I appreciate you reading this article. This article reveals one of the most important developments of my career. It is a long read and at times hard to follow so please take your time and if you have any questions please let me know.
This is an important discussion for all pawnbrokers, whether operating one store or more. Pricing your merchandise consistently is a major issue in today's retail business. It is a major issue in Pawnshops. Have you ever purchased an item from a retail store that was cheaper than the rest? This is a real problem in retail. Should it be a big deal in pawn? It is bigger than ever. It is an obvious in-your-face mistake when you pick up a brand new Playstation3 at $299.99 and the exact same new item is $279.99 somewhere else. Which one would you purchase? Why is it mispriced? Is there something wrong with the cheaper item? There is no difference with this product, rather a pricing mistake. This is a major issue for retailers.
Product Quality Differentiation. An item quality from As-Is to Like New translates to an item from worth nothing, to something that is worth a lot. Why don't pawnbrokers think this is so important? For me it was the essence of pawn brokering. What something was worth and what could I get for it. It was seeing the value in something that no one else knew. Could I be better a better Pawnbroker? This was the challenge and this pointed us in a direction that surfaced a huge opportunity—both on the resale and on the lending side of business. We sell used stuff. It is second-hand. Second-hand products demand product quality differentiation. I am going share with you something that is so obvious and simple, it is anything but simple to fix. If you have a Honda 2005 Accord with 50k miles and you were comparing it to a Honda 2005 Accord with 100k miles and all other considerations are equal, wouldn't one be worth more than the other? It's like that Skil77 that has 6 months of hard ownership versus one that has been gently used on weekends? We all see the difference. How much difference? Are we conscious when loaning on the item? Are we conscious about pricing the item for resale? I know that every day you come across merchandise that has obvious quality differences. How do you handle this day in and day out? Do you remember what you priced that Skil77 three weeks ago compared to the one that you are pricing today? Does your employee know that you priced this last week? Does your employee know you have 2 of the same items on the floor? This is where you are getting beat by average shoppers. You are losing profit if you are not pricing your merchandise by the quality of the product. Items that are ‘like new’ quality should be priced higher than an item in fair condition. Do you do this consistently everyday? Do your employees know what you are thinking?
This took us a long time to uncover the symptom and size of this problem. This revelation came to me on our 6th store; we were having a grand opening that evening. I was listening to a customer complaining to a sales associate that a Canon camera he saw at one of our other stores was cheaper. We always heard that about our competitors, but to hear this about one of our own stores had a new twist. How can you solve this? You can't ignore the common tendency to price items based on what we paid for it. Shouldn't we be pricing merchandise for what it is worth? What if we overpaid for an item? Would you sell a gold item you purchased last year at last year’s price? It’s worth more today... so sell the item for what it is worth!!!
I could not stand by to hear this conversation go on so I asked the customer what price the other camera was? He said it was 50 bucks less. Our item was priced at $199.99 on sale for $150.00. I told him we would match the price at $99.00. We generally priced our merchandise to negotiate up to 30%. This was a common business practice and customer policy for us to match price with our competitors.
IT’S NOT WHAT YOU PAY FOR AN ITEM. I thought the camera was properly priced though. After the customer who purchased the camera had left, I called the other store and asked about their camera and what was going on with pricing the camera so cheap. They described the camera as being complete with the case, functional, and clean. Sounded like the same camera we just sold. Then he added, "We only paid 30 bucks for it so I marked $99.00." This was a can of worms that needed to be sorted out. How do you fix this problem permanently? We would walk through our stores to make sure that our pricing was correct and consistent. The only consistency we saw was mispriced items. New stuff priced less than well-used items. We knew shoppers would cherry pick the better merchandise and guess what stuff ends up on the shelf? In the process you end up with a bunch of worthless merchandise that needs to be cleared out and heavily discounted.
We hired a retired Target Vice President who was the best that Superpawn employed—Jim Kelly. Not the quarterback as he would say. A fantastic agent of consistency in store appearance. "If you are building a brand, you have to be consistent." One of his initiatives was "zone defense" and we assigned our associates to be in charge of an area in the store. We became conscious of the importance. We trained, we trained, and we trained. We got a lot better.
