How Do You Price Your Small/medium/large Versions?

[Mark Anderson]

More and more shops are using the small/medium/large approach to pricing championed by Tim Huckabee of FloralStrategies. There is lots of information about how versioning this way can improve profits.

There doesn’t seem to be much information on how the price increments should work and whether there should be any impact on margin. Specifically – should the upgraded versions (medium and large) offer the customer better value and the florist lower margins?

Most florists seem to be focussed on consistent margins. Their “medium” and “large” versions are priced according to the same formula as their base “small” version.

Other florists sacrifice some margin to make their “medium” and “large” versions more attractive to the customer. The idea is that the customer is ready to spend some money and, since you really don’t know when they will order again, you should try and get every last penny out of them, even if it means sacrificing some margin.

Other successful vendors take remarkably different approaches with different products:



Peanut Butter



Price Pattern
There is only the slightest difference in the unit cost between the largest and smallest pack sizes. The difference could reflect savings in packaging and handling, meaning that margin might not be affected at all.


What is Going On?
I expected more of a volume discount but maybe, in this case, the retailer has decided they would not benefit. Peanut butter is arguably a non-perishable staple for many families and their consumption may be fixed. If a family is going to consume X pounds of peanut butter in a year any volume discount means only lost margin with no increase in sales to make up for it.


Similarities to Retail Floral?
Only the pricing. Like many florists peanut butter doesn’t seem to discount.


Differences to Retail Floral
A lot! Peanut butter is non-perishable, and an essential food item for many families.



Supermarket Popcorn



Price Pattern
Here you start to see some savings when you buy larger packages – the unit price in larger packages saves you 20% to 25%.


What is Going On?
Again this is arguably a non-perishable but it’s also more of a discretionary purchase for most people. My guess is that supermarket research (and there is tons of it) shows that when somebody is buying something discretionary like popcorn they should be motivated to buy as much as possible, even if it means sacrificing a little margin.


Similarities to Retail Floral?
It is a discretionary purchase.


Differences to Retail Floral
Non-perishable.



Movie Theater Snacks



Price Pattern
Here you start to see huge discounts when you buy larger quantities. The unit price for the largest packages is less than half the cost compared to the smallest size. And these don’t even take into account the “free refill on all large size concession items” promotion that is so common. Factor that in and the discount is almost 80%.


What is Going On?
Given that:

• Options for the consumer are very limited – there are no competing concession vendors in the theater to drive prices down leading to the exorbitant prices overall.
• The high base prices and margins allow for aggressive discounting on larger sizes.
• The products are essentially perishable. They are only at their peak for about 90 minutes. What is purchased on one visit does not diminish what is purchased on the next – you can’t stockpile these concessions.

The operator seems to be focussed more on maximizing revenue than preserving margin. You are in the theater and ready to spend money – the operator wants to get as much out of you as possible and is prepared to accept smaller margins on the “medium” and “large” versions.


Similarities to Retail Floral?
Both involve a perishable product and discretionary purchase.


Differences to Retail Floral
At the moment of purchase the theater operator has an effective monopoly and can charge far more than a florist. Those high margins allow them to discount more aggressively than a florist ever could.



Ice Cream




Price Pattern
Good discounts for larger quantities. The average unit price for the largest packages is about half of the smallest.


What Is Going On?
Unlike the movie theater there is more competition – in each case there were multiple ice cream vendors nearby - so the prices and margins aren’t as high. Like the theater the purchase is discretionary and highly perishable.

Again the operator seems more focussed on maximizing revenue than preserving margin. You are there at that moment to buy some ice cream. Much better to make a little less on the second scoop (and even less again on the third) than nothing.


Similarities to Retail Floral?
Again it is a perishable product and discretionary purchase.


Differences to Retail Floral
Based on the aggressive discounting the margins are probably higher than retail floral, but closer than movie theater snacks.



So...

Where do you think flowers fit in? To me most flowers seem more like a discretionary perishable purchase like ice cream. It also seems like discretionary perishable purchases get discounted at larger pack sizes.


