Articles

When the Price is Right.

Pricing is the most overused and misunderstood attribute of a retailer’s armoury.

This is because pricing strategy revolves around pricing architecture. Pricing is not a single dimension science. It requires a series of price/product value tiers and a blend of traffic generators, sell-to and sell-from initiatives and basket add-ons that lead to an outcome.

Poor retailers assume a target gross profit margin (generally expressed as a GP%) and attempt to shoe-horn every product in the range into the same mark-up ratio – usually by applying a simple multiplier such as buy price x 2.5.

Good retailers price the initial margin (and targeted average finished margin) individually by price/product value tier and through the use of historical data to analyse and adjust the “go price” for each part of the range, area by area. The “go price” is the maximum price you can maintain which will also maintain the highest volume of sales.

Poor retailers deploy blunt discounting across the range in the naïve belief that cheap price will stimulate volume sales that will deliver the originally targeted profit contribution. Good retailers only reduce price on items or sub-ranges when strategically or tactically essential and understand that they need to make up the lost profit contribution somewhere else within the range. Volume on the original items rarely makes up the margin loss.

If you don’t operate your pricing methodology right now the same way good retailers do, you are not only missing a major competitive opportunity, you are giving away profit unnecessarily.

Find someone who has experience building pricing architecture into merchandise planning.

Look at your sales data critically and regularly. Calculate the variance in profit contribution between full and off-price in absolute dollars. Examine the effect of your discounting on finished average margins through the lifecycle of the product or range.

Think through how you can run some simple controlled tests to find what the real “go price” of the goods should be. Price-check your competitors on like for like or directly comparable goods. This comparison is not simply for the purpose of price-matching but also to understand your customer’s value paradigm and where in the range you need to decrease pricing and where you can afford to increase your pricing to achieve your targeted profit outcome.

When you get your pricing architecture right the confidence you have in your product will grow in equal proportion to your profits.