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Friday, March 31, 2006

Stock Balancing Opportunities

Stock Balancing can be a benefit for both Vendors and Vendor's customers. In summary, it can be a mechanism that cleans the channel, removing older or non-performing products and replacing them with newer higher margin higher performing products. If we consider a product life cycle, we will recognize that a longer a product is available for sale in a channel the more likely that product will be discounted due to price pressure. Therefore, a widget that is loaded into a channel in April with a manufacturer's suggested retail price of $100, is likely to be reduced to $80 by August, and put on a seasonal sale in November at $70, and steeply discounted down to $50 or less by mid December, and sold on clearance in February at even lower prices. At the point the product is loaded into the channel the retail customer is making maybe 30-45% margin on a product selling at $100. However, 30-45% margin on a product selling at $80, 70, 50 or even $20 is much less. Stock Balancing this product out of the channel enables the retail customer to remove the product from the shelves and replace it with a product back at the higher cash margin level of $100. For the vendor, this is positive in reinforcing the strength of the brand and attaching a high dollar value to this brand. It also reinforces the idea that a new product is worth more than the older out of style item with fewer options. An efficient vendor should be able to reduce initial tooling and manufacturing costs after launch, and thus be able to reduce prices as price pressure from competitors come into play. This important as it allows the vendor to push retail customers to continuously advertise the new lower price, thus driving even more volume as customers see a new better deal in their local paper, flyer or store shelf. There are many pitfalls to avoid in these scenarios which will be covered in more detail in Stock Balancing Pitfalls to avoid. For further information on Stock Balancing please contact Softduit Partners.