The Ten Commandments of Pricing

A perilous mindset has trickled into the antiques business in the past few years: it’s that the business has fallen on tough times and prices are tanking. A recent article in the Palm Springs (Calif.) Desert Sun illustrates this mindset. The headline reads:

“Where is the antiques market going? Expect lower prices, Palm Springs dealer says.” The article continues: “It’s hardly a secret that the antique and collectibles market is mired in a down cycle. Antique shows are smaller, dealers are fewer and prices are lower. It’s a good time for buyers, if not necessarily for sellers.” 

That would be scary if it were true. But it’s not. Here are the facts: In the U.S., consumer spending is up, and spending on antiques and collectibles is up. In June 2019, IBIS Market Research had this to say: “The Online Antiques and Collectibles Sales industry has continued to flourish over the past five years, largely due to the growing ubiquity and popularity of online shopping...IBISWorld expects industry revenue to increase at an annualized rate of 5.9 percent over the (next) five years, including a 4.3 percent boost to bring total revenue to $1.5 billion” Consider: 5.9 percent is nearly triple the expected 2.1 percent growth rate of the U.S economy during the same period.

Yes, the IBIS report is about online sales. Unfortunately, there is no reliable mechanism for collecting sales data on antique stores, show dealers, estate sale operators, auctioneers and other segments of the antiques business. Imagine how much higher the IBIS numbers would be if those statistics were included in their report!

Antiques sales are up and demand is strong. Those bricks-and-mortar (B&M) dealers who suffer from low prices and lost sales do so because they have failed to adapt to new market realities. Online sales are strong for all industries. Auction sales are strong, achieving record-setting prices. Even so, the current trend in retail is “clicks to bricks”: online stores are opening B&M stores. Major online sellers have discovered that there are advantages to doing so: Customers like to browse a variety of products (rather than keyword-search online); they like to touch products, try them out, and interact with knowledgeable staff. Consumers like to browse, compare, and socialize. Some call the pastime “retail therapy.” Bricks-and-mortar is all about shopping, not just buying.

In its article, “The In-Store Experience Remains Crucial to Retail,” Adobe asserts, “Visiting a store is, and will remain, essential to retail. Furthermore, if retailers learn how to maximize their stores’ potential … the physical experience can become their brand’s key differentiator.” 

Antiques store operators are ideally situated to capitalize on the clicks-to-bricks trend. They have unique, curated inventories; product knowledge; and community roots. A well-curated inventory may bring customers into a store, but it’s the store experience that sends them home with a smile on their face and prompts them to tell their friends and neighbors. The difference between negative and positive shopping experiences comes down to product selection, prices, store merchandising and customer engagement.

Pricing and store merchandising are two elements that can have the biggest immediate impact on a store owner’s bottom line. So, I’d like to examine factors affecting these in a framework titled “The 10 Commandments of Pricing Antiques.” Here they are:

In this analysis, I don’t consider elements of product connoisseurship; such matters will have been considered when a dealer purchased an item for resale.

A myth is “a widely held but false belief or idea.” We are taught that abundant supply plus weak demand will lower prices. Conversely, low supply plus strong demand will raise prices. There are even eBay seller applications that will tally the supply and demand of products. The relationship between supply and demand is fundamental to our economic understanding.

But it’s not true. Adam Smith, in his epic 1776 tome, The Wealth of Nations, wrote that supply and demand were the “invisible hands” that naturally guided capitalist economies. For 250 years, economists have taken issue with Smith’s theory, but nevertheless it seems to have become bedrock economic principle in our educational system.

Smith’s theory can be more properly characterized as The Law of Aggregate Supply and Aggregate Demand. He proposed to aggregate goods and services into broad categories and measure the supply of a category against the demand for the category. For a 21st century retailer, that is a useless comparison, and it negatively affects his ability to correctly price his wares. For example:

Imagine that Christmas is coming, and the supply of bicycles is abundant. But parents aren’t buying bicycles this year; they are buying the Sony PlayStation 4 Pro. The aggregate supply of all bicycles is greater than the aggregate demand for bicycles. In theory, the price of bicycles should go down. Retailers who are over-inventoried with mass-market bikes may have to cut prices to sell them. But, demand for high-end hybrid bikes is up and prices are strong.

