Insider Advice on Pricing for Retailers
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by Ed Bernard
What do pistachios and clothing have in common? They are both subject to fluctuating retail prices. To better understand the techniques utilized in retail pricing, pistachio nuts serve as a good example. Unsalted shelled Pistachio nuts are my favorite snack and I usually buy them at a national drugstore chain. However, lately this store has been playing games with their pricing and it has been driving me, you guessed it: nuts!
Previously, I bought them at $4.99 for a 6-ounce bag. About six weeks ago, the store marked them up to $6.99 but reduced them “on sale” for $4.99. A couple weeks later the store changed the pricing again to $6.99 and you could get the second bag for 50 percent off, only to shortly return to the “sale” price of $4.99 a few weeks later.
This fluctuation of pricing on snack nuts illustrates a larger retail theme: there are a lot of pricing strategies that can be utilized at various time. This seems to be the regular practice for drugstore chains, who change their pricing on the most desirable items. Hotels, rental cars, airlines, all have the same mindset when it comes to pricing: get the most out of your product as you can when the time is right.
However, in the garment business, retailers cannot raise the price on shorts just because it’s a little hotter one weekend than the last. Because of the competitive nature of retail, stores must align themselves with the prices of other retailers in their area who carry similar items. There are some retailers who do the “up and down” routine with their pricing by putting the item on the floor at a premium price for a couple weeks and then marking it down to where it probably should have been in the first place. While some retailers see having product on sale as just the nature of the beast, since everyone likes getting a good deal; there are other retailers that mark everything at MSRP (manufacturer suggested retail price) and hope that their customers don't mind paying full ticket price on their purchases.
A few years back JC Penny came out with a new pricing concept. They would price everything at the lowest possible price and not have any special sales or promotions. Unfortunately, they bombed with this idea. Their best price wasn’t good enough and not being able to incite excitement by having a sale turned their stores stale very quickly.
There is also the concept of what I call maximum price point stores. Back when I was president of Bermo Enterprises, we had a chain of 10 dollars and under stores. These stores really rocked when the going was good! The consumer knew that they could afford everything in the store, so they rarely even looked at the price tag.
Similarly, Five Below is a national chain that specializes in five dollar and under product in lots of categories. Their stores are designed for kids and teens who are attracted by simple product displays, basic merchandising and clear pricing. The now public company began in 2002 and currently has approximately 1,000 stores in 38 states and employs 13,000 people.
Some retailers have loss leader items to drive customers into their stores. They will work on slim-to-none margins and use it as a “doorbuster" to drive sales on higher ticket items. This is a similar marketing approach to your local grocery store selling milk and bread for just above wholesale cost. One farm store retailer in the Midwest sells their basic five pocket and carpenter denim jeans for $9.99 every day. I happen to know that their cost and margin strategy is thrown out the window on this one! What is even more remarkable is that they sell their jeans all the way to size 60, at that same price of $9.99. While the margin may be small, or even a loss for the retailer, their customers can rely on them always having that product for cheaper than the rest.
Clearly there are many pricing strategies available for retailers to try. So, what is the right way to price your product while maximizing on profits? I would say that it is dependent on your market. While competition sometimes dictates pricing, if your product is truly unique within your area, it is hard to compare.
Personally, I have always leaned toward coming up with a price based on the combination of cost plus market. Cost plus market means your cost has to always play into the business side of the equation. When it comes to cost, there are very few reasons to buy something that doesn’t fit into your margin picture. Market simply means pricing the item appropriately to fit into your retail culture. If your strategy is to always offer lower prices than your competition and while still allowing a little extra margin, then this is where an understanding the market would be crucial. Shopping your competition regularly is a great way to gather valuable market insight.
While I do not recommend being the cheapest on everything, the consumer is better educated today than ever before. You should always be open to margin builder opportunities and take your shot on some unique items. However, you should remain aggressive when it comes to pricing the items that your direct competition also has available.If you give the consumer a great deal up front, then they will likely come back for more. Try to avoid constantly changing your pricing, as my drugstore does with the pistachios, otherwise your customer may feel confused.
Shopping off-price product allows you to increase your margins while offering your customer a deal they can’t refuse. Not to mention, the risk of testing out new pricing strategies and unique products is significantly lower when buying off-price. Visit OFFPRICE this August 7-10 in Las Vegas to see our huge selection of products that will draw in your customers with flexible pricing that is good for their wallets and your bottom line.
Pass the pistachios please!