How to Lose Money Selling Earrings

A Story About Rack Merchandising

By - August, 2013

Once upon a time I sold earrings. It was not something I had previously wanted to do, nor had I ever even considered it. I didn't even have sisters growing up, and none of my four brothers wore earrings, so I knew nothing about allergic reactions to nickel in jewelry or the value of surgical stainless steel posts and wires. But a small classified ad suggested that I could make big money with little jewelry, and I called for more information.

The man on the phone told me that he had earrings in stores, barber shops, gift shops, and other locations -- more than 110 racks just in the Grand Rapids area. His racks averaged 13 pairs sold per week, he said. And all he had to do was run the route once a week to collect his money and refill the empty spots on the racks. The owners of the various establishments where the racks were placed kept $1.50 for each pair that was sold.

Being a smart salesman, he knew to let me do the math myself. I had a calculator handy as we talked, and I punched in 110 racks times 13 pairs at $3.50 per pair came out to $5,005 in gross revenue per week. I figured he kept half of that as profit after paying for the earrings and various other expenses. He ran the business from home, so the other expenses were minimal.

As I said, I didn't know a thing about earrings, but I started to get interested. Numbers will do that to me. If I bought 10 racks, as he suggested, and 1,100 pairs of earrings to fill them, I'd be on my way to a decent income. He would charge me $1.75 per pair. Since they sell for $5.00 and the store owner keeps $1.50, my gross profit would be $1.75 for each pair. Multiplying that by 13 sales for each of the 10 racks, I arrived at a gross profit of $227.50 per week, or about $200 after minor expenses for my car. Then I could expand from there.

Now, you have to understand that this was back in the 1980s, and I was about twenty, and was making exactly $3.40 per hour working at an Arby's fast food restaurant. So $200 per week with the chance to make double or triple that before too long was enticing. Within a few days I had invested over $2,000 for the racks and earrings. Of course, this was a big investment for me as well, since the money had been saved from that $3.40-per-hour job.

Lessons in Rack Merchandising

I later learned that this sort of arrangement -- where you leave merchandise in a store and get paid when it sells -- is referred to as rack merchandising. I also discovered that I could buy earrings that were the same or better than the ones I was getting for a third of the price I was paying. In fact, there were some nice selections of earrings with surgical stainless steel posts and wires that sold for as little as 30 cents each when bought in bulk. In other words I could have been set up for a few hundred dollars instead of the $2,000 I invested.

Oh well, this man was going to help guide me in any case, especially since he hoped to sell me more earrings as I succeeded in selling a bunch of the ones I had (I didn't tell him I was already buying earring from cheaper suppliers). At least that's what I thought. The reality was that the owners of stores and hair salons and other places weren't lining up to have the racks in their establishments. The salesman had assured me that placing the racks was easy, because the businesses didn't have to pay anything up front. They just give you your share of the money after they make the sales, so they are happy to take the racks, he explained.

I eventually got four business owners to agree, and my mother helped me get another location, so I had five racks placed. Our town had enough businesses that it should have been easy to place forty or more racks, according to the salesman. Additional phone calls and visits to forty or fifty more businesses didn't result in one more placement. Perhaps I wasn't a convincing salesman, although that was unnecessary according to the logic of the plan.

Then I discovered that the racks placed averaged only 3 to 4 pairs sold per week. It wasn't worth the time, and I realized something else. The best earrings were going to sell, and some might never sell, clogging up the racks and reducing sales further at some point. The $1.75 gross profit per pair can't be achieved if some pairs never sell. I had enough. It probably won't surprise you that the salesman didn't want to buy back the earrings as he promised he would, or that I did not have that promise in writing. But believe it or not, I did get some of my money back after filing a claim in small claims court locally, so he would have to drive a couple hours to appear. He bought the earrings back for a dollar per pair.

I've since talked to people with vending routes. The truth is that if you make $25 or $50 gross profit per site per week with pop machines or anything else, and you have 40 sites within an hour of where you live, you can work a few days a week to make over $3,000 to $7,000 net profit per month. It is also true that it is a lot of work to get started, whatever a salesman may tell you. If it were really easy, the salesman might be out running his own route, instead of trying to get you to buy $6,000 worth of plastic gum ball dispensers.

Obviously it can work. The people in the business that I have talked to were doing well. I'm sure it was entirely possible to make good money with those earrings even. I was probably doing many things wrong. So how do you do it?

Obviously I am not the expert to ask. My story is more of a warning than a lesson for success. But you can start by avoiding the mistakes I made. And I can tell you a few things I would do differently knowing what I know now.

First, I would have talked to the owners of places where I hoped to place the merchandise, to see how open they were to the idea. As it was, I went to only a handful of places before twice hearing the objection that earrings are easily stolen, and since the owners pay for the empty spots on the rack as though they are sales, they might be losing money if there are more thefts than sales. This makes placement difficult. Jewelry targeted to older women, who are less likely to shoplift, might overcome this objection, but then would it sell? I don't know.

I obviously should have done some research into wholesale suppliers of jewelry. Many of the earrings I bought for 30 to 50 cents were nicer than the ones I paid $1.75 for. Now, it might have been true that the salesman, if he actually had much experience (who knows) would have a better idea of what sells, but then he probably was paying 30 cents per pair, so knowing what was available I might have negotiated to buy them at 50 or 60 cents each from him in order to also get his expertise.
As for the promise to buy back the earrings if they didn't sell as suggested, obviously something like that should be in writing. At the time the numbers seemed so reasonable (just 13 pairs per week per rack, and the need to pace only 10 racks!) that it didn't seem likely I would be asking for a refund.

The resources available today make it possible to research everything so much more easily that there is no reason not to do so. At that time there wasn't a single book on rack merchandising in the local library, but now you can find articles and personal experience stories like this online in seconds. At that time I had to order a wholesale catalog and wait for weeks to discover better wholesale sources. Now you could look online and see what things wholesale for even as you listen to a fast-talking salesman on the phone.

Finally, I accepted the numbers being thrown at me because they sounded reasonable. But I could have asked some people in similar businesses. Maybe 13 pairs per week was normal in other locations, but maybe I would have discovered that 5 was more common, and vendors were running their routes only twice per month. Again, this is probably something you can even research online now.

Learn from my mistakes.

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