Inventory as marketing investment.

When you get a call from a supplier offering you a “Deal” on something, should you take it? How much inventory should you buy & store at one time?

If you only have a 600 square foot store, or have no terms with suppliers, this may not apply as much to you.

Here’s how I decide whether to buy & how much;

It’s not how much you make when you sell something. It’s how much you make per day (or month) from selling something. It’s called “turnover”. How fast will the product move?

When I was a kid, I sold comic books through the mail. Sometimes I would hold on to a single book for a year waiting for someone to buy it at my price. I talked to a much wiser dealer and he said “Kid, it’s not how much you make as much as it is how fast you sell it”. Of course, I thought he was nuts. He wasn’t.

Let’s say you sell vacuum cleaners. You buy one for $100 and sell it for $250. (this is just a math example). All’s fine & good. If it takes you a year to sell it, you made 150% on your “investment” of $100.

But let’s say you paid the same $100 for the vacuum & added a free set of attachments that cost you $30. and a free supply of bags that cost you $10. Now your cost is $140….and you sell it for $250. Not so good, right? Now you’re only making 78% profit. But what if this additional cost allowed you to sell one a month instead of one a year?

Your profit on that “offer” would become astronomical per year. Your advertising expense per unit would plummet.

I hear from retailers (mostly in the vacuum cleaner business) that tell me that they buy a vacuum cleaner for $250 and sell it for $1,000. That sounds impressive, doesn’t it? But what if it takes them 6 months to sell each one at that price? What if they lose 3 sales of that unit for every one they sell because the buyer finds it for substantially less online?

Am I suggesting that you discount to be the lowest price and make more turns per year? Absolutely not!

I am suggesting you make your offers more valuable to your customer. This may cost you a little more per sale, but increase your net sales by a lot. Create “Packages” that the buyer will take more often, and that can’t be shopped.

“Number of turns per year” is just one way to see your inventory as an investment. When I get a call from a rep and they say “If you buy 40 of these right now, I’ll give you 20% off our lowest quantity price” now I have to make a decision. How many will I sell a year realistically? If the answer is “10” then I won’t do it. Why? Because when I think of the “Savings As Investment” it doesn’t look that good. If it takes me 4 years to save 20%, that’s a savings of just 5% per year. Hardly enough to get excited about. Plus the fact that I may not want to be in business in 4 years, and I’ll have to sell at wholesale or below just to dump the inventory. Nope.

But what if I know I’ll sell all 40 items in 6 months or less. Now I have a savings as investment of 40% per year (20% per 6 months is 40% per year..roughly) Now if I can convince them to give me 60 day terms, which I usually can, I’d be brain dead not to take the deal.

For the first 5 years I had my store (The Sweeper Store) I would try to re-invest in inventory as follows. Sell ten-buy 12…..sell 12-buy 15. I did that to build my inventory and take advantage of quantity prices. Our store is stuffed to the gills with inventory now, so I buy based more of discounts (on things I would buy anyway) than real need.