Music Trade Review

SEPTEMBER
IS, 1923
THE
MUSIC
TRADE
REVIEW
7
Figuring the Basis of the Allowance
Burdick A. Trestrail, President of the Mutual Sales Service, Ltd., Canadian Distributors for the Gulbransen­
Dickinson Co., Points Out That the Real Evil of the Trade-in Allowance Made by the Piano Mer­
chant Lies in Making Allowances That RealIy Exceed the Resale Value of the Instrument
The address by C. Alfred Wagner, at th e
tions for s tool or scarf, etc., leaves you your
lIlusic trades convention in Chicago this year,
net sa le,
d ea ling with' the so-called evil of the allowance
Taking thi s as a $200 gross sale, $100 of it is
for trade-ins, has many laudable features, as
capita l invested and $100 is gross profit, Now
have other efforts tending to eliminate or modify
before the sale we had th is investment $50+
inflated allowances. But when he, or others,
$50+$50+$50=1 piano. After the sale we have
take th e position that allowances for trade-ins
di sposed of $100 of invested capital, and we
s hould be based on their inventory value rath er
have this left $50-1$50=1 piano, In other words
than sale value are they necessarily right? 1 we have $100 inves ted in the trade-in. Then
we have to spe nd $25 putting., it in salable
take issue with them until such time as they
s ubmit better evidence or logic than I have seen
co ndition , whi ch leaves an invested capital of
$25+$50+$50=1 piano. Next we sell that piano
thus far.
Dealing with 1v1r. VVagner's presentation of
for $250 without further trade-in, and our total
th e case , he s tates that under the accounting
invested capita l of $225 has brought us gross
sys tem emp loyed in the New York store his
sa les of $450, or 50 per cent profit on gross.
company classifies as "Loss on Allowance" any
vVe have exc ha nged our $225 in money for
difference between the amount which it allows
$450 in accounts r eceivable.
for a tra d e-in and the amount at which it places
Now, had we allowed only $100 for that piano,
its inventory. He cites that a piano for which
as the se ge ntl emen claim we should, we would
it allowed $200 and which required $25 in re­
hav e had $300 in accounts receivable from the
first sale, and th e n, when we sold the trade-in
pairs and th en so ld for $200 would show an
inventory value of only $75 and a "loss on al­
for $250, we would have a total of $550 ac­
lowan ce" of $125. The inference is that only
counts r ece ivab le from th e sa m e capital invest­
$75, or as nea r that fi g ure as possible, should be ment of $225, which is som e gross profit. Some
allow ed for tnat pia no, if the dealer ex pects to
critics w ill ' say : "B ut you had to make two
mak e his proper profit.
sales to complete the one." Not at all. Each
In the Canadian Music Trades Journal for
sale is complete in itself. Just because we
August is a noth er s tate ment, credited to a lead­
did not dispo se of our en tir e investment does
in g auditor, th at "The correct allowance to make
not affect the sale, A sale at $200 is just as
on an instrum en t should be the wholesale cash
complete as one at $400, only smaller. We dis­
price of an instrum en t, which should be such
posed of some of our merchandise on hand, but
a sum that af t er a dding to it the cost of putting
left part of our capital in stock.
the instrument in selling condition the regular
Of cours e, if you want to take the position
gross, profit on its sale should be secured."
that the first transaction is a $400 sale on which
Where the Real Evil Is
you want $200 profit and the second is a $250
These statements hav e received widespread
sale on which yo u want $125 profit. then you
support a nd are appare ntly accepted by the
are trying to make a squa re circle or turn black
trade, by and large, as proof of loss in their
to white. In such case you should base your
business through a llowances. While I would
sales commissions on th e same figures.
certainly hesitate to throw any monkey wrench
One Dealer's Viewpoint
into the discussion th a t would stop progress in
In discu ss ing this with one large dealer he
this direction, I beli eve the real evil of allow­
said to me: "But if I sell a piano for $400 and
ance is not in allowing more than the inventory
allow $200 for a piano that I put into stock at
value, but in allowing' more than the resale $100 then I am only getting $300 for my first
value. And I b elieve it is poss ible that we may
piano." That is not so, because that $300 in­
so mislead the dealer on this "trade- in" di scus­
cludes $100 in merchandise that has a sales
sion than he may come to' re ga rd that as the
value of $200, You cannot sell $100 in cur­
cause of all losses and overlook fa ctor s which,
rency for $200 to save your life, but you can
perhaps, cause him real loss.
sell that $100 represented in the piano for $200.
My contention is that th e d eale r ca n allow
I cannot see wh ere yo u can lo·ok at this thing
ju s t as much for a trade-in as h e ca n sell it for,
from any point except capital invested, mer­
less twice the cost of putting it in condition,
chandise on hand, an d accounts receivable.
and make his full per centage of profit on his
Your accounts receivabl e plus cas h received are
sales (say 50 per cent gross) with no so-called
your sales, and if you credit yourself with sales
"Loss on Allowance," If he can close the deal
of $400 where you are only collecting $200 (as
for an allowance le ss than thi s, so much the
Mr. Wagner's store must have done to show
better; he can th en a fford to sell the trade-in
the "Loss on Allowance" he had) you are com­
for less, or make a greater profit . This is how
mitting a practice that I should say is far more
I base my conclusions:
dangerous than excess allowances.
