by Joel R. Evans and Barry Berman, the Zarb School of Business
This is the fourth in our series of six columns on hints for price-setting by small firms. How would you respond to these questions?
- Do you plan for stock shortages (due to shrinkage and clerical errors) when setting prices? How? Yearly, tens of billions of U.S. retail sales alone are lost due to inventory shrinkage (theft) and billions more are lost due to clerical errors by workers. Even the most vigilant and careful firms are affected. To lessen this problem, a three-pronged approach should be followed. Anti-theft devices, such as angled mirrors and in-store cameras, should be used by all retailers, including the smallest ones. Employees should be better trained in stocking displays, entering customer transactions, and keeping records. Prices need to reflect estimated stock shortages as a percent of sales. If a store manager knows (by studying past data) that 4 percent of revenues are lost due to shrinkage, then prices should be marked up an another 4 percent. By using anti-theft devices and employee training, stock shortages may be lowered — so that additional markups are also held down.
- Do you use price lining? Price lining is a very useful strategy. With it, a price floor and a price ceiling are set for each product category you sell, and then selected price points are set within the range. For example, a stereo firm may decide that a $200 price floor and a $1,000 price ceiling are most appropriate for its full-component systems. It could then sell systems for $200, $400, $700, and $1,000. By doing this, several goals could be reached: The firm can more clearly identify the appropriate suppliers, use price points in negotiating with suppliers, and limit the number of models carried in the $200 to $1,000 range. The consumer benefits because there is less confusion in choosing among models, he or she can stay within the prescribed budget, and product quality differences are easier to discern.
- Do you advertise prices? Where? Every firm, regardless of positioning and size, is capable of some form of price advertising. Although large firms have greater resources to advertise online, in newspapers, and on television and radio, there are SEVERAL avenues available to small firms in advertising prices: They can advertise online through inexpensive Google AdWords — narrowed down by specific geographic location, product model, etc.; and in weekly papers that have more targeted audiences and are much less costly than other media. They can set aside a section of the store window for weekly specials (so customers get used to looking for them). They can use in-store displays to feature prices; manufacturers may help with these displays. They can give out in-store circulars. The combination of tools applied must be linked to the image that the retailer seeks to portray.
- Do you let customers bargain over the prices of any items? Another key pricing decision is determining whether or not to permit any customer bargaining. Supermarkets, restaurants, dry cleaners, and entertainment facilities typically have fixed prices and do not permit customers to bargain at all. Some firms, such as service stations and office supply stores, may have fixed prices for certain items (like gas and stationery), but permit bargaining for some items (like auto body work and expensive furniture). Still other retailers, such as auto dealers and jewelry stores, may encourage bargaining for almost everything they sell. Where do you fit and why? Remember, the use of “we’ll meet competitors’ prices” advertising is a form of flexible pricing that allows customer bargaining.