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Do you understand how to price your products/merchandise?

Written by: Joe Dager

Article Overview: There are a number of pricing strategies you can use to achieve your growth goal. Each has the potential of producing a profit, and most are tied to the critical relationship of price-to-sales volume and stock turnover. Some strategies you may want to consider are listed below.

Do you understand how to price your products/merchandise?

There are a number of pricing strategies you can use to achieve your growth goal. Each has the potential of producing a profit, and most are tied to the critical relationship of price-to-sales volume and stock turnover. Some strategies you may want to consider are listed below.

Suggested Retail Pricing: This is the practice of selling at prices set by your suppliers. It is convenient because many product lines are available prepackaged and pre-priced. However, you lose flexibility and must live with a set percentage markup. (To combat this disadvantage, some suppliers offer "two-for-three" options using the retail price). Because suggested-retail or retail-price-maintenance plans are illegal in some states, the practice usually is a loser. Using a slightly different strategy, Panasonic published a "minimum retail" a price list showing a higher "average retail"; some stores use such gimmicks as "compare at" or "nationally advertised at" to imply that the "official" price is at a certain point.

Full-cost Pricing: This pricing is calculated by adding the costs of the product or service plus a flat fee or percentage as the margin of profit. During inflation, you must keep track of your costs to make sure that you are charging enough. In many business lines, owners have come to realize that when they replace their stock, the wholesale price has often risen above their retail price. If they do not raise prices rapidly enough, they are faced with diminishing inventories at a constant dollar investment or with having to invest more money to restock their shelves at the constant level.

Multiple Unit Pricing: You can increase the size of your individual sales by offering a meaningful discount for larger purchases. A liquor store usually will offer a discount or throw in a free bottle of wine when you buy a case. The same idea applies to the "baker's dozen," a discount on a "set" of tires or selling beer and soft drinks by the pitcher. This is a good technique for building customer goodwill, but you will not see your customers as often. The trade-off, of course, is that you save time and money on containers and packaging, save time by writing up fewer sales and, perhaps, can make your delivery service

more efficient by selling by the truckload. Variations are "two-fors," "six-packs," "cheaper by the carton" and "bulk price."

Discount Pricing: The discount store usually offers lower prices as a trade-off for spartan interiors, lack of sales help and the efficiency of central checkouts. These stores typically work on a 35 to 38 percent markup compared to 42.5 to 45 percent for a department store. Since discount stores depend on the efficiency of greater volume to cover operating costs, they must maintain, or at least promote, good prices.

Loss Leader: This refers to promoting a few items at a sizable reduction to attract customers. The idea is that the increased traffic will result in greater sales of your regular-priced merchandise. The reductions have to be on recognized brands and items purchased frequently enough so customers know the prices and can recognize the savings. You must keep switching leader items - people are not going to buy catsup four weeks in a row regardless of its price. The danger is that you may develop a following of cherry pickers who will breeze into your store, scoop up the specials and buy nothing else.

Keystone Pricing: This refers to the practice of setting the retail price at double the cost figure, or a 100 percent markup. It is most common with jewelry items and in specialty shops, high-ticket fashion shops and department stores. Typically, the merchandise is subject to drastic clearance markdowns on items that are slow sellers or held past the season.

Price Lining: This is the technique used by most retail stores of stocking merchandise in several different price ranges. A hardware store, for example, may carry hammers in good, better, and best categories at $3.49, $6.49 and $9.98, respectively, and a professional model at $17.95. The theory is that people buy products with different uses in mind and with different expectations for quality and length of useful life. If you do not carry a range of prices, you may lose the customers who cannot find the product at the right price. Price lining simplifies buying and inventory control because you buy only for the price levels that you know your customers will accept and eliminate those goods that fall outside the levels you want to carry.

Competitive Advantage: Here is where you copy or follow the prices set by your competition. Based on your service image, you can set your prices equal to, above or below those of your competition. This strategy requires constant vigilance by reading the ads and shopping your competition. It is a more passive technique because you're always following your competitors. Chances are your more aggressive competitor can make better purchases than you. A variation of this is the we-won't-be-undersold routine, where you offer to meet or beat the prices of all your competitors.

Pre-season Pricing: Many manufacturers offer price discounts or dated billing as incentives to buy early. This is important to manufacturers because of production planning and the lead time necessary for ordering raw materials. For the retailer, the same principles apply; also, off-season specials may be a way to profit in business on a year-round basis. When you sell at a lower price to get the early sales, you may be borrowing from later full price sales. On the other hand, anyone who has tried to buy snow tires during the year's first snowstorm knows the extent of delivery problems. In this case, early sales at a lower price would have allowed the merchant to serve the customers better and to capture sales that may be lost due to limited service facilities.

Price Is No Object: This refers to certain marketing situations in which the quality of the product or service is far more important than the price. If you need a kidney transplant, for example, you are not going to shop around and haggle over price. And even if you do press the doctor, he probably will quote you a range with a $5,000 spread rather than giving a specific number. The same is often true with high-ticket fashions and jewelry. Using the same psychology, expensive automobiles and boats are not sold on price. They may use a starting at or base price to get people interested, but the prices of the options are usually in very small print. The extreme of this attitude is that if you have to ask the price you probably cannot afford the item anyway.