A dealer buys a new piano from the factory
It is obvious, of course, that a dealer should
for $200. He has $200 invested in merchandise.
make as small an allowance on a tr a de-in as
Now it so happens that this is but one piece of
he can, as he is, in a sense, a purchaser as well
merchandise representing $200 capital. But sup­
as a seller, and should execute the trade to the
pose, for illustration's sake, we break it into
best possible advant four units of $50 each, thus $50+$50+$50-1$50=
in buying regular stock. But because the sale
1 piano.
is the prime transaction and the trade-in, or
N ow then, the dealer sells this piano for $400, purchase, an inevitable part of it, he camlCt con­
for which he is to re ceive $200 in money and
clude the deal as he would if he were just buy­
a piano, for w,hich he has a llow ed $200. Thi s
ing the piano, but mu s t make allowance for this
trade-in piano is going to cost $25 to put in con­
consideration, just as a manufacturer does for
dition, after which he can sell it for $250.
cas h or quantity sales, etc.
However, if 'a
M y belief is that th e whole misconception of
dealer would simply make it an iron-clad law
the trade-in problem comes ri g ht here, in re­
neve r to allow more than the sale value of the
.ga rding that as a $400 sale ! It is only a $200
instrument as it stands and, if he is convinced
sa le; $200 is the amount yo u pay co mmi ss ion o n;
he can put a few dollars into repairing it, add
$200 is all the mone y yo u are going to collect.
twice that amount to the allowance he made
Any attempt to record this as a $400 sale simply
a nd then sell it for the total, he cannot have
misleads you and places you in a fool's para­
any "Loss on Allowance," so long as he doesn't
dise. It is a $200 gross sale, which, with deduc.­
inflate the amount of his sales.
O ne dealer tells me his policy is to allow
three-fourths of the price that the trade-in can
be so ld for when repaired, his experience show­
in g that on e-fourth is ample to handle repairs,
cartage, etc. Thus, a piano he think5 he can
resell for $200 wh en put in good condition, he
allows $150 for. Another dealer told me he
deducts a fl a t $50 from the amount he can re­
se ll any tr a d e-in at, after it is repaired, and
that is his a llow ance, his experience having
s hown him that $25 is ample average allowance
for repairs.
Our Gulbransen de a lers , fortunately, both in
the United States and Canada, are supported by
an a dver tise d one-price policy which enables
t hem to start clean and helps them to make only
fair allowances.
Start at Net Profit
No w I rnay be badl y confused Ll1 my con­
c lusions and am e ntir ely open to conviction in
th e matter, but ' it is my firm conviction, gath­
ered from conversation and observations across
the country, on both sides of the line, that the
so-called "trade-in evil" is grossly exaggerated,
insofar as it affects dealers' profits, but that
F. B. T. Hollenber g hit the dealers' ailment
right in the solar pl ex us in his address at the
convention when he d ealt with the cost of col­
lecting time sales and th e cash value of time
paper. When you see an automobile price you
know that i5 the cash price-that freight, taxes
and charges for time payment are all extra.
The salesman shows yo u how much all that
amounts to and you pay it . And don't forget
that that extra charge for time payment in­
cludes a nice profit for the finance compan y
who handles it-and that is where dealers'
profits are bein'g dis si pated far m9re recklessly
than through the trade-ins. The dealer becomes
a banker as well as merchant, but not only
does not make money as a banker, but loses it.
Nice, carefully prepared schedules of deprecia ~
tion and allowances are praiseworthy and prob­
ably w ill prove of s ome help, but if we really
want to help the music dealers of this continen t
start to make net profit; if we want to put the
retail music business on a plane where it will
attract capital and brains, instead of discourag­
ing them, let us strive to formulate a plan that'
will enable the dealers to separate the merchan ­
dising from the banking end of their business,
establish known and advertised cash prices, such
prices to embody only a fair profit, and then
they can soon find ou t where they lose money
and why, if at aIL
For instance, there is a department store in
Toronto that does only a cash business. Their
prices for pianos are considerably below any
other house in the city, for the same grade of
piano, even the one-price houses, who say their
prices are cash prices, with only interes t added.
This department store never has a time sale,
and while their music business is, of course,
1I0t great, they know just how much they mak e
and work on a .small mar g in , ju st as they de>
with all other products . Now, suppose they
decided to take contracts for sales spread over,
say, two yea rs. Why could not they do just as
the automobile people do and say: "If you take
six months the price is so much; one year the
price is so much; two years and the price is
so much more. Here is the schedule of charges.
We make no profit on that."
What I am getting at is, what would be the
effect if some big dealer adopted that policy in
a city? Could he get away with it? Would it
be possible to get all the reputable dealers in
anyone city to do it? If so they wo.1J10, have
to establish lowex cash prices.