Pricing Strategies for Retail Stores
Correct pricing is more critical in retail than in other types of businesses, mainly because majority of retailers carry the same products. Because of this, consumers can easily shift loyalty on the basis of price alone. As there are many types of establishments, we will only tackle the case of retail stores selling fast moving consumer goods, like supermarkets and drugstores.
Errors in pricing take a long time to reflect in sales, and by then, the damage can be irreversible. An example is when a company decides to raise prices. You may think the effect would be insignificant as the change is just small and the results in the succeeding weeks may indicate that sales were not affected, but the decline in sales may come gradually over a period of months or even years. Even if the company decides to reduce prices back to their original levels, it would be very difficult to regain lost customers.
The policy on how to set pricing is a strategic decision that has a deep impact on the company’s sales and profitability. I had extensive experience in pricing in retail stores and here are some of the lessons I learned:
Proximity to competitors. If you are near competitors, take extra effort to have competitive prices. While you may be tempted to react to all threatening price moves, consider if you have only one store or if you have a chain. Having different prices between your branches will cause headaches. There will be customers complaining that they are getting a lower price from your other branch, but the bigger problem is that the lack of consistency in pricing will make your company image unclear. Usually the answer in this situation is to maintain similar prices. One possible exception is if you are in a very high rental location with a captive market. This is often the case in vacation places like resorts.
Turnover of the item. There are some items that are so fast-moving that you can sell them even before you pay your supplier. Here, a very small markup is justified. These fast selling items are usually the most well-known and sought after products, so much so that some stores use them as loss leaders, which means that they price it less than its cost to increase store traffic. On the other hand, if it takes many months or years to sell, then the item must be priced higher in consideration of the long time your capital is frozen.
Space requirements. Compute your cost of rental per square meter and consider this in the costing of an item. If you do not pay rentals because you own the place, use the amount that you would have paid if you were renting. This would force you to maximize your space utilization.
Spoilage and special storage needs. These are factors that increase the cost of the product. You must add the cost of the items spoiled and the expenses you incur in storing the item (the cost of refrigeration, for example).
Price of the leading brand or comparable brand. It is crucial not to be too far off the price of the leading or comparable brand. This is true for both higher and lower pricing. Even if the product is not exactly the same, like in the case of generic medicine, people tend to compare the item with the leading brand. One time, I priced a generic medicine at P5 while the leading brand was P20. I was surprised to learn that no one wanted to buy the item; people were saying that it was so cheap that it was likely fake. I increased the price to P10, and the product sold swiftly as people now think it more effective.
Consider your customer mix. In theory, you should try to cater to the needs of different customers, but this is impossible to do in practice. Catering to everyone will please no one. People will not be able to tell if your store is for them. Compromises must be made in order to present a clear image. An upper class customer, for example, may not be delighted to shop in a place with cheap products. In deciding what segment to target, focus on the net profits you will get and not just sales. Selling huge quantities to a price sensitive crowd may be less desirable than serving the needs of those who prefer higher quality of service.
Do not offer the lowest price if you do not have the lowest total cost. This blunder is often committed by those who neglect to factor in taxes and overhead expenses. Those who forget this are mostly business start-ups who do not yet know all the expenses they will be incurring. In most situations, it would be better for a beginner not to focus on price competition since the established players are probably able to source supplies at a lower cost due to their larger volume.
Conduct surveys to get feedback. Ask customers what their reaction would be to a price change. If you have the resources, get market research professionals to do this for you. Just make sure that the sample survey is large enough and truly random to have a scientific result. You could incorporate other questions that may help your operations.
Test price changes first on a limited scale. Even the most expensive surveys would not be as accurate as an actual test because people may not do what they are saying even if at the time of the survey they were giving their honest opinion. To limit the damage, gauge the response first by doing a trial test in a single branch. If you only have one outlet, try it first on a few items.
Anticipate the reaction of competitors. Setting your price higher or at the same level as competitors would probably not provoke a reaction. However, if you price lower hoping to make up for it in more sales, you may ignite a nasty price war that would destroy your profits.
Purchase POS software with the capability to assist in pricing. If you could afford it, invest in POS software that can help in your pricing. There are some advanced POS that can give you instant data and analysis on the effects of price changes on sales.
Pricing in retail stores demands continuous planning and monitoring. Doing it by gut feel is no longer satisfactory today because of intense competition. Neither is just setting a constant mark-up the best policy. Price is too potent a weapon in the marketing mix to be taken for granted.
*Originally published by the Manila Bulletin. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.