Category Archives: Zarb Tips

Pricing Strategy: A Small Firm Perspective – Part 5

by Joel R. Evans and Barry Berman, the Zarb School of Business

This is the fifth in our series of six columns on hints for price-setting by small firms. How would you respond to these questions?

  • How do you use prices in competing with a larger firm? One of the most common myths in retailing is that small firms can never enter into price competition with the Amazons and Home Depots of the world. While it is true that small firms will generally have a tougher time if they try to compete on price across the board (due to the economies of scale of the discount chains), they can do so if they run sales or offer regular savings on selected items. By focusing on special prices for 10  to 25 noticeable items, small firms can highlight that they are viable options for their shoppers and attract customer traffic. This works best if a firm runs specials on different items than those featured by the large chains. Also, small firms may have a major advantage over these chains: The latter often often need some type of upper management approval to offer sales and individual outlets may not have the flexibility to match local firms.
  • Have you formed a buying group (cooperative) with other small firms to get better terms on your purchases? Large firms can get good terms from suppliers and make special requests of them because of the buying power they wield due to the volume of business that they do with the suppliers. Small firms can gain in their own dealings with the suppliers by forming buying groups; this will then enable the firms to account for substantial dollar purchases and lead to better terms. Buying groups are common for hardware, furniture, appliances, groceries, and consumer electronics. Check with your own trade association for further information — and be sure that forming a buying group is legal.
  • Do you use odd prices ($59.95) rather than even prices ($60)? Although the impact of odd pricing on customer behavior may be overrated (after all, most people do not consider a nickel off to be much of a bargain), there is one significant reason to use this practice: Consumers are more likely to believe that a firm plans prices very carefully and works hard to keep the prices as low as possible.
  • When you take a physical inventory, how do you compute the value of the merchandise remaining in stock? The prices set for the merchandise remaining in stock (after a selling season or before a reorder is placed) should have some relation to the value placed on that merchandise. For example, if a firm knows the value of an item in inventory is $30 at cost and that firm wants a 50 percent markup at retail, the selling price would be $60. The computation is easy if merchandise costs are stable. If they are not, the firm should learn about the retail method of inventory planning (which is based on the average of merchandise costs, depending on the quantity bought at each cost level) and apply this concept. Several computer software programs are available to aid in this process.
  • Do you understand the difference between an initial markup and a maintained markup? Do you use these concepts in setting prices? Initial markups often need to be higher than maintained markups if a firm is to meet revenue and profit goals. Thus, an initial markup for an item must reflect the fact that during a selling season there will be shrinkage, breakage, employee discounts, and end-of-season markdowns. A maintained markup represents the weighted average markup for an item, which is computed as: (total actual revenues received – the cost of goods sold)/total actual revenues received. A firm will make a serious mistake if beginning-of-season prices represent the average prices sought for the entire selling season.

 

Pricing Strategy: A Small Firm Perspective – Part 4

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.

 

Pricing Strategy: A Small Firm Perspective – Part 3

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.

 

Pricing Strategy: A Small Firm Perspective – Part 2

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:
    1. 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.
    2. Suppliers should provide average markup data for specific products.
    3. 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.
    4. 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!

 

Pricing Strategy: A Small Firm Perspective – Part 1

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.

 

Good Analysis May Require Small Data, Too

Over the past few years, many universities, companies, and analytics experts have become greatly enamored with “big data,” now that such data are  easier to collect and analyze. Nonetheless, there still remain many instances when “small data” can be quite useful.

Consider these observations from Jessica Stillman, writing for Inc.:

“Ask Google how many people are searching for the term ‘big data’ and you’ll get a graph that resembles a steep mountainside. The concept has become incredibly hot over the last few years and it shows no signs of cooling anytime soon. And why not? Every day, our devices spew out an incredible amount of data on our behavior, preferences, and relationships. What could be wrong with our newfound obsession with combing through numbers for profit-boosting insights and previously unnoticed correlations?”

“The trouble according to Martin Lindstrom, author of Small Data: The Tiny Clues That Uncover Huge Trends, is when we overuse data to the point that we forget to actually talk to people. In an interview with Knowledge@Wharton, Lindstrom argues that what he terms ‘small data,’ i.e. face-to-face conversations with actual, real-life customers often in their own homes, is a more reliable source of great business ideas than massive databases and sophisticated number crunching. ‘I think it’s fair to say if you take the top 100 biggest innovations of our time, perhaps around 60 percent to 65 percent are really based on Small Data,’ Lindstrom claims, citing breakthroughs ranging from the idea for Snapchat to the resurgence of Lego as examples of the fruits of small data.”

Click the clever image to read more from Stillman.

CREDIT: Getty Images

 

Zarb Professor Interviewed on Database Marketing

This television interview of Hofstra University’s Professor Joel Evans (from the Zarb School of Business) recently appeared on Fios1’s Money & Main$treet program. The interview was conducted by host Giovanna Drpic. It deals with several aspects of database marketing — from a small firm perspective. Database marketing can be a great aid to company success!