Handling the concern
T: Well, that’s quite interesting. So far, our customers were clearly divided into two categories: one needs a table clock as a source of information, and the other as a status item. The latter group buys, more often than not, very expensive table clocks decorated with diamonds or just exotic stones. Here you have, as I look, exclusivity combined with functionality. This category of customers who need both functionality and status is a little new for us. And the price range is slightly higher than the “purely functional,” but also slightly lower than the “exclusive.”
In my opinion, there is a certain difficulty: your desk clock does not compete with the “purely functional” ones, but it can greatly “cut off” our sales of exclusive watches and clocks.
S: Does this doubt prevent you from making a decision on the purchase of our clocks?
S: What kind of trouble threatens your store if you decide to start selling the Gagarin table clocks?
T: It is obvious. We might lose profit because exclusive watches and clocks are sold with the highest margin. With the advent of your table clocks, the turnover of exclusive watches will significantly decrease. They will be bought much less often; customers will shift to your table clocks. As a result, we will lose profit, and it is unlikely that your clocks recoup these losses.
S: What usually happens to the store director if the store’s profitability drops?
T: He is usually fired and replaced by another.
S: Well, if we manage to find together how to avoid declining profits, will this be enough for you to decide on the purchase of our clocks?
T: If you show me how to keep profits, I agree to purchase a trial batch of your clocks. And then we’ll see: if the profit really does not fall, then it will be possible to conclude a purchase agreement. But I have little faith in miracles, though.
S: Why, in your opinion, income will decrease if, instead of Rolex watches, people buy a Gagarin table clock?
T: An exclusive watch, or as you call it, a Rolex watch is 2-3 times more expensive than a Gagarin table clock. If a customer who previously could choose Rolex chooses Gagarin, we will lose from 50 to 66% of the turnover in this purchase. In the total annual turnover we will lose 30 percent, and this is unacceptable.
S: And why, in your opinion, will the costs increase?
T: The Gagarin clocks, as with any table clocks, is a new product in our store, so it will take longer to explain to customers why they are so good. Rolex watches usually “sell themselves,” everything is clear to the buyer there. It means that the seller should spend more time and effort to sell Gagarin table clock than to sell Rolex.
S: What do you think, will the losses increase?
T: Yes, it seems so. Since the seller spends a lot of time selling the Gagarin table clock, he has less time to work with other buyers. It is quite possible that total revenue decreases, both for Casio watches (let’s call it “functional” watches) and for Rolex watches. Or, to serve the same number of buyers as before, we need more sellers.
S: That is, in general, the store’s profitability may fall by 50% in the first year, right?
T: I would say by 40%, but that’s still a lot. The management of our network would be clearly unhappy and take appropriate measures. I would get fired, the assortment would be returned to the previous state, and that’s the end of story for both you and me.
S: Do you think that there is no way to keep the turnover and costs at the same level?
T: I don’t see any reasonable chance.
S: What temporary reduction in profitability is considered acceptable?
T: 10% in the first year, not more. And even then, provided that next year profitability will be restored to the previous level.
Ways to prevent threats
S: Is it possible to avoid a decrease in turnover if you sell cheaper goods?
T: Yes, but only if you increase the turnover rate. Well, if we sell a batch of expensive goods in three months, and we sell the same batch of cheaper goods in a month, then in total we will receive the same profit.
S: And how could you avoid unnecessary costs when selling new watches?
T: We can, for example, talk about the advantages and benefits of these watches to many customers at the same time. Then the effort and time will be distributed among these customers. Or instead of telling we could use, for example, visual advertising that lets the buyers familiarize themselves with it on their own. Booklets with descriptions of new clocks could also be sent to the prospects.
S: Good! Is it possible to serve more customers by telling them about the benefits of a new clocks?
T: Of course. To do this, we need to somehow bring together many buyers interested in new table clocks.
S: How could you keep the same number of sellers as before despite the fact that they should tell customers about the benefits of new watches?
T: We could probably organize the division of labor. One seller works with a group of buyers of Casio watches, another one with a group of buyers of Rolex watches, and a third one with a group of buyers of Gagarin table clocks. If, of course, it is possible to assemble such groups.
S: One more question. How can a possible drop in profitability be reduced to an acceptable level?
T: I think, it is possible. To do this, we need to conduct a mass action to sell Rolex watches in order to compensate for losses due to the fact that customers are switching to Gagarin table clocks.