INVENTORY ITEM TURNOVER IS IMPORTANT WHEN PRICING AN ITEM. We also found during this process that new merchandise sells a lot faster than merchandise of lesser quality. Inventory turnover. It wasn't just about margin. If you sell a Skil77 four times a year at a 50% margin you have turned a 200% profit margin. If you sell the same item at 40% margin eight times you make 320% margin. What we also discovered when we lent more on the items that were better quality, we ended up having more money on the street in our loan portfolio and our default rate did not go up. More money lent on the better items had a lower default rate than lending a lot less on lower quality used goods. It was because you weren't actually lending more on the item, it was because the item was worth more to the borrower. Wow! I highly recommend this strategy.
We became infatuated with this theory. We believed there was a lot more to squeeze out of this challenge. We saw improved margins, increased turnover, and major increase in loan portfolio balances. Our back rooms were packed with loans and our merchandise that was properly priced was blowing out the front door.
One of the smartest persons that I have ever met, Tom Haas, led us at Superpawn. Tom is a retail operator and has become a great pawnbroker. Tom, as our President, brought our organization competencies up two notches. Tom had just left working for Summer Redstone of Time Warner’s division Nickelodeon. Tom had, from start to finish, opened all of the Nickelodeon retail branches for Time Warner. We drug Tom from Austin, Texas to Las Vegas to help take us to the next level. This also enabled me to focus and finish our third iteration and new operating system PRIMA.
I believed that a systems approach in determining the "absolute" quality of merchandise could be achieved. A standard could be created for second-hand merchandise. We found that there were 5 significant levels of quality difference in second-hand merchandise. This did not include re-furbished merchandise, which is a whole topic in itself, and something we rarely handled. How were we going to teach and train ourselves, and staff to loan and price, on 5 levels of quality for 120 categories or 135,000 items SKU's.
We thought we nailed it. We added condition rating to our systems that automatically discounted by percentages for pricing and lending, “AS-IS”, “FAIR”, “GOOD”, “VERY GOOD”, and “LIKE NEW." Our implementation within the system included different discounts for quality within all 120 categories. So each category had different percentage discounts for each quality rating. Take for example firearms. Firearms had a much softer discount for quality compared to cameras. This created the next attempt in a standard rating system for pre-owned merchandise. There was more to do!
WE NEEDED TO RETHINK THE WAY WE LOOKED AT MERCHANDISE. We began an extensive training program to teach our Pawnbrokers what each quality rating meant. Overall the quality ratings AS-IS and LIKE NEW were the easiest. It was the middle three ratings that we could not get our arms around. It was the standard quality ratings for 120 categories of merchandise. From leather coats to sporting goods to electronics to tools to antiques to… well what ever might come across our counter, we were planning a wide variety of discussion. Over the next year, we completely changed the way we looked at merchandise. All of us knew intuitively that this was logical and correct, but getting there was becoming a bigger challenge than we thought.
During this period our training committee, who consisted of all former pawnbrokers with a combined experience of 75 years, was having a tough time deciding how to articulate the basics of pawn brokering. "It’s our art." How do you determine the value of an item? Everyone that you talk to that is not a pawnbroker asks this question! This got deep. I sat in on many of these meetings and the opinions of these seasoned veterans were diverse, but all correct. We studied this for 4 months and came up with a methodology and a program. When we researched the practices of First Cash, Cash America, and EZ Pawn, they all relied on each store’s manager’s opinion on how to price and lend. How could this be? These were brand establishments. I traveled to Texas, Florida, Atlanta, and the West coast and searched pawnshops to find the answer.
PRICING INTEGRITY CREATES TRUST WITH YOUR CUSTOMERS. Simply put—each brand had no consistency. In some instances, even the same company, within blocks of each location, would have slightly different signs. And inside the merchandise and pricing were different. It made no sense at all. How could the pricing of merchandise not be important when you are selling to the public? There was no pricing integrity. Was the reason why people shopped in pawnshops to find mistakes of unknown value? This was interesting. When I was behind the counter and someone brought in something I was not familiar with, I offered a conservative amount. The customer knew what it was worth. It looked like it had value and I low-balled it. When I had to sell it, I always made a profit, and in many cases, more than I imagined.
