How Appliances are Priced...Markup, Margin, Sales and UMRP

This may come as a big surprise to those of you not in the industry, but there isn’t a lot of money in the appliance business.  Why do it then?  It’s all about volume.  A lot of appliances get sold, even if the profit is low; there is still money to be had if you sell enough of them.  Homes get built—they need them.  Old appliances fail—they need them.  You get the picture.

Usually when you go into an appliance store, or simply a store that sells appliances, the products will be marked anywhere from several hundred dollars under cost up to about a 35% mark-up over cost.  Yes, I said under cost, I’ll come back to that in a minute.  Most things are usually at between 15 and 20% over cost.  What that means is that if a dishwasher costs the dealer $500, they are going to add let’s call it 20% or $100, so they will sell it for $600.  At suggested retail, a fictitious number that no retailer every really sells at, you would often find products at the 35% markup point.  You price too many things at that price, however, and you are out of business because no one is going to buy from you.  The only time you see those numbers come into play is if someone is doing a sale, they often mark up everything to suggested retail, so even if they do a 30% off sale, they still may be able to make a 5% profit on an item.

Ok now, I’ll answer the question from up there, and the other one that just popped into your head.  Yes, I said under cost.  This is where it gets a little sticky.  Dealers get money back from manufacturers to advertise their products, but only if they stick to the manufacturer’s guidelines about what prices and what models they put in their ads.  In order to get the money to help pay for the ad, the appliance dealer often will pay $500 for an item they are allowed to sell in an advertisement at $379, and they may pay $440 for a much better unit, but one that doesn’t allow them to advertise under $599.  That makes no sense…well in a twisted way it kind of does.  When you see a $599 refrigerator, you may think, ok, that’s an alright price, but when you see one at $379, you think that’s a great deal, I need to get in there and buy one.  They then count on the salesperson to step you up into a better product that costs them less but one you are willing to pay more money for because it has better features, looks better, has a better brand name or any other conceivable reason.  Now you get why they set it up that way.  If they are going to give you money to advertise they want to be sure that what you advertise will actually sell product for them.  And as for the second question…If the $600 range only has $100 profit in it, why did I get that one for $350, they aren’t going to lose money on one.  Wrong—dead stock, old and discontinued units have a shelf life, the older they get, the less valuable they get as new models always come out with more features for lower prices, every appliance dealer worth his salt knows it better to lose 20 or 25% today than 75% in 24 months, and still have the cash tied up in the meantime.  Most dealers have one of two mantras “cash is king” or “volume is king.”  They want to sell as much as they can as often as they can—if they can’t make money on one deal, break even, invest that money into a sellable product and try again.  If they are good enough it works, if they aren’t they go the way of Highland and Fretter.

Now for the other part of the pricing question, UMRP….Some items never go on sale, and it isn’t just one item, it’s usually an entire brand.  Sub-Zero, Wolf, Thermador, Viking, Jenn-Air, Miele, Asko, Aga, Icon, Electrolux, Dacor, Fisher Paykel, and a handful of others are all examples of this.  Let me help you make sense of this.  The appliance business is a very cut-throat competition between retailers, and sometimes between salespeople.  It isn’t unusual for someone to go to 2 or 3% over cost to take a deal from a competitor.  If every deal was that low, most dealers would be out of business.  Many of the higher end brands took a cue from Bose, a speaker company that never allowed the dealer to discount their products, with the thinly veiled threat that if a dealer discounted their products, they wouldn’t continue to have them to sell.  With this type of policy in place anyone that sold their products was guaranteed a certain percentage markup—let’s hypothetically call it 22%.  Every dealer likes a profit line.  By signing on a line with a Universal Minimum Resale Price (UMRP) policy, the dealer was guaranteed that they could sell that line and make good money.  They just have to be the best in the market, not the cheapest—good salespeople love this structure, because if they are knowledgeable, courteous, friendly, and really want the business, they will almost always get it.  The sign of a very shrewd dealer—a floor stacked with every UMRP brand under the sun, in order to give the customer the most opportunities to find something they like, but still have to pay full price for.

Hopefully that gives you a better feel for how appliance pricing works.  It isn’t magic.  They don’t double their money.  If you buy something at half price, you are buying it for at least 25% less than what the dealer paid for it.  If it’s new, and you can negotiate 10% off the purchase price, feel good, at that point you are saving about the same percentage the dealer is making.  My personal advice, never make a dealer bloody on a deal—what I mean by that…if you work over the salesperson and get them under about 7 or 8% markup chances are they are going to be in trouble, or under some pretty heavy scrutiny for going that low.  At that point you have taken out the profit, which is the majority of what they (the salespeople) get paid on, and if you have issues or troubles after the fact they are going to essentially turn their back on you at every possible opportunity that won’t get them fired.  Sometimes winning isn’t really.  I’ve seen it happen hundreds of times, and if you pull up online reviews you can see it too.  You’ll see the warning signs…I bought this from the salesperson, it was originally $800, but it was on sale for $600.  I brought in four online prices that were lower and he was not happy but agreed to sell it to me at the lowest price, but when I had a problem with delivery and called back he wouldn’t take my call…I don’t know why.  I do.  Industry average for a salesperson is being paid 1% on volume (price sold for) and 10% on profit, so chances are at $600, there was about 10% in it or $60 profit dollars, on which he would have earned $6.  But when you forced him to sell it to you at $539, you took it to a dollar under cost.  He then made $5.39 on the volume and nothing on profit—instead of the $12 total he would have made at $600.  You took two hours of his time to do it.  Can you live on $2.69 an hour?  You just asked him to.  Well if he doesn’t like it he can find a different job—is a comment I hear, but then who is going to sell you your products, someone has to.  Sales people aren’t evil they are just like everyone else...some are good, some are bad, and some are ordinary.  Treat yours with courtesy and respect and they will take care of you for a lifetime.