In these days of market segmentation and specialization, aggregating products in order to analyze supply and demand simply doesn’t work. Richard M. Ebeling, writing for the American Institute for Economic Research in February 2019, remarks: “When the level of aggregation (of demand) is taken ... as a whole in relation to the supply of all goods as a whole, one has aggregated away most if not virtually all of the choice-theoretic relationships ... In fact, aggregate demand and aggregate supply become conceptually meaningless and factually nonexistent.”

Antiques – even those in the same category – vary according to age, condition, rarity and provenance. Prices will vary according to those criteria. Dealers: Don’t over-research prices for your products. Don’t allow the marketplace to dictate how much you should charge for an item. Your store is a micro-market, and your prices should reflect your brand, not someone else’s.

When I started in the antiques business, I believed that pricing my products was pure arithmetic: If my cost of goods sold was X, my expenses were Y, and my desired return on investment was Z, then I should mark up my products by a factor of K (keystone). Most antiques dealers operate in a similar fashion: they multiply their product cost by a keystone of 2x, 3x, or whatever. Almost every antiques dealer I’ve ever interviewed answered the question, “How do you price your products?” with some variation of “I figure if I get two or three times what I paid, I’m doing all right.”

By such thinking, a Starbucks latte should cost less than a buck and digital text messages should cost about 1 cent per 100,000 texts. Product pricing is not based on acquisition or production costs; it’s about understanding how much a consumer is willing to pay, and then getting them to pay that amount. Value (and hence prices) can be increased by manipulating your retail environment.

A recurring theme in pricing psychology is that judgments of monetary value have a lot in common with sensory judgments like weight, loudness, brightness, warmth or odors. People are sensitive to relative differences but not absolute values.

In his book, Priceless: The Myth of Fair Value (And How To Take Advantage Of It), William Poundstone asserts that consumers have no idea what products should cost; they can only determine relative value. They don’t know the value of anything in absolute terms; they learn relative value by comparing merchant advertising and shopping a variety of stores and websites.

MIT professor Don Ariely’s research in Social Comparison Theory supports Poundstone’s assertion: merchants can direct consumer’s choices in a manner that achieves the best deal for the consumer and the most profit for the merchant. In his book, Predictably Irrational: The Hidden Forces That Shape Our Decisions, Ariely points out that this tactic is commonplace.

To illustrate his point, Ariely engaged the help of 100 students. He showed them an ad for the magazine The Economist, which offered three subscription options. He asked the students to choose which option they would prefer, if they were to subscribe to the magazine. Sixteen students chose the internet-only option for $59; none chose the print-only option for $125, and 84 chose the internet-and-print option for $125, for total revenue of $11,444.

In phase two, the ad was again submitted to 100 students, but the middle choice – the print-only option for $125 – was omitted. The only choices were now internet-only for $59 and internet-and-print for $125. One would expect that the results wouldn’t be that different; after all, in phase one nobody chose the print-only option anyway. But the results were completely different when the print-only option was eliminated. In the second round, sixty-eight students chose the internet-only option, while 32 chose the internet-and print option, for revenue of $8,012. 

Giving consumers the right combination of choices (making one choice clearly the best value) resulted in $3437 in additional revenue from phase one. 

Professor Ariely states this tactic as a formula: If you want to sell product A, offer two comparisons: a less desirable product B, and a product that is almost as good as product A (but not quite) that we will call product A-minus. Price A and A-minus close enough that product A is clearly the best value. 

This knowledge is essential to antiques dealers because most consumers don’t know what antiques, art and collectibles should cost; there are too many variables. How does a customer determine the value of something they know little or nothing about? Dealers must give their customers points of comparison if they want them to discover which item is the best value. In a store setting, pricing antiques and collectibles relative to each other is more important than pricing them relative to what can be found online. In that fashion, dealers can achieve the prices they want without giving the impression that all their merchandise is overpriced. Let the customer make the choice, and they will happily pay your price.

