Monday, September 17, 2012
Dieter Brandes, former ALDI Ceo and author of "Bare Essentials: The ALDI Way to Retail Success" has explained to me that ALDI does not use cost plus pricing and budgetting which involves setting a gross margin percentage target. ALDI uses contribution margin-based pricing within the constraints of pricing below competition.
In a nutshell:
1. Contribution Margin Per Unit = Price - Buying price
2. Product’s Contribution to Profit = Contribution Margin Per Unit x Units Sold
3. Contributions to Profit From All Products – Firm’s Selling,Gen.&Adm. Costs = Total Firm Profit
The important thing is that contribution is measured at item (SKU) level in euros. Brandes said: "It's always about Volume x Margin in euros. At the end we need money, not margin in percentages. Otherwise I would only sell a single item for a margin of 99% - and selling just one unit would be enough.”
When comparing two items in my product mix, only the absolute amount of the Product's Contribution to Profit is relevant, the gross profit margin percentage of a single item (SKU) is totally irrelevant for retail.
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