Price Skimming: This refers to the practice of charging high prices formaximizing profit in the short run. The real disadvantage of skimming is that it attracts competition. Your competitors will soon figure out what you are up to, and the high profit potential will encourage them to copy you. They may produce cheaper versions of your product or style, referred to as knockoffs in the market. Once you have meaningful competition on price, your skimming days are over, and you run the risk of ending up with a warehouse full of products that cannot be sold at any price. It works best when:

• The product is unique and people are willing to pay extra just to have it. There are trendsetters in society who always are looking for something new and are willing to pay the price. A larger number are followers, and they will buy your product if it is accepted by the leaders. The followers, however, will not pay the higher price.
• The cost of development is high and there is a chance of early obsolescence or imitation by competitors.
• You have a strong patent position, or your product would be difficult to copy.

Penetration Pricing: The opposite of skimming is to introduce your product at such a low price that you will quickly gain a large share of the market. The purpose is to discourage competition. However, eventually you will have to raise your prices to start making some profit and, when you do, you will learn much about customer loyalty.

Buying a Market Position: A variation of penetration pricing is to buy your way into the market with free samples or heavy coupons, for example, 50 cents off on a 69-cent purchase. This tactic is usually used by big companies because it takes considerable financial backing, and it may be six months or more before it starts to pay off. Small marketers can use it to the degree they know what they are doing and can control the process. A frequent follow-up is important to ensure samples are not going to professional collectors but are reaching potentially strong customers.

Pricing is truly an art. Be careful not to think that using a multiplier alone will get it done. Market conditions, penetration and your strategies are changing constantly. Your pricing must do the same. However, every time you change a price it affects your financial structure. Understanding what an increase or decrease to a certain product or service will affect your overall finances. Do not do it in a vacuum!

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Article Tags: critical relationship, growth goal, pricing strategies, stock turnover



Related Forum Posts
Re: Matching competitors prices - beware - While I agree that getting into a price war should be avoided if possible... on rare occasions, it's not a bad idea to match someone's price (or even beat it) if you're doing it "one time" to land a new customer. For instance, I was recently looking for the best price on a [u:2rhwa2wg]specific[/u:2rhwa2wg] flight to NY and a customer service rep from Flight Centre ended up taking zero commission to help me book my flight. In fact, she even beat the price by $5 in the hopes of creating brand loyalty for the future.
What are we worth? - Yes, I talk to other women business owners about this topic frequently. We still have some re-creating of ourselves to do and it's hard to overcome the socially adapted ways of being in the world. I'd suggest a panel of experienced women to look at pricing for women owned businesses products and services. This is the toughest piece for women - they don't know how to value what they do. Not hard to understand really, historically women's work has been unpaid and generations of habit do impact thought and behavior. This could be a new business, what do you think? I know of women who would pay this "consultancy group" to price their product/service. It's about validation too. Women might think they have a good price, but then have such anxiety about whether it's right. They second guess themselves, again, because they don't have the track record in business or havent' been at the negotiation table before. So ... a little service to build their confidence? I'd endorse it.
Re: need pricing help please - I think you could be selling yourself short. Plus you may be focused on the wrong things when it comes to pricing your products. What will your buyers be able to do or get as a result of your product? How much would that be worth to them? Buyers will gladly pay over $100 for a one page report because it tells them exactly what to do to overcome a specific difficult to solve problem. Even when that information can be found free elsewhere. I know it's hard not to compare your eBook to a physical book. Yet, that may not be a fair comparison. Another thing to consider is the perceived value when a product that sounds great comes with a very low price. Some potential buyers will doubt the value of your product because the price seems way too low for the result it promises. There's a quick and easy way for you to discover the right price though. Open a Google Adwords account ($5) and then set-up a multi-variant test for different price points. If you have a decent amount of traffic you'll quickly discover the best price.
Can consumers reduce the price of gas? - Hi Everyone, I just wanted to get your opinion on someone's suggestion that we as consumers can actually reduce the price of gas if we were to simply stop supporting the two biggest companies, Esso and Shell. The logic behind this "price war" theory is that if no one buys Esso and Shell gas, then they'll be forced to lower their prices and then the other smaller companies will follow suit as well. Is this a myth or is there actually any truth to this gas price reducing strategy?
Re: How Not To Start A New Business - Well, these guys these guys will not succeed at all. they need to have a way of doing things. First thing first, which market segment are they targeting? Or are they in the same segment the previous magazine was. They also need to understand the trends, currently people read online magazines so they need a website. After that they need to develop the marketing mix, which will guide them in their marketing activities. This marketing mix will be made of 4 Ps, which are Product, Place,Price and Promotion. I will assume the magazine is the product, the first P, The Price is what is the role the price will play in the market, do they want premium price, or do they want to skim the market. The other P, they need to have, is the Place, this will help in having a strategy on where to place their magazines, this includes the websites, malls, newspaper stands etc. The final P they need to develop is the Promotion, this is the advertising , channels, websites, forums, blogs, name it. Once they have done that, they can sit down and wait for money to come but not without superior customer service, otherwise without all this, they are wasting their time and money.


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