by Joel R. Evans and Barry Berman, the Zarb School of Business
One of the most crucial areas of decision making for small firm is pricing. Yet, we have found that small firms often do not have well-conceived pricing plans. And many such firms seem to panic (or ignore the problem) when large discount-oriented firms enter their trading areas – or become more aggressive. This is not necessary; small firms CAN prosper in today’s more discount-oriented environment, as long as they have a good understanding of their niche in the marketplace.
With this in mind, we have prepared a six-part series on pricing. We offer a number of tips to help you improve your pricing decisions. In this article, we begin with several questions for you to consider. When you address these questions for your firm, always ask yourself the rationale behind your answers:
- Do you have an overall pricing philosophy? What is it? (high-end, medium, or low-end)
- What are the characteristics of the people who shop with you? store? For what reasons do they shop at with you? (for low prices, for convenience, for service, etc.) Is this consistent with your pricing philosophy?
- How do you compute prices?
- When setting prices, do you take all of your operating costs into account? (including your own salary)
- How does your firm use manufacturer suggested list prices?
- Are your prices “fair” to the customers who shop with you? What does the term “fair” mean to you?
- Do you or one of your employees research competing firms to check on their prices? Do you check competitors’ ads for prices? If you do check competitors’ prices, how does your firm react to what you learn?
- How often do you change prices? Does this vary by product category?
- How often do you run sales? Does this vary by product category?
- Do you plan for stock shortages (due to shrinkage and clerical errors) when setting prices? How?
- Do you use price lining? (whereby you sell items at a range of prices, such $12, $17, and $25 dollar ties)
- Do you advertise prices? Where?
- Do you let customers bargain over the prices of any items?
- How do you use prices in competing with larger firms? (such as Amazon)
- Have you formed a buying group (cooperative) with other small firms to get better terms on your purchases?
- Do you use odd prices ($4.95, $59.95) rather than even prices ($5.00, $60)?
- When you take a physical inventory, how do you compute the value of the merchandise remaining in stock?
- Do you understand the difference between an initial markup and a maintained markup? Do you use these concepts in setting your prices?
- How are your prices displayed?
- What payment method(s) do you accept? (cash, check, store charge, bank card, PayPal)
- Do you understand both of these terms: Elastic demand? Inelastic demand?
- What do you think about everyday low pricing?
In Part 2, we start examining these issues. So, why don’t you look over the preceding questions now and come up with your own answers. Then, compare them with our commentaries.