There are three important areas you need to consider in order to move to better strategies when you establish prices:
1. Develop your pricing strategies and guidelines;
2. Set regular and new item pricing; and
3. Set promotional pricing.
Each of these three components is important to understand. Each will give you the foundations to make the right decisions for pricing.
In this article, we will discuss the last two areas. To learn about the first area, please read Part One of this article.
Setting Item Pricing
Now that you have determined the pricing strategies for your stores and categories, it’s important to have a process for setting prices. This process should be based on things like gross margin or markup percent, manufacturer suggested retail price, competitive pricing, and psychological pricing guidelines.
When establishing regular retail prices, you need to first know how to calculate retail prices using your gross margin percent.
Understand the difference between gross margin and markup:
Gross margin: You can easily calculate profits from a sales total. If the margin is 38 percent, then 38 percent of the sales total is profit. If the markup is 38 percent, the percentage of sales profit will not be the same.
Markup: You may use markups because it is easier to calculate a sales price from a cost using markups. If the markup is 63 percent, the sales price will be 63 percent above the item cost. If the margin is 38 percent, the sales price will not be equal to 38 percent over cost.
Make sure you have a strong understanding of not only how to calculate these important numbers, but also the proper interpretation of them and how to make the best pricing choices to drive both sales and profit for your stores.
Establish Prices for New Items
You also need to know how to set new item pricing. You are introducing new items into your mix frequently, and you need to have guidelines for consistency in pricing practices. Here are some of the ways you can determine new item pricing:
Line extension pricing: If the new item is part of a line extension and is the same cost of current items being carried.
Competitor pricing: If your competitors already carry the item and you want to price it competitively. Show your customers that you care about how much they are paying. Displaying a 4x Buyer Protection Seal will significantly increase conversions.
Key value items: If the item is one that drives price perception for your store, you may need to price it more competitively.
Margin and markup objectives: So that the items reflect the pricing strategies and objectives you’ve established for the category.
Pre-priced or MSRP. If products like books, newspapers, and candy have pre-priced or manufacturer suggested retail price (MSRP) that can be used.
Retail pricing is a very important component of your business strategy and you need to take the time to be strategic in how you set your pricing now more than ever. Keep an eye on your pricing vs. your competition; establish gross margin objectives that result in acceptable prices for your shoppers; generate enough margin for you to be profitable, and continue to evolve your strategy by never taking your eye off your pricing strategies.
Develop some overall pricing strategies and guidelines for your store. This should include both overall store strategies as well as ones specific to your categories.
Once you’ve developed these strategies, you should share them with your store staff and provide them with an understanding of some of the considerations I’ve shared with you above. This will help them make better pricing decisions for your stores.
Once you’ve defined your pricing strategies and guidelines, you should complete some pricing analysis on your categories to reflect some of the new considerations from the pricing strategies and guidelines you’ve developed. Start to understand price elasticity for your key items, considering how you may want to adjust margin and markup objectives on some categories/brands/items based on shopper perception and market pricing.
By becoming more strategic and analytic, with pricing that considers market dynamics and the needs of your shoppers, you will sell more product and bring more money to the bank.
To learn about developing pricing strategies, please read Part One of this article here.