by Joel R. Evans and Barry Berman, the Zarb School of Business
This is the second in our series of six columns on hints for price-setting by small firms. How would you respond to these questions?
- Do you have an overall pricing philosophy? What is it? These are company positioning questions to get you to reflect on your competitive niche; all other pricing decisions are tied to this philosophy. With a high-end pricing philosophy, a firm believes that prices can be set at above-market levels due to a posh atmosphere, distinctive products, super customer service, etc. With a low-end pricing philosophy, a firm stresses below-market prices due to low operating costs, special buys, tight controls, etc. With a medium pricing philosophy, a firm treats prices as a non-factor in the competitive strategy; this means at-market prices and more attention to store hours, location, product assortment, etc. Regardless of approach, the key is that it is CONSISTENT with the other parts of a retail strategy (people won’t pay high prices to “me too” firms).
- What are the characteristics of the people who shop with you? For what reasons do they shop with you? Is this consistent with your pricing philosophy? Shoppers may segmented as: Economic consumers – They view competing brands as similar and want low prices. This segment has grown in recent years. Status-oriented consumers – They see competing brands as dissimilar from each other. They are lured by prestige brands and customer services more than price. Assortment-oriented consumers – They seek firms with big assortments and want fair prices. Personalizing consumers – They go where they are known and are personally attached to employees and the firm. They’ll pay slightly above-average prices. Convenience-oriented consumers – They shop if they must. They like online shopping, nearby sites, long hours, and catalogs, and pay above-average prices. Consider where your customers fit and whether you are acting accordingly?
- How do you compute prices? In setting prices:
- You should look at industry data to get a sense of typical markups for your retailer type. Data are available via Dun & Bradstreet’s Key Business Ratios and other sources.
- Suppliers should provide average markup data for specific products.
- You should use selling price = 100% calculations, with selling price = cost of goods sold/unit + operating costs/unit + desired profit/unit = 100%. The toughest item in the equation to compute is operating costs/unit. So, here, is a simple tip: (3a) Add up all of your operating costs; (3b) Estimate your total sales; (3c) Divide (3a) by (3b). This sets operating expenses as a percentage of selling price, and that number can be inserted in the formula.
- Check out competitors to be sure that your prices are consistent with your pricing philosophy.
- When setting prices, do you take all operating costs into account? Sometimes, these factors are not taken into account in setting prices; they should be: owner’s earnings, family employees’ earnings, the portion of rent going for stockroom space, equipment and store repairs, the costs of processing credit-card transactions, the costs of business services (such as accounting and legal services), advertising costs, insurance premiums, etc. Ask your accountant to help identify all your operating costs. Low prices are proper only if you can actually make a profit with them!