Price Strategy
What is my pricing strategy? What
is my markup (increase in cost price) strategy and how does that affect my
overall retail price? You must make sure you calculate your retail price
based on the markup you receive and not the costs involved. You also want
to think about profitability and relate this back to the goals of your area as
well as your organization.
Top Pricing Strategies
Before you can determine which retail
pricing strategy to use in determining the right
price for your
products, you must consider the product's direct costs and other related
expenses. These two key elements of overall product cost are
termed cost of goods and operating
expense.
1. Markup Pricing: The
markup on cost can
be calculated by adding a pre-set, often industry standard, profit
margin percentage
to the cost of the merchandise. The percentage markup on retail is determined
by dividing the rupee markup by the retail price. For example,
if your markup is Rs. 20 and your product retails for Rs. 40, your percentage
markup is: Rs. 20 / Rs. 40 = 0.50 or 50 percent. Remember to keep your markup
high enough to allow price reductions and discounts, cover shrinkage (theft,)
and other anticipated expenses, in order to achieve a satisfactory
profit. If you retain a varied product selection, you can use different
markups for each product line if needed.
2. Vendor Pricing: Manufacturer suggested retail price
(MSRP) is a common strategy used by smaller retail shops to avoid price wars
and still maintain a decent profit. For any products you resell, you'll find
some suppliers have minimum
advertised prices
(MAP) and may not let you continue to sell their products if you try to price
below their MAP.
3. Competitive Pricing: Consumers have many choices and are
generally willing to shop around to get the best price. Retailers considering
a competitive
pricing strategy need
to provide outstanding customer service to stand above the competition.
(a)
Pricing below competition simply means pricing
products lower than the competitor's price. This strategy works well if you as
a retailer can negotiate the lowest buying prices from your suppliers, reduce
other costs, and develop a marketing strategy to focus on price specials.
(b)
Prestige pricing, or pricing above the competition, may
be considered when your location, exclusivity, or unique customer service can
justify higher prices. Retailers that stock high-quality merchandise that isn't
readily available at other locations may be quite successful in pricing
products above their competitors.
4. Psychological Pricing: Psychological pricing is a technique of
setting prices at a certain level where the consumer perceives the price to be
fair, a bargain, or a sale price. The most common method is odd pricing, which uses figures that end in 5 or 9,
such as Rs. 149.99. It is believed that consumers tend to round down a price of
Rs. 59.95 to Rs. 59, rather than Rs. 60.
5. Keystone Pricing: Keystone pricing involves doubling
the cost paid for merchandise to set the retail price. Although this was once
the rule of pricing products, more intense competition and the continually
changing retail landscape have driven some retailers to use methods other than
Keystone. However, stores selling higher-end goods with less sensitivity to
price may still use keystone. Eg. Cloths, Electronics products.
6. Multiple Pricing: This method involves selling
more than one product for one price, such as three items for Rs. 100. Not only
is this strategy great for markdowns or sales events, but retailers have
noticed consumers tend to purchase in larger amounts when they use multiple
pricing strategies.
7. Pricing Strategies
Based on Discounts
Discount pricing and price
reductions are a natural part of retailing. Discounting can include coupons, rebates, seasonal prices, and other
promotional markdowns. Typically, price strategies based on
discounts are designed to bring in more traffic that might offer the potential
of purchasing higher-priced items.
8. Discount Pricing: This one is self-explanatory. Merchandise priced
below cost is referred to as a loss
leader. Although
retailers make no profit on these discounted items, they hope the loss leader
brings more consumers into the store who will purchase other products at higher
margins.
9. Economy Pricing: Used by a wide range of businesses
including generic food suppliers and discount retailers, economy pricing aims
to attract the most price-conscious of consumers. With this strategy,
businesses minimize the costs associated with marketing and production in order
to keep product prices down.
10. Price Skimming: Designed to help businesses maximize
sales on new products and services, price skimming involves setting rates
high during the introductory phase. One of the benefits of price skimming is
that it allows businesses to maximize profits on early adopters before dropping
prices to attract more price-sensitive consumers.
11. Bundle Pricing: With bundle pricing, small businesses
sell multiple products for a lower rate than consumers would face if they
purchased each item individually. Not only is bundling goods an effective way
of moving unsold items that are taking up space in your facility, but it can
also increase the value perception in the eyes of your customers.
The components of
price mix are:
(i)
Organizational objectives
(ii)
Competition
(iii) Cost and
profit
(iv) Credit
terms
(v) Discount
etc.
(vi) Fixed and
variable costs
(vii) Pricing
options
(viii) Pricing policies
(ix) Proposed positioning strategies
(x) Target group and willingness to pay
Many factors influence a retailer's bottom line,
including properly
priced products that
hit the sweet spot of maximizing unit sales without sacrificing the profit per
unit. Understanding your business cost structure and choosing the right pricing
strategy are crucial steps toward achieving your profit goals. Many pricing
strategies exist, which is why it may be wise to experiment until you find a
strategy that is the most effective for your individual business.
Product Cost and
Profitability
The cost of goods also includes the cost
of any direct labour to produce the item. The expenses related to operating the
business, known as operating expenses, include overhead items such as
advertising, payroll, marketing, building rent, and office
supplies.
Once you have clarity on what your
products actually cost, look at how your competition prices their products to
establish a benchmark for your price. As a retailer, you also need to examine
your channels of distribution, such as online sales through your own
website, via brick-and-mortar stores, and through other vendors.
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