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When you create your profit and loss statement to assess the
health of your business, you will see:
Sales minus Cost of Goods Sold equals Gross Profit.
You pay for all of your expenses with the gross profit. If you
are finding that your gross profit is not enough to cover your
expenses, you have two options, you can either raise gross
profit by increasing sales or lowering cost of goods sold, or
you can lower your expenses. Certainly, that's an over
simplification, the art of business management is in the
hundreds of nuances held within those two options. For this
article, let's assume that your expenses have been carefully
streamlined and that you are doing due-diligence in your
purchasing habits. Therefore, let's investigate the pricing end
of the equation.
How you set your prices may be one of the most important
management decisions you make as an owner or manager of a retail
flower shop. A tremendous amount of work goes in to running a
flower shop, wouldn't it be a shame to under price your products
and not be able to make ends meet? On the other hand, over
pricing and putting yourself out of the market before you even
begin would also prove to be disastrous. Market conditions and
your competition will, in large part, determine your pricing.
Bear in mind, though, that depending upon these items only,
without analyzing the actual cost of the products you are
selling could cause you to loose your shirt. Pricing strategy
can be a complicated thing in a retail flower shop. This is
because there are perishable items and skilled labor to be
factored in along with the raw cost of goods.
Let us consider each of these factors one at a time. We'll begin
with the cost of goods sold (COGS) because that is the most
straight-forward of the three. The cost of goods sold is the
price you paid for the item that you are selling, plus any cost
associated with buying and owning that product until such time
as you sell it. If you were selling widgets, and you purchased a
widget for three dollars, your COGS would be $3. In the flower
business, you'll need to add the cost of your fresh flower
preservative or any other product that you must add to the
flowers to make them saleable. In the case of an arrangement,
your cost of goods includes the flowers, container,
preservative, and ribbon or accessories.
Secondly, with perishable items, you'll have a certain amount of
shrink, or loss of product. Take time to analyze the amount of
product that you loose. For every $100 worth of fresh flowers
you buy, you should factor in approx 5% loss for shipping and
normal damage. You will also need to find out your own shop's
loss factor. Let's say for this example that you loose 10% of
your fresh flowers because they are not sold before they go out
of date, or because they are wasted or broken in the shop.
Now, let's look at the components of a fresh flower arrangement.
We'll use some industry standards as a jumping off point for
setting the price. Fresh flowers: If the flowers cost $10 at
wholesale, you'll add $1.50 for shrink, .10 for preservative.
Multiply by two to get the retail price of the flowers: $23.20
Container: The vase cost you $2.00. Multiply by two to get the
retail price: $4.00 You'll be putting in a bird, a bow and a
butterfly, which will cost you $3.00, so your retail price on
those items is $6.00. This gives us a total retail price of
$30.20. We're not done yet!
Third, the cost of the skilled labor that was used to create the
arrangement must be considered. Look at your business plan and
calculate the cost of your labor as a percentage of your total
sales. Let's say your labor costs are 12% of your total sales.
You'll need to add this labor factor into every item you sell.
If you'd like to be able to sell giftware items without adding
labor, you'll probably need to do a little more analysis to
figure your design labor cost as a total of your total sales.
This number is probably more like 20% to 25%. Let's go with 25%
for this example. Now the math gets a little more complicated.
You need to find the selling price that reflects a 25% labor
cost. Dust off your algebra I text and solve this equation:
Cost + (PRICE+(PRICE *25%))=PRICE
Or
$30.20+PRICE*.25=Price
Don't panic! The easier way to do this math is to just divide
the cost by whatever percentage you need to add to the labor
factor to make 100%.
$30.20/.75=$40.26
If we were using the 10% labor factor, the math would be:
$30.20/.80=$37.75
Factor in your market considerations and do your research on
your competition. Set your price accordingly. Follow up with
continued analysis and adjust the labor factor or the
multipliers you use in the formula as needed until you find that
you have the results required to cover your expenses. For
example, you may find that you need to multiply your costs by
2.5 or even 3. You may find that your skilled labor is actually
a 30% factor, or even a 10% factor. Finally, we have not
addressed delivery. That's a topic for another article, but do
remember to consider where the money is coming from to cover the
cost of delivery. If you include delivery in with your regular
expense (which you should), you'll need to either add a delivery
charge, which in effect is just raising the retail sell price,
or, you'll certainly need to use a larger multiplier, closer to
three than two.
In summary, you can analyze pricing from dawn to dusk, in fact,
many people make a career of it! I recommend that you set a
formula based on your best research. Make the formula simple
enough for your entire staff to follow. Most importantly, don't
stop there. Be diligent about checking your numbers on your
profit and loss statement, and adjust the formula as often as
needed.
About the author:
Karen Marinelli is a Floral Industry Professional with nineteen
years of experience in the academic, retail and wholesale
sectors of the industry. She believes the common goal should be
to sell more flowers to more people, more often. For information
on How to Open a Flower Shop, visit http://openaflowershop.com/
To order flowers online, visit http://send-flowers-online.ws/
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