How to Win on Price Wars? Don't Fight 'Em

By Amy Rutherford, Owner, Red Barn Mercantile, Alexandria, Va.
Small business retail can be a real challenge, what with big-box stores constantly driving prices down to levels I can't match. But it's even more frustrating to compete on pricing with my own vendors.

My six-employee shop sells home furnishings and antiques in a small town just outside of Washington, D.C. Many of our vendors sell their products directly to the public through their websites, often at a lower markup than I can afford to match. Then we get customers in the store asking why we're charging more than the price they saw online.

I have a couple of pat answers. Sometimes I'll mention that shipping will add to their costs when shopping online, or tell them that they have the benefit of a flesh-and-blood helper when they come into the store. But pat answers don't always suffice.

We opened in 2007, and I quickly realized that to succeed, I would need to choose my vendors carefully and offer premium service that customers can't get online.

Vendor math
The problem is in my overhead: Because I pay thousands in monthly rental and staffing costs, I have much higher expenses than vendors selling their products online. If their standard markup isn't enough for me to make a profit on the sale, I need to price their products higher. I could match their prices, but then I'd just be cycling money through my store.

Sometimes I can talk to a vendor and explain how their pricing is hurting my store -- and likely other stores as well -- but that doesn't always get very far. If they are big enough, they don't really need to worry about me. That's what happened with Serena & Lily. I used to carry a lot of their bedding products, but I can't afford to anymore because I can't match their prices.

The more well-known a vendor's brand is, the more aggressive he prices, which forces smaller retailers to stop carrying the products. So I search for lesser-known vendors that are more willing to consider my needs.

For instance, I met a blanket maker at the recent New York International Gift Fair. They've been making beautiful blankets for 20 years, so I know they are a quality company, but they are just now trying to expand their brand. I implored the owner to think more about the retailer in terms of his markup.

He said he'd planned to keystone the blankets -- meaning he'd charge twice what they cost to produce -- but would consider some additional markup to allow smaller retailers to carry his product. That makes him an ideal vendor, because he's willing to think about my needs as well as his company's bottom line. Partly because of that decision, I decided to carry his blankets -- although we're starting out with a small order to see if they work out.

Local, local, local
I can't walk away from all of the vendors who out-price me, so in many cases I just have to convince my clients that we're worth the premium. For some items, such as sofas, rugs and candles, it's an easier sell because the in-person shopping experience is important -- it's really hard to know what a "Forest Floor" candle smells like when you're shopping online. But for other products, it's a question of relating to the customers.

We're based in a small town, so we play up the local economy angle: We like to share the statistic that when consumers shop at a locally owned store instead of online or at a big-box retailer, three times the amount of money stays in circulation in the local economy. We send out frequent emails to locals via the business cooperative we're part of. It helps: Recurring business from locals makes up a huge part of our sales.

We also take advantage of the fact that we're local to provide that extra level of service most online retailers can't provide. For example, colors on computer monitors don't always match the real thing, so people looking to buy rugs online often come in for a sample swatch and are surprised by the true color. We'll then offer them a few different rugs of the same style that they can take home, so they can see how well they match the wall color, furniture and lighting. They usually end up buying the rug from us. For the rugs we carry, I've had to match our vendor's prices because they have such strong name recognition. But getting the customer to buy from us is a win-win: They save on shipping and I get a potential repeat customer.

Staying on my toes
The extra effort is paying off -- we had gross sales of more than $350,000 in 2009 despite the tough economy, and we're on track to do better this year. I'm realizing that vendor management -- looking for new vendors and judging whether to stick with or drop existing ones -- is something that I have to constantly stay on top of. And when I don't have the luxury of making it work with a vendor, providing that extra level of great service has made all the difference.

Amy Rutherford, a third-generation collector of antiques, grew up moving around the country with her Air Force family.
-- As told to Peter McDougall

Resources:

• Learn about the importance of vetting your vendors.
• Check out Inc.com's guide to setting prices for your products.