by Joel R. Evans and Barry Berman, the Zarb School of Business
This is the third in our series of six columns on hints for price-setting by small firms. How would you respond to these questions?
- How does your firm use manufacturer suggested list prices? Before discounting grew, many retailers adhered to suggested manufacturer list prices, except when running sales. Consumers did not do much comparison shopping among sellers and suggested list prices let resellers (particularly smaller ones) meet profit margin goals. But, today, the situation is quite different. More consumers expect regular prices to be below those suggested by manufacturers; as a result, many retailers are not using list prices as their regular prices. So, what is the value of suggested list prices to retailers and when should they be used by them? Suggested list prices remain important to retailers in computing markups. Typically, when a manufacturer uses list prices, it offers markups to retailers that are based on those prices. If a retailer knows that actual customer selling prices will be lower than suggested prices and computes markups accordingly, the retailer may be in a better bargaining position with a supplier; at the very least, the retailer can to choose whether to stock items based on the real markups. Generally, retailers have a better chance to use list prices if they are positioned as full-service stores, particular items are popular, or they sell items with customary prices like newspapers and gum.
- Are your prices “fair” to customers? What does “fair” mean to you? Whether a firm is a discounter, mid-priced, or upscale, “fair” reflects the value a store offers. From a consumer perspective, this means a discounter’s prices have to be low enough to make it worthwhile for a person to give up some customer services and brand choices; at an upscale store (online or in the store), the level of services and brand choices must be worth the premium prices. From a firm’s perspective, “fair” means prices reflect a firm’s operating structure in a way that enables it to earn a satisfactory profit. To be successful, both perspectives must be addressed.
- Do you research competitors to check prices? Do you look at their ads? If you check prices, how do you react to what you learn? A “no” answer is myopic and will lose customers. Pricing should encompass two concepts: Absolute prices are the actual prices set by a given firm; they should be tied to costs and desired profit. Relative prices reflect a firm’s prices compared to competitors; variances between absolute and relative prices must be based on value. The reaction to competitors’ prices depends on the value offered; any firm’s prices must result in its offering VALUE EQUAL TO OR GREATER THAN COMPETITORS.
- How often do you change prices? Does this vary by product category? There should be goals as to how often to change prices and whether the frequency of changes should vary by category. Some firms (like stationery stores) want to keep prices for a selling season to reduce comparison shopping and encourage repeat purchases; some (like produce stores) need to change prices as costs vary; and some (like electronics stores) change prices as technology evolves.
- How often do you run sales? Does this vary by product category? There should also be goals about the frequency of sales. Some firms (like supermarkets) always have several items on sale; some (like Walmart) have everyday low prices and run sales on fewer items; and some (like Saks) have fewer sales because they want to protect their image. The easiest way to change prices is to do so across-the-board. This is also the poorest way since consumer demand, competition, selling seasons, markups, etc. all differ by product category.