In a retail setting, price is the remittance expected in exchange for a product; it’s the amount of money that a dealer wants to get for an item. Value is ephemeral; it is the significance that one places on an item; it’s what a customer believes an item is worth to them. In every transaction, buyers balance the money paid against the benefits received (practical and emotional).

Price is a factor of the value that consumers perceive in a product and how much they are willing to pay for it; in other words, what the market will bear. According to pricing psychology, if you’re not pricing your inventory according to what the market will bear, then you’re pricing incorrectly. Determine how much you think your best customer would be willing to pay and price the item accordingly.

For example, I love baseball. When I was a kid, I was a huge Washington Senators fan. I hold Senators memorabilia in high regard. If I personally value a Topps Camilo Pasqual baseball card at $20, then I would be willing to pay $20 and under for the card. If my dealer prices the card at $15, it doesn’t mean that the card’s value is $15, it just means that $15 is a good price for me, since it’s below the value that I personally place on the card. It also means that the dealer could have gotten an extra 25% for the card if he would have priced it higher. I would have willingly paid the price.

Of course, you never know how much value a customer places on an item until you engage them in conversation. That’s why it’s critical to engage your customers; don’t let them wander around your store gasping at your prices. Price high; you can always come down, but you can never go up.

In every corporate retail shop everywhere, prices are determined in this manner. Wholesale cost, operating margins and demand curves (though important) are not the primary drivers of an item’s selling price; the primary driver is the price that the market will bear.

Dogged insistence on getting more than you paid for every item in your inventory is a quick road to bankruptcy.
We all have inventory items that aren’t selling. Some have a lot of inventory items that aren’t selling. 

We all make buying mistakes, no matter how careful we are. We buy the wrong item, or we pay too much for an item. Over time, these buying mistakes collect like silt in a riverbed: a half-dozen items or more accumulate every month, and eventually we’re awash in dead inventory. Our retail ship won’t float because it’s stuck on a financial sandbar. Too much silt, too much dead inventory. We find ourselves selling newer items while the old, dead inventory sits there, takes up space and costs us more money to hold.

Don’t be reluctant to let an item go for less money than you think it should bring. Don’t get too attached to your products; remember, you’re stocking a store, not a museum. Pro retailers love their products, but only for their sales. If an item is not selling (or if you can’t get the price you want for it), mark it down and sell it.

View your inventory as if it were a stock portfolio: each item in the portfolio must pull its own weight. Stocks that don’t produce are sold at a loss so they can be replaced by better-performing stocks.

Earlier I spoke about the Law of Aggregate Supply and Aggregate Demand. Let me expand on that a bit. Just as it’s not practical to aggregate a mix of antiques within a category, it’s not practical to aggregate a mix of antiques sales channels and expect the same results from each. Retail stores, flea markets, auctions, estate sales, yard sales, thrift stores, consignment stores, antique fairs and online marketplaces each attract customers with differing price and quality expectations.

Dealers should match their pricing model to the customer’s expectations at each venue.

Even within each venue segment, expectations will vary. Customers at an estate tag sale expect to pay higher prices than at an estate auction. Buyers on 1stDibs.com expect to pay higher prices and receive higher quality than they would buying on eBay. Dealers can charge more for their goods at a bricks-and-mortar store than they can online.

Customers are willing to pay more when there is a higher level of trust. Some venues are inherently more trustworthy than others. Liquidation venues like auctions, yard sales, flea markets and estate sales are here-today-gone-tomorrow. Online marketplaces have always had trust issues. Bricks-and-mortar antique stores have a sense of permanence; customers can pick up and examine the merchandise and interact face-to-face with a merchant.

As the level of trust increases, so should your prices. When a store’s inventory, merchandising and location work together to give customers the impression that you offer “nothing but the best,” the result is a high level of trust. When these three components work together, you can charge top dollar prices. 

Dealers who use a keystone approach to pricing usually have a formula for their markup, 2x cost, 3x cost, and so on. Keystoning provides a quick “rule of thumb” for a dealer, but it doesn’t allow for changes in expenses. Rising expenses cut right into a dealer’s profits.

