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Profitable Times Newsletter

Is the Price Right?

Setting The Retail Price Is An Art, Mixed With A Little Science and A Heavy Dose of Discipline

  • Cost
  • The competition
  • Perceived value
  • What the market will bear
  • Suggested retail price
  • Uniqueness
  • Fixed costs
  • Cost of finding the product
  • Cost of transportation in
  • Cost of the receiving process

All the above factors need to be considered as you maximize the retail price for your merchandise. And don't kid yourself, everyone, from big box discounters, to the 99 store; to the most exclusive stores in town are constantly working on how to maximize the retail price within their retailing environments. The following are a few thoughts on how to make certain the price is the most profitable possible for your store.

When To Set The Retail Price
The time to establish the retail price is before you place the order, not after the merchandise arrives in your store. If you don't think you can sell a product for the retail price all the factors above demand, then move on to another vendor or another product. Sure, if the freight bill surprises you, or you bought a product sight unseen and it isn't what you expected, you can adjust the price after the product is delivered — but this should happen very infrequently. A method that is often helpful is to mentally work the price setting process in reverse. Estimate what you think you can sell a product for at retail and then find out the cost. If the cost is less than 50% of the retail price it has passed an important initial test.

Maintaining Margins Is Important
Although setting the retail price is more art than science, the price should fall within the margin parameters you have established for your store. Your margin goals will probably be best met with a mixture of markups not a blanket policy for all products. But the negative effect that shaving your margins has on the top of your income statement is difficult to recoup as it trickles down to the money you put in your pocket from the bottom of the statement. It is true that a lower price increases the units sold, but it is also true that you can't lose money on every sale and make it up on the volume.

Don't Order More Than You Can Sell
Pay attention to quantity discounts, free freight requirements, show specials, closeouts, and negotiate price whenever you can. These are factors that can reduce your cost and improve your margins without putting upward pressure on the retail price. But beware, buying more than you need to take advantage of price breaks will usually result in bloated inventories, markdowns and eventually, eroded margins.

Unique Products Payoff
Unique products allow a greater markup and counterbalance lower margin products. If you expended extra effort to find unique products you are entitled to additional gross margin. Besides, a selection of unique products helps to make your store distinctive, alleviates price competition pressure and drives positive word of mouth advertising.

Enhance the Perceived Value of Your Merchandise
The merchandising and displays in your store have a good deal to do with what you can charge for a product — especially for your more expensive merchandise. If you are asking top dollar then your merchandise needs to look like it's worth it. Use descriptive signage to emphasize the uniqueness, quality and benefits of your higher priced merchandise. Also, make sure your core products don't look commonplace and that 'value' priced merchandise is not perceived as schlock.

Enhance the Perceived Value of Your Customer Service
Remember, today's customer places strong emphasis on perceived value and customer service. If you deliver exceptional customer service you may be able to charge a bit more.

Maintain A Seamless Flow of Price Levels
Having a seamless flow of price levels makes it easier for the customer to spend a little more money. Through your sales techniques you can point out the benefits of more expensive merchandise, and if the price difference is reasonable, increase your average sale by moving the customer up a notch. Large price gaps can make the job of up-selling much more difficult.

One way to determine if this seamless flow of prices exists in your store is to complete a retail price matrix. On the horizontal axis of a sheet of graph paper breakdown the range of prices in your store (or preferably by product category) into equal price categories. For example, depending on the full range of prices, each vertical line may represent a $2, $5 or $10 retail price increment. Along the vertical axis indicate how many products (not how many units) fall into each of the price categories. Now, connect the tops of the product counts in each price category. The resulting line should look like a smooth, modified bell-shaped curve — with fewer products at the lower and upper price ranges and the bulk falling into the price range most appropriate for the majority of your customers. If the curve is not smooth it may indicate barriers to those very profitable incremental sales.

For a copy of a retail price matrix email us at request@andoniadis.com.

The 'Keystoning' of Old Is Out
In the past, with the exception of some notable categories such as pre-priced products, the cost of a product was generally keystoned (doubled) to arrive at the retail price. This is no longer adequate. At the very least, an additional increment to cover the costs associated with the shipping and processing of incoming merchandise needs to be added to the keystoned price before the final retail price is established.

Perhaps the easiest way to establish the retail price for the bulk of your products is to first take the cost of the product and multiply it times 2.2. (The .2 represents a factor to help cover freight and receiving related costs.) Then, massage that price up or down depending upon the factors mentioned above that are relevant to your retailing environment. You can move the price up if the look and feel and uniqueness of the product, and the competitive atmosphere, allows it. But never (well, almost never) take the retail price below your margin parameters.

I have experienced many stores leaving money on the table because they were afraid to maximize their retail pricing. I hope the points in this article help you to do otherwise.

 
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