This is important. Pricing pre-owned merchandise has nothing to do with what you pay for an item. What you pay for an item has nothing to do with how you price your merchandise. Pricing is a function of what it is worth and what you can get for it. You should price merchandise for what it is worth plus your negotiating posture, and then you negotiate with that customer what you can get for it. This is the reality of the business. Credibility in the marketplace is built with consistent well priced merchandise.
This goes against the grain of most pawnbrokers. Most pawnbrokers believe that if you pay 10 bucks, you have to sell it for $30.00 and mark it $50.00. No matter what you price the merchandise for, you are most likely going to negotiate to a certain price. If you price based on what you paid for an item, and if you made a great buy, why lose your advantage? If you believe in a cost based margin in pricing and you over paid, then you would have to price up the item. Why is merchandise that you paid more for, priced higher? It’s simply a purchasing mistake. When you see a overpriced tag on one item, you lose integrity on all the items in your store. Customers have no tolerance with this issue. Pricing integrity is the key to customer confidence. When you go to the grocery store and the Best Foods mayonnaise is priced to high you immediately wonder about the other items in your basket. What message are you sending to your customers that shop at your store? If you make a good buy on an item, price the item for what it is worth and make the extra margin. Get paid for your good purchasing skill. But if you pay too much, price the item right, then sell the item for a smaller profit. Pricing merchandise in your store this way develops a theme of integrity and credibility. This is how you build reputation and brand.
HANG IN THERE…
CUSTOMERS THAT TRUST YOU WILL LAST LONGER So, I hope we can agree that there is an opportunity. Price your merchandise for what it is worth. Worth is the item value plus your negotiating posture. We have to negotiate, I believe this, and if you don't negotiate, then just price it for what it is worth. If it is priced correctly it will sell. An item that is priced correctly just needs a customer that knows its value. If your store is known to negotiate, it is really hard to change this purchasing proclivity.
During the quest to learn the appropriate method of a quality rating system we found several other pockets of opportunity. We wanted our customers to see items that had value at every level of the quality rating. We even found a price point for items that were broken. If you know the value of an item when it is broken, then you really have found the correct value system. Not everything has a value in AS-IS condition but there is a huge market for customers that like to fix things. With everything that we have discussed up to this point our company never completely figured out the full solution to this until we turned our selling effort on EBay and our Website. Yes, I am happy to say that after reading this long article it has a happy ending, we did figure it out. Here is what we learned.
Take for example the digital camera. Online customers were very picky. Our online sales came from, EBay and our website. It seemed that customers who purchased from the store were much easier. It is a lot easier and many times more profitable to sell from your store. If you did not need a store-front for the pawn operations this might be a different story. But yes, anytime that you can sell an item in your store, do it! There is place and a time to sell an item online.
These online customers needed to know everything. These customers asked for more information than we ever experienced selling in the store. I believe that this was a confluence of product information at their fingertips through the web. Customers have become savvier, but online retailers have also found that they needed to describe the merchandise to a tee. Customers that did not get what they expected would send back their item. Most customers that purchase from a pawnshop try out the item before the purchase. This testing procedure keeps the rate of return low. Getting back merchandise from an online sale is super expensive. It is worse than a customer bringing something back to the store. Describing merchandise for the web made a huge difference in selling stuff successfully.
Another challenge—how do you effectively and consistently describe merchandise on the web? It’s that brand thing, consistency. You have to trust me, it is really important. The answer to this challenge is remarkable. The answer lied in the hands of my great grandfather who embarked in this crazy business 125 years ago. It’s in the Pawn.
This can only be done on a computer data input screen, but you are all doing it that now. My great grandfather would do this by hand when he used to fill out the Pawn ticket.
Item - Camera -- Manufacture - Canon -- Model -- Powershot S90 --- Accessories --- case. This was the basic information that we describe in a pawn transaction. It is what we fill out on computer terminal. Why can't we just re-use this effort and put this into the item description when we sell it online? The system has this data. Can we move it systematically into a different business effort? We essentially took the pawn transaction and emulated the posting effort that is required to sell online. All of those years that the governments made us fill out those tickets were going to pay off in a different way. We created value oriented metadata.