For example: If I habitually mark items at a 3X markup, my annual income statement might look like this:

Sales Revenue: $900,000

Cost of Goods Sold: ($300,000)

Operating Expenses: ($420,000)

Profit: $180,000

The following year, expenses go up, but I’m still using the “3 times” as my markup:

Sales Revenue: $900,000

Cost of Goods Sold: ($300,000)

Operating Expenses: ($495,000)

Profit: $105,000

An 18 percent increase in expenses resulted in a 58 percent decrease in profits. The 3X markup didn’t account for the upswing in expenses. To maintain the same profit level in year two as in year one, I must ensure that my markup allows for the higher expenses plus the return on investment that I want.

Here’s how to do that: in year two, my operating expenses were equal to 165 percent of my cost of goods. Also, I want a 20 percent return on investment, just as I had in year one. If I have purchased an antique thingamajig for $100, here’s how I’d calculate it’s selling price so that I make the desired profit:

Cost of Goods: $100

Operating Expense: $165

Total Investment: $265

20% ROI: $53

Selling price: $318

The proper keystone markup number for year two is 3.18, not 3. You should always know what your expenses are as a percentage of your cost of goods, otherwise you’ll cheat yourself out of profits.

Prices go up; yours should, too. If you are regularly adjusting your retail prices to account for rising expenses, you should be OK profit-wise. But if your expenses are holding steady, you should incrementally raise your prices anyway. Incremental price increases reinforce customer’s appreciation for the value of your products.

Your gross sales will not be affected by raising prices incrementally. You may lose a few sales but any losses will be compensated for by the increased prices. If you boost prices whenever you re-merchandise your store, no one will even notice the higher prices.

Don’t use the same pricing formula for all your products; mix it up.

Grocers vary markups by product category. A grocer’s average markup is about 15%, but convenience foods are marked up about 40%, deli meats and cheeses about 50%, and non-grocery items even higher. Some items are sold as loss-leaders, advertised to bring shoppers into the store so that higher-priced items can be sold.

There is no one-size-fits-all formula for mixing up pricing formulas in an antique store. We’ve discussed Keystone (markup) pricing, Psychological pricing (focusing on what customers are willing to pay), and Prestige pricing (charging top dollar to create an exclusive clientele)
.

Here are a few more tactics for your consideration.

Benchmark pricing: price according to what your competitors are charging.

Charm Pricing: Research has confirmed that prices ending in the number 9, 7, or 8 work, and their effectiveness has nothing to do with being a few cents cheaper.

Multiples Pricing: Offer groups of items for one price, like “3 for $5.” This strategy works well when you are overstocked on certain items and want to sell them off in quantities to reduce your inventory level.

Loss-Leader Pricing: selling some items for less than you paid for them

Markdown pricing: put individual items or categories on sale. Never advertise “Everything in the store X% off.” Such a tactic reeks of desperation and is not in your best interest.

Dutch auction: in a retail environment, Dutch auction means tagging items with dated, gradually descending prices. Doing so creates excitement and moves inventory. 

Ultimately, price is the amount that is rung up at the cash register, not what you put on the item tag. Don’t give away profits by haggling with customers.

Customers control haggling. They know you have overhead to pay and that you need their money. Never haggle over money; instead, negotiate a value. Haggling is about price; negotiation is about value. As a dealer, negotiating puts you back in the game. In a haggle, all you can do is dig in and defend your price.

In a negotiation, you can move the discussion away from price by uncovering a customer’s reasons for wanting to buy an item. Does he need it to complete a set? Is it a gift? Did she say she has the “perfect place” for that end table? Spend time discovering the value a customer places in your item, and you will find that you get higher prices and spend less time haggling.

If your customer still feels that the price exceeds the value of the item, try increasing the value by:

The important point to remember in any negotiation is that whoever wants to make the deal the most has the upper hand. Price is not the only point under consideration. In your store, you should be the one to set the terms of any negotiation. When you negotiate rather than haggle, both you and your customer benefit. 

It’s said that antiques dealers make their money when they buy. Don’t give it away when you sell. Price for profit, vary your pricing tactics, keep your prices high, adapt prices to the venue and always sell value. Do these things, and your business will stay profitable.