What do you think? Should margins stay consistent? Or is it better to sacrifice a little margin in favor of maximizing revenue? If you sell one dozen roses for $40, does it make sense to offer two dozen for $60? The margin will certainly be lower but if it means you make an extra $5 you would have missed otherwise is it a good trade?

 

[Mark Anderson]

A few more examples of aggressive discounting that wouldn't fit in the original post.

 

[ChristiBrown]

very well thought out mark! I think the Icecream model is similar. Where I give the discount on larger arrangements is the labor portion. I figure part of my cost of selling an arrangement is getting the customer to the store, time to sell it to them, and time to make it. The first two cost me virtually nothing different if it is a bigger arrangement, the third only a fraction more so it is easy to make that margin a bit smaller on larger arrangements because you are making it up in those other areas (assuming of course that your designers come in, design, and go home and don't work all day regardless of the number of orders, then you have no savings in the model). Slightly smaller profit margin, but larger profit.

 

[Mark Anderson]

It's good to hear from you Christi!

That makes perfect sense to me. Hopefully the base ("small") price is calculated in such a way that it covers the cost of generating and processing the sale.

After that, like the movie theater, I would happily settle for a little less of an upsell that wouldn't have been made otherwise.

 

[anytimeflowers]

Mark,

You put a lot of thought, research, and effort into that post. It provokes thought on my part as well and Christi makes an excellent point.

However.....

I voted No! Never. I voted before I read your post because I have strong feelings on this. Most food items cost the manufacturer far less than the packaging they go into, not so with flowers. Food manufacturers are working on margins of 900% or better, and the packaging for a small vs a large is not much different in terms of cost ~ much like Christi's point about the costs of making the initial sale.

The difference is in that margin. Florists simply can't afford to lose the 300 - 400% margin they get because they are dealing with an extremely perishable product. The only thing comparable would be the movie theater popcorn and you made the point yourself Mark. It's far better to make something on that popcorn by selling it at a quantity discount than to simply throw it away and make nothing.

Change my mind, it's open.

 

[Mark Anderson]

Thank you for the feedback Linda!

Please believe when I tell you I know florists don't have movie popcorn margins – I never meant to imply they did. The goal was just to include a wide variety of examples.

The price on the first seven cups of movie popcorn is about $0.81 each. Factor in the free refill on the large size and the price on the upsell units is about $0.03 each! It is a discount of over 90% – no way florists could ever discount like that.

Also - I never meant to suggest that any "better" or "best" portion should be priced below cost. No way! That would cut into the profit on the "good" portion and completely negate the point of versioning.

Is there any chance you could please help me out by providing a really rough estimate of the costs on a $60 fresh arrangement, broken out by container, flowers and labor? I don't want to make any assumptions about how you price things in your shop. I would be very grateful.

Thanks again.

 

[concord]

I voted maybe, because I have so many exceptions to my pricing rules now a days. For example my standard 20%
labor on design at times seems excessive on a simple $150 vase that takes me no longer to make than the $100 size and if I take $30 labor off the $150 it just doesn't look big enough. However, if it's a more complicated design, or a wedding, I may have a 40% labor charge. Even my 3.5 mark p on cuts is a guide line, not a hard and fast rule. There are some things, like purple or pink hydrangea that would be $30 ea if I did a 3.5. I rarely get them and frankly I just don't get why they cost so darn much! (Sorry, off topic)

 

[Mark Anderson]

It's good to hear from you Helen! I hope all is well.

Events are definitely different. Is there any chance you could please tell me what your container/flower/labor costs would look like on a $60 "catalog" product you created as opposed to a custom/fill-to-value order? Something like a $60 "Concord Autumn Centerpiece" that would be a standard item that you would offer in your store?

 

[anytimeflowers]

Hi Mark,

The phrase "incremental income" gives me the heebie-jeebies because it was a catch phrase offered up by the wire services. They used it to convince florists that they were just using up labor and product that was already hanging about anyway so why not use it up and make some money instead of nothing. That is rarely true unless the shop has massive volume and can buy the products in quantity.

