Back in the 1980s, I had a very successful computer business. We sold Mac and PC hardware and software at a discount through mail order and catalog sales. And when I say "at a discount," I really mean at a discount!
When I joined my partner in the business, pricing was very gentlemanly and civilized. Most of the mail order houses at that time tried to imitate the catalog industry, which was making gross profit margins (GPM) of 2030% or more. But we decided to sharpen our pencil and see exactly what we needed to sell at breakevenplus a 12% net profit. Our overhead being rather lowwe worked out of a local strip mall that housed a privately owned home stereo store, a secondhand clothing store, and a family-owned greasy spoon restaurantwe figured we could sell at a 10% GPM and still make a small profit.
And we were right. Unfortunately, this upturned the industry applecart in a lot of ways. First, it started a price war. Our competitors had to drop their prices or lose sales. With our company's tag line of "Low prices are born hereraised elsewhere," we didn't win any popularity contests with competitors and manufacturers, to say the least.
The second problem: Not only were we not selling at the suggested retail price, but we were selling below what even the established retail stores could sell at. This caused quite a bit of gnashing of teeth at computer retailers, such as Computerland. They barraged manufacturers with complaints, saying that we were undercutting their sales and taking away their retail customers.
We knew this wasn't true. Why? Because we knew that retail customers and mail order/catalog customers (people willing to send in a check or order over the phone) were not the same. How did we know this, and why did we feel that the retailers didn't have a case?
Because we had a chain of retail stores tooand they were doing quite well, thank you. We saw that our local customers were willing to pay more for our merchandise, including sales tax, than they would if they picked up the phone and ordered from our mail order house.
A Different Breed of Customer
Of course, today, selling at a steep discount is no big deal. Retailers have accepted it and so have the manufacturers. Selling at a low GPM has become SOP (Standard Operating Procedure, for those of you who haven't served in the military).
You see, we discovered what most retailers and mail order/catalog companies have known for many years: Retail customers are a different breed from catalog buyers. The retail customer wants to see and touch the product before she buys. She also wants the immediate gratification of taking it home, then and there. And let's not forget the social element of shopping. Retail customers may be more inclined to enjoy going to a store with other people and being part of that social experience. Because of these things, it's a tough job turning them into mail order/catalog buyers.
But, funny enough, catalog buyers are the same type of people who buy online.
So what does all this mean to your e-business?