Retailing: From A to Z

TIPS FOR BETTER RETAILING: “Pricing and Small Retailers: Questions to Consider – Part 2″

by Joel R. Evans and Barry Berman 

This is the second in our series of six columns on hints for price-setting in retailing. How would you respond to these questions?

• Do you have an overall pricing philosophy? What is it? These are company positioning questions to get you to reflect on your competitive niche; all other pricing decisions are tied to this philosophy. With a high-end pricing philosophy, a retailer believes prices can be set at above-market levels due to a posh atmosphere, distinctive products, super customer service, etc. With a low-end pricing philosophy, a retailer stresses below-market prices due to low operating costs, special buys, tight controls, etc. With a medium pricing philosophy, a retailer treats prices as a non-factor in the competitive strategy; this means at-market prices and more attention to store hours, location, product assortment, etc. Regardless of approach, the key is that it is CONSISTENT with the other parts of a retail strategy (people won’t pay high prices to “me too” retailers).

• What are the characteristics of the people who shop at your store? For what reasons do they shop at your store? Is this consistent with your pricing philosophy? Shoppers may segmented as: Economic consumers – They view competing retailers as similar and want low prices. This segment has grown in recent years. Status-oriented consumers – They see competing stores as dissimilar from each other. They are lured by prestige brands and customer services more than price. Assortment-oriented consumers – They seek retailers with big assortments and want fair prices. Personalizing consumers – They go where they are known and are personally attached to employees and the store. They’ll pay slightly above-average prices. Convenience-oriented consumers – They shop if they must. They like nearby sites, long hours, and catalogs, and pay above-average prices. Consider where your customers fit and whether you are acting accordingly?

• How do you compute prices? In setting prices:

  1. You should look at industry data to get a sense of typical markups for your retailer type. Data are available via Dun & Bradstreet’s Key Business Ratios, the National Retail Federation, Progressive Grocer, and other sources.

  2. Manufacturers should provide average markup data for specific products.

  3. You should use selling price = 100% calculations, with selling price = cost of goods sold/unit + operating costs/unit + desired profit/unit = 100%. The toughest item in the equation to compute is operating costs/unit. So, here, is a simple tip: (3a) Add up all of your operating costs; (3b) Estimate your total sales; (3c) Divide (3a) by (3b). This sets operating expenses as a percentage of selling price, and that number can be inserted in the formula.

  4. Check out competitors to be sure that your prices are consistent with your pricing philosophy.

• When setting prices, do you take all operating costs into account? Sometimes, these factors are not taken into account in setting prices; they should be: owner’s earnings, family employees’ earnings, the portion of rent going for stockroom space, equipment and store repairs, the costs of processing credit-card transactions, the costs of business services (such as accounting and legal services), advertising costs, insurance premiums, etc. Ask your accountant to help identify all your operating costs. Low prices are proper only if you can actually make a profit with them!

TIPS FOR BETTER RETAILING: “Pricing and Small Retailers: Questions to Consider – Part 1″

by Joel R. Evans and Barry Berman 

One of the most crucial areas of decision making for retailers is pricing. Yet, we have found that small firms often do not have well-conceived pricing plans. And many such firms seem to panic (or ignore the problem) when large discount-oriented retailers enter their trading areas – or become more aggressive. This is not necessary; small retailers CAN prosper in today’s more discount-oriented environment, as long as they have a good understanding of their niche in the marketplace.

With this in mind, we have prepared a six-part series on pricing. We offer a number of tips to help you improve your pricing decisions. In this article, we begin with several questions for you to consider. When you address these questions for your firm, always ask yourself the rationale behind your answers:

• Do you have an overall pricing philosophy? What is it? (high-end, medium, or low-end)
• What are the characteristics of the people who shop at your store? For what reasons do they shop at your store? (for low prices, for convenience, for service, etc.) Is this consistent with your pricing philosophy?
• How do you compute prices?
• When setting prices, do you take all of your operating costs into account? (including your own salary)
• How does your store use manufacturer suggested list prices?
• Are your prices “fair” to the customers who shop at your store? What does the term “fair” mean to you?
• Do you or one of your employees visit competing retailers to check on their prices? Do you check competitors’ ads for prices? If you do check competitors’ prices, how does your firm react to what you learn?
• How often do you change prices? Does this vary by product category?
• How often do you run sales? Does this vary by product category?
• Do you plan for stock shortages (due to shrinkage and clerical errors) when setting prices? How?
• Do you use price lining? (whereby you sell items at a range of prices, such $12, $17, and $25 dollar ties)
• Do you advertise prices? Where?
• Do you let customers bargain over the prices of any items?
• How do you use prices in competing with larger retailers? (such as Walmart, Home Depot, Costco, etc.)
• Have you formed a buying group (cooperative) with other small retailers to get better terms on your purchases?
• Do you use odd prices ($4.95, $59.95) rather than even prices ($5.00, $60)?
• When you take a physical inventory, how do you compute the value of the merchandise remaining in stock?
• Do you understand the difference between an initial markup and a maintained markup? Do you use these concepts in setting your prices?
• How are prices displayed in your store? (shelf labels, price tags on individual items, etc.)
• What payment method(s) do you accept? (cash, check, store charge, bank card, PayPal)
• Do you understand both of these terms: Elastic demand? Inelastic demand?
• What do you think about everyday low pricing?

In Part 2, we start examining these issues. So, why don’t you look over the preceding questions now and come up with your own answers. Then, compare them with our commentaries.