle and Hogan suggest this as a corollary to firm prices. "A policy of never walking away from business sends a clear message to customers, encouraging them to be extremely aggressive on price in order to test how low you will go," they write. Salespeople should know to turn down "any deal that the company would not want to offer any customer willing to meet the same criteria."

The result may be a short-term loss of sales, but typically not reduced profits. That’s because in many cases increased volume produces no more profit, and sometimes less, than selling fewer items at the established price.

Include your service value in the price. Quick turnaround, guaranteed delivery, warranties, and other service benefits all have value to buyers. Your prices should reflect them. "A sharp negotiator never gives away something that is valuable," Nagle writes.

Make life easy for your customers. Maeve Gillies, the designer behind the Celtic-themed MaeVona jewelry line in New York City, has opted to simplify her pricing for bi-metal items, setting prices based on the primary metal rather than pricing out each component individually. She also does not pass along metals price increases until they exceed a 10 percent price range. She thinks it’s worth the cost to her to create buyer goodwill.

"We want people to get used to our prices within a certain range," says Ken Cowin, CEO of MaeVona. "We want pricing to be consistent, user-friendly, and understandable. So we aim to re-price twice a year, although we will do so more frequently if metals prices increase by large amounts."

Gillies is sensitive to another pricing issue, too: She sets her wholesale prices so that the retail price, after markup, won’t contain the number 13. "People won’t buy" if the price contains a 13, she says. "But they won’t know why."

Reduced to its essence, pricing comes down to accounting for all of your costs and all of your products’ value, and communicating that value to your customers. If you do it well enough, you’ll obtain returns that allow your business to prosper.

Originally published in the September 2007 issue of MJSA Journal.


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