Now please don't go, this won't get technical. Metadata are canned questions that add depth to the description of a basic product. Let’s stick with the example above: Item, Manufacture, and Model. The metadata would be: Original box? Case? Memory Stick? Megapixel? Warranty Card? Flash? These questions could easily be answered yes or no or a pick-list. All of these elements add up to something. Each question has a weighted value. We knew that if we had all of these listed and included on the web page, whether on EBay or on our website, that we would get more for this item. But, if we didn't have one of these elements listed, customers would pay less. Some elements of the product affected the value more than others. Wow! Condition rating was reborn. Yes, it just didn't matter to customers whether the item had wear on the corner of the camera; it had more to do if it was complete. In fact 80% of the value had to do with the complete nature of the product rather than the wear and tear. This was huge. This tool gave our pawnbrokers the greatest advantage. Our competitors had no chance. It became a simple reminder just to make sure that the camera had memory. Sometime you would find a memory card worth 40 bucks. The possibilities were astounding.
We created metaquestions for 120 categories. Our approach was to ask the best pawnbrokers to build a list of questions for each category of their expertise. If you knew guitars, we would ask the most precise questions. Every effort in describing an item had value. In some cases, if the item had a missing component then it could be a deduction. It would be like a cordless drill not having the battery and charger. Every question created and then asked during a pawn or a buy, had a weighed value. It could also be thought of as building an item value. Start with the item, then the manufacture, then model, and on and on. We nailed the quality rating and built best practices into the way we looked at merchandise. Any pawnbroker could challenge and change the weighting and we were able to change the device within the system instantly.
This systematic approach is intriguing but there is huge lift into your business without the assistance of system. Follow the earlier steps I have shared.
I believe the best pawnbrokers are people that know how to talk to people. More time spent with a customer and more time spent with employees’ results in better store performance. This approach allowed our people to do what they do best. This approach left the heavy lifting of merchandise evaluation to the system. There is so much to ensure a loan is made properly. Many people would challenge me by saying you can let a system evaluate. I agree. The best framers aren't the ones that use a hammer today. They use a pneumatic nail gun. It's the framer that checks angle and measurement. A good pawnbroker is the one who tests the merchandise, asks the right questions, describes the merchandise, and has time to ask the customer if they have anything else they can pawn or sell. The loan manager’s oversight is heavily reduced during this transactional period. He/she doesn't have to check, because the system asks the loan associate every time.
When you have made a loan or buy, answering the metadata question correctly, the item is automatically ready for pricing. The item was priced correctly determined by its quality. Two tasks completed in one transaction. In fact this item entry screen enabled 7 major tasks and reduced our administrative tasks by 30%.
We added other fancy features to the category engine such as replicated depreciation. If the item was in Pawn and renewed for 2 years and then defaulted, its price went down according to the depreciation percentage rate assigned to that item’s category. Computers are a good example of where this comes into play. When we evaluated and loaned on the item in 2009 after 4 renewals the customer defaults and you end up have to sell the item. If this was a computer, the price would have to be cut dramatically. The automated depreciation took this into account and re-priced the item to today’s value. We were especially sensitive to this because it needed to be priced to sell quickly. If we had a price correlation to what we paid for it, the item would sit and over time lose more value.
GOOD PAWNBROKERS TURN INTO GREAT PAWNBROKERS. We all know what makes a good pawnbroker. They comprise of about 20 attributes. If each time they looked at an item and they had information that included current turnover rate, average sales price, and profit by quality, default rate, and how many in current inventory, do you think they would make better decisions? They do, they did, and where they went from here it only got better.
If you become interested in BRAVO this system will have all of these features. You won't be the guinea pig, PRIMA has all these features and it has been tested, vetted, and proven.
This was a long one with a lot of useful information. I would love your feedback. What are you thinking? If I could boil it down to fiver major take home messages they would be...
- Keep your store looking its best! Zone defense
- Consistent price check of your merchandise. You will find as many items that prices need to be raised than lowered.
- Quality rating starts at the loan counter. Pay premium for complete items and be more conservative for lower quality items. Lower quality merchandise takes longer to to sell and time is money.
- Add inventory turnover to your pawn brokering decision process. It just not margin.
- Consistency is a long term objective but this is what drives excellence. Build a business for the long term.