So, your question about a rough estimate for a $60 catalog product. We'll call that the Medium

Let's just say a dozen roses for simplicity. This would also be a good example for your idea about volume discounting because it truly would show the differences involved.

Cost

Container and packaging ~ $2.60
Labor ~ $12.00
Flowers and foliage ~ $11.70

There are many variables to the flower cost but also to the container. I use a larger, much more expensive vase for two or three dozen roses.

 

[concord]

It's good to hear from you Helen! I hope all is well.

Events are definitely different. Is there any chance you could please tell me what your container/flower/labor costs would look like on a $60 "catalog" product you created as opposed to a custom/fill-to-value order? Something like a $60 "Concord Autumn Centerpiece" that would be a standard item that you would offer in your store?

Wholesale flower cost =$11 WS container=$5 labor$12

 

[Mark Anderson]

The phrase "incremental income" gives me the heebie-jeebies because it was a catch phrase...

For what it's worth I agree 100% Linda. I know some shops that were able to make it work but I believe that thinking hurt far more. I hope this discussion is not evoking memories of wire service reps past.

The difference here is (I think) that we're starting with the profitable sale of the "good" version, then trying to make a little more money (and increase customer satisfaction) by offering better value on the "better" and "best" versions.

Thank you, and Helen, for sharing your costs. I'll try and get back here shortly with pricing based on that.

 

[Mark Anderson]

The attached pdf uses Linda's costs to illustrate two possible pricing strategies.

The first part involves projecting costs for larger "better" and "best" versions. Linda mentioned she would consider the $60 piece the "better" (or middle) version but here we are using it as the "good" or small/base version just because I was reluctant to try and scale her costs downwards. Instead we look at a 1.5x "better" version (50% bigger than the base "good" version) and a 2.0x "best" version (100% bigger than the base "good" version).

For each version the flowers/foliage and container costs increase in direct proportion. I thought there might be some savings on the container as we scaled up but Linda said that was not the case.

I did assume some efficiencies in labor - that the "better" version which is 50% bigger would require 25% more labor, and that the 100% bigger "best" version would require 50% more labor. If I'm wrong about that please let me know and I can redo.

Then we move on to the two different pricing strategies. In the first one we don't discount – the 2x "best" version costs twice as much as the base "good" version.

In the second one we follow the lead of many other retailers and discount much more aggressively. The increments are discounted 50% (giving us prices of $60, $75 and $90) but still provide a small increase in overall gross profit.

The best possible case would be people paying the non-discounted price of $120 instead of an aggressively discounted price of $90. The gross profit would be much higher.

Why such a big discount? I think the lesson to be learned from (among others) the ice cream guys is that people really respond to this kind of discounting – that many more people will move up to the better and best versions if they are heavily discounted. It is the magic of being able to say "50% more flowers for just 25% more money, or 100% more flowers for just 50% more money". The pricing strategies we see all around us suggest that resonates.

It makes sense. It is very hard to assign absolute value to the things we buy. What is the absolute value of gasoline? In some ways it seems outrageously expensive, but at the same time it costs less than the bottled tap water they sell inside the station. Absolute value is hard to determine.

The research I have seen shows that we settle instead for looking at relative value based on comparisons we can easily make. If there are two or three gas stations on a corner the one with the lowest price is the one offering the best value. Relative value is easy. And comforting.

How does this come into play here? The average customer must assume you are providing decent value or they wouldn't trust you with their credit card. They must assume that $60 represents acceptable value.

Well... if $60 is acceptable then twice the flowers for just $30 more is exceptional. You could, in many cases, see an extra $5-$10 on each sale. It's not the margin you would have received at the non-discounted price but it is much better than nothing at all.

That extra money is one benefit but there may be a few more. I think one is a more highly satisfied customer – you gave them a choice, and they come away feeling they got a much better value. I can definitely relate to this – this kind of pricing strategy is very effective on me.

The other big benefit is a recipient that is blown away by the flowers that they receive – they are getting twice as much! Hopefully that makes for a more passionate flower enthusiast (and champion for your store).

Because we have been comparing different products from different industries the relative margins have to be addressed. The popcorn is not a relevant example but it is an interesting one, at least to me, because you see a vendor that charges about $5 for the small pack basically doing whatever it takes to make an extra $0.40.

