Your Profit Is In Your Pricing – Are You Paying Attention?
Originally posted January 2014.
How do you set your retails? Seems like a pretty simple question right?
I think you might be amazed at the responses you get when you ask that question in the company of your buyers, pricing coordinators, or whomever, and how shocked you will be when you really start to understand how little time and effort is placed in the one task that will drive most of your profitability – the setting of your retails.
Having been on the road a bit lately, and having been around not only the buyers I work with, but listening in on many other buyers conversations, or just initiating conversations with others around me, I am convinced that the amount of time spent on really understanding pricing strategies and really grasping the understanding of how important it is, is lacking.
The typical approach to pricing these days seems to fall loosely into four ways of thinking – more or less:
– I set price based on a margin expectation established by upper management
– I set price based on suggested retails set by the vendor – recommended msrp
– I set price based on what my competitors are doing with their pricing
– I set price based on the cost of the item
Not one of the above approaches will lead to a maximization of pricing profitability because none of them focus on what is really critical when pricing; what is your consumer willing to pay for items in your stores in general, and furthermore, are their regional differences in pricing that your consumers are willing to accept so that you may be able to have a tiered pricing strategy that reflects these regional differences if they exist.
So why don’t we price for profitability. Maybe we’re lazy. Maybe we don’t have the tools that show us what others are priced at. Could be that we are working with systems that don’t allow buyers to easily price by region. Maybe we don’t know our consumer. Maybe there is a fear that with the internet, there is this idea that everyone knows everyone’s prices so you don’t want to be seen as non-competitive. Or maybe it’s just that there is a real lack of understanding of how pricing and profits truly interact.
Many buyers don’t spend the time to do the math. I really believe that they don’t understand the simple ways that pricing impacts profits. Let me expand.
You buy something for $1.00 and sell it for $2.00. You think that is a good margin (it can be but it could be better potentially) and you are in “the game” with the market in general: your competition is priced that way or that is what the msrp is suggested to be.
You sell 10 items a week which achieves a top line of $20 and a profit of $10 on these sales.
If you can go to $2.29 per item and not impact your units, so still sell 10 units per week, your topline just went to $22.90 and your bottom went to $12.90. That is a HUGE ROI! You increased your margin from 50% to 56.3% and you increased your margin dollars by over 22%! — That should make a few folks happy I would think.
The above will work with “blind items”; those items that maybe we/consumers really don’t know the price of. We all carry a tonne of product that falls into that space. I am highlighting this for those who think I am saying to price kvi (known value items) at non competitive retails. Ie: if you are a grocer, a true grocer, you may want to make sure your milk and eggs are not out of whack with your retail competitors, as those items, in your stores, really have a tiny range of accepted pricing deltas. People will know, within a few percentage points, what s an acceptable retail. However, if you are drug or convenience, you may have some room to move into very different retails on these items as I, the typical consumer, does not expect retailers like you to be that competitive in these commodities anyway. I buy items like that from you for convenience.
No, what I am talking about is building an understanding of those items that are blind, or those items that are not core to your business, and thus allow you some latitude in pricing so that you can pocket better profits.
Now for those who say that this idea is a “sales killer” move, as we will lose sales because we are too high now – I’ll agree with you – sort of…
Let’s say we take a 20% hit in units. We priced ourselves a little too high and have managed to anger a good chunk of people. We now only sell 8 units which now gives is a topline of only $18.32 and a bottom line of $10.32.
That is still more profitable than the 10 unit sell at $2.00 retail. Gives us the 56% return vs. the 50%, and an increase in margin dollars of over 3%. We made more money and we give ourselves a better ROI; which is really the only reason we do this!
Still scared of the unit drop? Panicked about traffic? Try a $2.19 retail. Maybe you lose 10% of your units. You still deliver a $10.71 profit on a $19.71 topline delivering a healthy 54% vs. 50% return and a 6.6% increase in margin dollars!
My point is, if we learn focus on pricing as a means to increase profits and not just as an exercise to set a retail so that we can move on to the next buy, we will reap the benefits of a much healthier bottom line even if we affect the topline slightly. And that is we even affect the topline at all. I believe in most instances no one will see the price changes and we will not have a degradation in units thus not hurting topline dollars negatively at all.
We may not want to go crazy and enact a pricing policy like this chain wide if our stores are spread out into many regions. Chains in Canada and the States may have stores in many different markets. The West can support pricing that the East can’t and vice versa. Some cities, or parts of same cities, could support different prices. There are many differences built into the regions that must be taken into account. Do the research and see if you can find ways to grab some extra because of regional disparities.
This idea of really watching how we manage retail pricing applies to sale pricing as well. Do the math that we did above. Do you need to be as aggressive in your pricing or are you giving away your profits?
Again, I would be very cautious about pricing kvi’s this way, although it can be done, you really need to know your consumer and how she shops you.
Having said that, most of what we carry can have a pricing strategy like this, and it can be enacted quickly and effectively, at the very least in a few categories for sure.
Maybe it’s worth it to you and your company, maybe it’s not. That’s for you to decide. At the end of the day – it’s only money… I just hate leaving extra money on the table 😉
Ciao for now @kootenayborn