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A Practical Look At Setting Prices In Your Retail Store

By Ashley Hart

Republish: EasyPublish™
Published: 11Feb2012
Word count: 1553
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There are several factors that affect your retail store's profitability. For example, your sales staff's effectiveness in interacting with customers plays a significant role in encouraging repeat sales; your management of inventory and cash flow is similarly critical; and stocking your floors with products your customers want to buy is imperative in gaining their loyalty. Another aspect of a successful retail operation is the strategy used to set prices. The right approach can improve short and long-term profits, clearing the way for future growth. The wrong approach can deliver dismal results that jeopardize the business and put you in a position of looking at business liquidation sales.

This article will describe several pricing strategies that can be applied to your store's merchandise. Our goal is not to highlight one method as "better" or "more suitable" than another. Instead, we'll provide an overview of the various pricing schemes from which to choose.

Relying On Direction From Your Vendors

Manufacturers often suggest prices at which retailers should sell their items (i.e. MSRP). The purpose is to establish a pricing standard across a wide retailer base. This is done with the aim of preventing stores from engaging in price wars that reduce the perceived value of the products. Retailers usually have the option of adhering to these suggestions, or setting alternative prices. In some cases, store owners will agree to recognize the MSRP, and only price products lower when marking them down to close out the inventory.

In some cases, manufacturers impose a minimum price below which the retailer is prohibited from going. This is called a minimum advertised price policy. When imposed, the manufacturer will often extend advertising funds on the condition that the retailer comply with the policy.

The advantage to this pricing strategy is its simplicity. The independent merchant does not need to make pricing decisions. The drawback is that it limits the store owner's flexibility.

Setting A Price Based On A Markup

This is one of the most common pricing strategies used by small retailers. It is relatively simple, and can be performed using two methods. The first approach is to add a dollar amount to the price that reflects a predetermined margin for the retailer. For example, suppose you are pricing an item that costs $80, and wish to earn a 65 percent margin (or $52). You would price the product at $132 (or, $80 plus $52).

The second approach is a bit more complex. As with the previous method, the retailer aims to calculate a price that reflects a given margin. However, the process of doing so is different: the net earnings are divided by the final price to arrive at the margin. For example, suppose the retailer wants to earn a 60 percent margin on an item that cost $20. She begins by using an end price of $50. The net earnings per sale are $30 ($50 less $20). The resulting margin is 60 percent (or, $30 divided by $50).

Watching The Prices Set By Other Retailers

Another method is to set prices based on those used by competing retailers. For example, the store owner may choose to undercut her competitors by lowering her prices. If she is able to secure better terms from her vendors than competing retailers are able to secure from their vendors, this strategy can prove successful.

The independent merchant may also set prices above those of her competitors. This is done to appeal to customers who care about the status of owning a given product. An example of this pricing method, called premium pricing, can be observed with Rolex watches.

What Prices Trigger A Psychological Response?

Many retailers apply prices that are believed to have a psychological effect on customers. The most common approach is to round down a whole number so that it includes cents. An example would be to round down $40 to $39.95. This is thought to prompt a response from shoppers, making them more likely to purchase the item.

There are several additional pricing strategies that can be used to maximize your retail business's revenue and profit. Those described above represent the most common among them.

Learn more about business liquidation sales at www.gawrightsales.com.

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