The ice cream seems closer to floral. I looked online and the margins are, I believe, higher than floral at about 70%, but I don't believe they are including (admittedly less) labor in that the way we did in our examples. But the ice cream vendors are also discounting far more aggressively. We're talking about discounting the increments 50%, they are going from a $3.15 first scoop to a $0.50 second scoop – a discount of almost 85%.

Please understand – I don't claim this is the definitive answer but this kind of pricing strategy seems so prevalent it feels like there must be something to it.

Thank you.

 

[anytimeflowers]

Mark, I don't mean to be challenging you. I'm going with you on this, working through the reasoning ~ that's why I said change my mind. I'm always up for new ways to give customers value as long as I'm not going to hang myself in the process.

When I started my store from scratch, I sold roses for one dollar. I went through 1200-1500 roses a week. It was during the summer when the prices were the lowest, I believe I was paying .17 each so I was still raking in a good profit and also getting my store noticed. But it wasn't enough to pay my overhead. I only did it as an introduction of myself to the community and made sure they knew I was shooting myself in the foot with that price. I really didn't have any complaints about the price going up when September hit, the first complaints I got for the price hike was for Valentine's Day, a full five months after I stopped the sale. By then I already knew who a lot of my regulars would be and who were the price shoppers. I didn't feel like I was losing anything by losing them, they challenged me about the lower price at the grocery store and I literally invited them to turn around and go back to the grocery store to buy their roses. Kindly of course.

On line though, that's a completely different set of rules. I think you're onto something, I just have to give it some more thought. I looked at your PDF and it is accurate. As soon as I saw the extra $5 instead of an extra $20 though, you lost me. I think that would need to be adjusted. I figured the roses at .85 each and the foliage at $1.50. Sometimes I get roses way cheaper than that and sometimes way more expensive so that's just an average.

Thanks for all the brain cells your'e using up on us! I have a very early morning so I will say "good night" and catch you on Sunday.

 

[Avignon]

Thanks for a thought provoking post. According to Principles of Corporate Finance by Brealey Meyers Allen, you should aim to increase profit, not margin. If you can come up with a formula where you sell more at a lower margin, you take home more money at the end of the day and that is all that matters. Having said that, it poses some new questions. How many more people are going to upgrade because of the discounted increment? If 50% would have upgraded anyway, you may be shooting yourself in the foot by offering the incremental discount. Another interesting question is " what is the method consumers use to make a decision? Do they choose the flowers first and then see how much they cost or do they come with a budget in mind and see what they can get? "Keep in mind online is very different from walk in customers in this regard. You posed a great question. It seems like the proverbial onion.

 

[Mark Anderson]

...If you can come up with a formula where you sell more at a lower margin, you take home more money at the end of the day and that is all that matters.

That is almost the exact quote that got me interested in this. 7-8 years ago I met with a very successful florist - he had come into the business with no industry background and expanded to about eight stores in twelve years. His signature special, promoted on bus ads all over the city, was something like one dozen roses for $19.95, and two dozen for $29.95. Feeling very clever I said "that has to hurt your margins" and he just laughed and said "you don't take margin to the bank kid". It really has been on my mind ever since. I started noticing the pattern (to varying degrees) everywhere and just kept trying to figure out where flowers fit in.

As soon as I saw the extra $5 instead of an extra $20 though, you lost me. I think that would need to be adjusted.

I agree Linda - that part is hard to swallow.

But the truth is that while the vendor sets the price the customer that determines the value and acts accordingly. What the examples show is that many vendors have recognized that the law of diminishing marginal utility (for our purposes the decline in enjoyment derived from each additional unit consumed) comes into play and priced accordingly.

Let's say I'm going to send flowers to my wife at work. She's going to go from a no-flower day to a flower day. That is huge, and I'll pay to bring her that happiness.

Then you try and convince me to send two dozen. That would be special, but not twice as special. She isn't going to be twice as happy or twice as grateful and I'm not going to pay twice as much. I'm probably not going to be motivated by a small (less than 20%) discount either.

