Mar. 10, 2008: Listening to the lowly O-ring and its important message
March 10, 2008
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You’re not LIS-tening ...
Let’s try this again.
Four years ago in this magazine we talked about an O-ring. The lowly O-ring. You saw in 2002 over 23,000 of part No. 11105 were sold for around MSRP (20¢) and made $5,600 in margin. But, another 13,000 of these little suckers were sold by more aggressive dealers for just under a buck. Those guys made $12,856.
The message was clear. The public will pay 95¢-$1 for O-ring No. 11105 and not bat an eye. In the overall scheme of things, that $1 was not material in their buying decision. They were OK with it.
And expanding that message, we asked you to think about the price you charge for other small items. Is that price commensurate with the value, the usefulness of that part to the consumer? And at what point do you maximize your profit, while still retaining the goodwill of your customer?
We talked about goods in the marketplace that are elastic (Steak: You raise the price, you sell less. You lower the price, you sell more), and inelastic (Salt: You raise the price, you sell the same. You lower the price, you sell the same). And, we concluded that this little O-ring was an inelastic commodity (again, the pun is unintentional) since sales continued on at almost any price.
So the assignment was for you to first price little 11105 up where it should be, and second to review your parts inventory and figure out where else you could maximize profit.
Four years have passed, and I was wondering just how you are doing …
So I pulled up little 11105 and ran it around the track again. Turns out the OEM had doubled the cost and moved the MSRP up to 45¢. They got the message, but you guys have gone backwards.
Look at the 2007 chart. First, some of you sold 6,000 of these things for less than 20¢ each and made a whoppin’ $142 in margin. Way to go! I’m sure you’ll make it up on the volume.
And then the greatest part of the herd did exactly what the OEM told them to do, hovered right at MSRP, sold 13,000 pieces and made $3,325. Wow. I’m really impressed.
Then there were you guys — the ones who are on top of this little game and realized the true market value of 11105. You marked it at 95¢ to a buck, sold 15,540 of them and made $13,000.
Now, drift on up to 40,000 feet. Take a look at your pricing — all the way from your units on the floor, through your thousands of parts boxes and on to your shop rate in the back. Work with it. Move the numbers around, both up and down. Test the market. Push the envelope. You will never know what works until you try it.
Let little 11105 lead the way. It might be tiny, but its message speaks very, very loud.
Hal Ethington has been associated with the powersports industry for more than 30 years. Ethington is a senior analyst at ADP Lightspeed. He can be reached at Hal_ethington@adp.com.