Various factors are taken into account when establishing selling prices:
- The fundamental law on business is cost. Determine the cost of the unit to be sold: add the overhead and the profit.
- Competition – what do competitors charge for a comparable product?
- Location, decor, and atmosphere – a higher price may be justified if the location is convenient or the decor and atmosphere has “distinction.” The customer will accept the higher price and is willing to pay more for extra service and comfort.
- Will the prices attract a profitable clientele? There are profits only when enough sales are made and the cash is in the register.
- The danger in overpricing and underpricing. Overpricing will frighten customer away, which means insufficient volume to cover the cost of operation. Underpricing may produce a large volume but at the same time a loss in operating profit. In either of these situations, the results will be a failure. The maxim of successful retail operation is always sold profitably.
As a retailer, you have probably been wondering, how exactly do other companies set the numbers on their retail price tags?
Where do their retail prices come from?
According to Mark Ellwood, the author of “Bargain Fever: How to Shop in a Discounted World”, many retail enterprises use an expensive retail price consultant to determine their retail prices. Ellwood explains that price consulting started in the 1980s when Hermann Simon, a former professor of economics in Germany, challenged the traditional method of “cost-plus pricing”.
Cost-plus pricing is the first retail pricing strategy that everybody has in mind. Just look at the purchasing price and add a certain percentage, i.e. your margin. While this is a straightforward price strategy, a store or a retail chain operates in a crowded retail business environment.
With omnichannel retail, e-commerce and online ordering directly from China, there is even more competition in retail than there used to be a decade ago.
A retail customer has so many options that it is vital to get your prices right. Retail prices are an important part of product image and your general image as a retail business. In many cases, the most important.
Mark Ellwood writes:
“Simon and his colleagues invented value-based pricing, essentially transaction utility in practice. Don’t start with manufacturing costs, Simon said, but with the customer and what they value about a certain product.
Today, price-consulting savants break down exactly how much the demand for a good or service yo-yos in sync with its price tag (a concept known as price elasticity of demand), then help businesses adjust accordingly. The brinkmanship is akin to an everyday auction, pushing prices as high as the market will bear.”
For a retailer, it is advisable not to rely solely on price consultants to work out the retail prices. It takes experience and knowledge to know how to establish a retail price strategy. It is crucial to start thinking from customers’ point of view and see how to match customers’ expectations of what your suppliers can offer in terms of purchasing prices.
Business Insider has a great article, listing a few pricing methods that retail price consultants use to manipulate customers to buy things. These price strategies are so successful that people buy goods even if these are not really necessary for them. While visiting stores, you can easily spot examples of these retail price strategies.
1) Anchor price strategy
To explain “anchor pricing,” Ellwood uses the example $16.99 lobster sandwich in Panera Bread’s bakery chain, which they introduced to their menu in 2009. “An absurdly expensive treat became an anchor price, throwing everything else on the list into bargain relief.”
According to Ellwood, there is an obvious purpose to overprice one item. An anchor price makes everything else seem cheap in comparison. And it works both for a restaurant menu and in a retail store.
2) Goldilocks price strategy
Goldilocks pricing strategy uses the power of three to push shoppers toward the one product a store is hoping to sell the most.
Ellwood presents an imaginary Best Buy offering of three Samsung TVs. Each TV set is marked down 30%: a 32-inch for $499, a 40-inch for $699, and a 46-inch for $899. According to Ellwood, Best Buy is hoping to sell the 40-inch option, because it will likely offer the healthiest total margin.
“[Goldilocks pricing] identifies a target item and then bookends it with similar offerings that make it both a bargain (cheaper than a 46-inch TV) and better quality (that 32-inch is for skinflint Luddites),” he writes. “Offering just a pair of similar items, shoppers will be drawn to the cheaper one. Present a trio instead, though, and they will gravitate to the mid-priced option.”
Note that you can get a bargain price from your supplier if you are confident enough that a certain product will sell more than others.
3) The strategy of retail prices ending in 7, 8, or .99
Since childhood, we’ve used to the fact that some prices have common endings. This has nothing to do with Kabbalah mysticism, nor is it a mere coincident. While some of us are used to round these retail price numbers up, customer surveys show that the magic is not lost.
Prices end in 7, 8, or .99 not only to give an impression of the lower price but to present a product price image. According to Ellwood, price consulting uses number theory to signal a certain kind of product.
“Retailers know that prices ending in 9 indicate a value product (such as throwaway sunglasses), while a 0 ending shorthands premium and prestige (designer clothing), and 7 or 8 endings signal items priced to move and closeouts.”
Ellwood cites one price consultant who “estimates that $9.99 price tag, can, on average, sell 10 to 20% more product than a $10 one.”
The author says that “prices ending in 7 or 8 are most common in clearance racks or at retailers whose reputation rests entirely on good value, such as Costco or Walmart; they’re intended to imply a constant spigot of bargains.”
As you see, these retail price strategies are centered on your retail customer. To further target your customers by providing a motivating price image, it is essential to use advanced Enterprise Management Software that is designed for retail management.
Advanced Retail Management Software has built-in features that let you to manage your retail price lists dynamically, and to connect your pricing strategy to customer relations.
Modern retail management software has embedded Product Information Management modules that communicate the prices to all channels simultaneously, in real time. You can adjust your prices according to the stock levels, or sales activity. For this, you have real-time reports right in the Product Information Management interface.
It is often a good idea to make slight discounts on items that sell well, and that can be obtained easily in large quantities. Use anchor pricing to mark upper and lower price limits, push the sales of a certain product with goldilocks price strategy, and indicate a value offering with .99 ending.
You can take the price management a step closer to the customer, by implementing detailed Customer Relations Management (CRM) and Loyalty Programs.
You can go as far as associating customer groups and product groups, so you can have a very limited amount of trigger offerings. These should be designed to target individual clients by their needs. For example, you can use the Sales History module to make a Customer Group of people who have a cat, and give them especially nice prices for limited-amount offers on cat food.
There are many ways to manipulate retail prices. The key idea is to make your customers feel that you care about them, and help them to optimize living costs by offering good value.
You can do this with general discounts, though in today’s dense retail competition environment, it is worthwhile to tailor retail price strategies that focus on your customer.
Naturally, you still have to optimize your retail management processes and supply chain. Retail enterprise management software has an extensive list of tools for that.
Keep in mind that for customers, supply chain optimization is invisible back office stuff. Price, on the other hand, is a very direct communication act, a way to tell your customer that you consider him/her a king, just as the old proverb goes.
ERPLY is an international software company, providing a wide range of cloud-based enterprise management software. Erply’s focus is solutions for scalable businesses such as retail companies and franchise operations.
Based in New York City, Erply now has over 100,000 stores on its platform, large retail chains such as Elizabeth Arden Retail, Athlete’s Foot, Carat London, Viasat, and Rapid Refill. Erply is also helping to power international organizations, including UNICEF and United Nations.
Erply’s Retail Enterprise Resource Planning (ERP) suite is based on hybrid cloud technology and incorporates POS (hardware, mobile, and tablet), CRM, Product Information Management, Inventory, and Supply Chain Management, Billing and Accounting integration, e-Commerce, Franchising and many more tools to support the growth of your business.
Erply’s software design philosophy is holistic. All applications, tools, and databases are designed for seamless integration. Each module works right out of the box but can be customized to meet industry- or company-specific needs. These solutions help businesses around the world to increase revenue, build loyalty, reach new customers, and lower supply, storage, and handling costs.
With Erply, there are convenient options of a Free Trial or a free Demo Session, so you can test and pre-evaluate the countless possibilities a modern retail software has to offer. Please contact us directly at:
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