The choice we see other retailers making in some situations is margin be damned - they want the extra profit. The real question is where flowers fit in on the scale (the examples show very different strategies for different products) and what florists can afford to do.

It only works if...

• each increment stands on it's own by offering some gross profit.
• you made your full margin on the base "good" unit.
• the discount is enough to really entice people.
• you aren't cannibalizing full price sales.

On the last one (cannibalizing) I think florists have an advantage for two reasons, at least on phone orders. First, if you think it is a big occasion you aren't going to start the customer small and then offer a discounted upgrade to where they should be – you are going to start them with something big and offer to upgrade that. Also - at the theater I can save money by buying one large soda and sharing it with my wife. You can't buy two dozen roses and split them between your wife and mistress!

 

[concord]

You can't buy two dozen roses and split them between your wife and mistress![/quote]
I actually wouldn't put it past some people to try!

 

[Joan Marie Driscoll]

Mark, very interesting comparison. However I think the most important issue has been left out. Comparing flowers to other perishables only works if the reason for buying them are the same. Unfortunately they are not.

The perishables you have compared flowers to, are consumed typically by the purchaser or their immediate loved ones. Although not a necessity, it is a "want" consumption at the time. Flowers are typically bought for others and our idea of what we will spend on others is usually very different then what we will spend on ourselves or our children.

There for the rate of return on the perishables discounted will be increasingly higher in a grocery store than those at a flowers shop.

I struggle with this idea every day, because in the end I need to make a profit everyday on everything and not just with a discounted one time purchase.

 

[Mark Anderson]

Thank you for your comment Joan!

Please don't think I'm saying it is easy – I know it's not. Like I said I've been struggling to accept it for almost eight years.

As I looked into it more I was surprised to realize how susceptible I personally am to certain pricing strategies. There are some I just can't resist and this is one of them.

The popcorn is a great example. I know it's bad for me, and the best possible decision I could make would be to order the small... but I can't stand the idea of paying $5.69 for 7 cups when I could have so much more (20 cups, 40 with the free refill) for just $1.00 more. I can't resist the "value", even though I never get the refill, only eat maybe 2/3 of the bag, and feel absolutely awful.

For me, personally, it would be the same with flowers. I appreciate the costs involved though, so it's probably even better to look at friends I have outside the industry. If they called to order flowers for their wife they would probably be nervous about $60. Double the flowers for $90? They would love that - it just seems like a better deal.

Again - I don't think this is an easy decision for a florist to make. It definitely doesn't make sense for every product or occasion, and it won't work with every client. I just wanted to ask the question because it seems like some retailers really make the strategy work.

 

[EuroFlorist]

One big aspect of the decision making process that seems to be left out (unless I missed it) is Brand. I wonder how the value of your Brand or unique design style impacts the choices from one florist to another. Especially with all the cookie cutter FTD/Teleflora websites out there. Do the wire service brands work for or against the florist? And will they sometimes actually push the consumer to more uniquely positioned florist not associated with a wire service website. This train of thought may lead way off topic, but the Brand element should probably be considered as an integral part of the consumers choice and the overall value of any upgrade offering presented.

 

[pnelker]

I'm new to the industry and I will admit I don't know much but I do know this. One should not pay more than another just because they have the means to do so. One should not get more than another just because they can spend more. Be not a respecter of persons.
When I opened my shop 4+ years ago I found that the industry had a formula for pricing products sold. Example; a stem of flower should be marked up 3%-3.5% depending on the shops expenses, etc. etc. etc. Hard goods have a cost and they should be priced as well, 2%-2.5% markup. These items should be adjusted based on the changing cost of the fresh goods and hard goods thru out the year.
I've stuck with this and I have not had any hard decisions to make based on rather I like the person, they talk nice to me, or the fact that they are a repeating customer or a first time customer.
Most important, give a good product for a good price. Works for me.
p.s. I do change this markup based on buying flowers for my shop (of which some might die before being sold) and those I purchase, say for a wedding (were I know I'll use them all and none will go to waste).
Have a great day and be blessed!