Wednesday, February 27, 2008

"The retail price of a bottle of perfume is largely determined by the environment in which it is sold."

One of the first lessons I was taught in the mail order business -- lifetimes ago, so it seems -- is that the retail price of any particular item should be the price at which profit is maximized.

Sometimes profit is maximized by keeping the retail price low and selling in volume; other times the price is maximized by restraining volume and pumping up the price.

In the mail order business, as it existed in the days of old, the optimum price could be determined by "price testing." Ads were run offering the identical item at several different prices. Then, analyzing sales volume, merchandise cost and advertising expense for each of the test cells, the most PROFITABLE retail price could be determined. From that point on, the item would be sold at that price.

Notice that, in this model, setting the price has nothing to do with the COST of the item. In fact, the most profitable price could be one at which the item is sold at a LOSS, although I hope this never happens to you.

This method of pricing ignores the concept of a "standard" markup, be it 3 time cost, 5 times cost or even 10 times cost. Instead, the retail price is set based on

Now how does this apply to perfume?

What does a buyer EXPECT to pay for a bottle of perfume?

Think quick. If you see a perfume in a dollar store, what do you expect to pay for it? Certainly not $45. No, you expect to pay ONE DOLLAR. Conversely, it you saw a bottle of perfume priced at one dollar in Saks, Bloomingdales or Neiman-Marcus, you would ask, "What's the gimmick?" The price would not seem right. If you saw a one-ounce bottle of Chanel No.5 EDP in WalMart's prices at an "everyday low price" of $145 -- you would ask, "What is Chanel No.5 doing in WalMart?" because you might feel that something about this bottle and price was "not right" -- "not right for regular WalMart shoppers because regular WalMart shoppers don't buy real Chanel No.5; "not right" for anyone else because they would question how WalMart happened to have obtained a Chanel perfume.

The simple truth is, the perfume buyer goes into a particular store EXPECTING to find perfume prices within a certain RANGE. The more desirable -- "hot, new" -- fragrances can be expected to be at the high end of this range, the proven standbys in the middle, and perhaps a few "economy" fragrances at the lower end. But the buyer HAS a price range in mind for ALL of the store's offerings and a fragrance prices outside of this range will seem "wrong" -- and will be harder, or even impossible, for the store to sell.

The cost of making your perfume

When a major fragrance marketer plans a new fragrance, the FIRST step in the process is to determine a retail price point. From there, an acceptable manufacturing COST can be determined, based on the margin the manufacturer wants for this product. (Major fragrance marketers DO NOT "price test" in the way mail order people once did, but they do have huge amounts of accumulated data on what consumers have been willing to pay in the past for particular fragrances.)

For the creative perfumer, the fragrance itself comes first and cost is secondary. Big companies rein in this tendency. The small, independent perfumer is not so constrained but this lack of constraint can cause problems by allowing the perfumer to build a fragrance that costs more to produce than it can fetch at retail.

So you, the independent perfumer -- just like the mass market perfumer -- MUST give consideration to the retail price that your creation can reasonably fetch -- and build your formula accordingly.

This issue is particularly important for independent perfumes who use a lot of NATURAL materials in their compositions as these can pile on the costs VERY quickly.

The selling environment

Where are you going to sell your perfume? What kind of retail outlet? Let's look at the LEAST likely first.

A Website --
IF you are mad enough to think you can make money selling your fragrances on a website, the "aura" you create for that website will largely determine what price you will be able to get for your fragrance, assuming you are ABLE to sell it at all on the internet -- which is a tough proposition, so don't give up your daytime job!

"Fancy graphics" are necessarily the component needed to create the aura needed to sell perfume at $85 an ounce and up. Remember how Chanel build a perfume empire stressing SIMPLICITY -- but also by stressing Chanel!

How you create a website aura that will allow you to get the price you want ... is YOUR problem to work out. But unless you can do it, forget trying to make money selling your perfume "web only."

A retail boutique --
IF you are really into it, with money to burn, you might try your own retail boutique. A few companies have done it; none too successfully. Giorgio tried it in New York, as did Helena Rubinstein (for her husband!) If you own your own store and have lots of money, you can create whatever retail environment you want. The danger is you won't be able to sell enough of your perfume to cover your expenses.

Somebody else's retail store -- Most people making their own perfume at least HOPE they will be able to retail it through someone's existing store. THE BIG FANTASY for some is that the fragrance will become a huge hit and be taken in by a major retailer. I know of NO instance where this has ever happened. Coty, Estee Lauder, Gale and Fred Hayman all came close to this ideal but none of them opened the doors to major retail sales outlets by simply having a "good" fragrance. Each of them engaged in a LOT of selling!

A more realistic approach is to deal with stores -- boutiques -- where you feel comfortable shopping and where you feel comfortable working out a deal with the store's buyer. Buyers know their customers. They KNOW what customers want AND WHAT THEY WILL PAY. Assuming they are willing to give YOUR fragrance a shot, they know pretty well how to price it.

What this means is that the price for your perfume will be determined by the STORE ... not by you. If you've put your all natural fragrance into an eighty dollar bottle and the store says they can't price it above fifty-five dollars ... you've got a problem!

Conversely, if -- because of the selling environment of the store -- they want you to price your perfume at $135 ... you don't have to tell them that your cost comes to less than six dollars a bottle!