Pricing is about assigning a fair value for not just a product but for all the services that come with it too. It’s about finding the right balance to become more profitable.
Anytime I have discussions with my retail clients about the key performance areas of business profitability the chat generally comes down to four factors that need to be measured and monitored closely: stock-turn, quantity of sales, margins and average retail.
There are many factors that can affect these four areas alone but if there is any area of a business that is the quickest and easiest to adjust in order to improve the bottom line, it would be price. It would also be the area of business that store owners have the most reservations about changing.
Increase in profit
The effect of this is obviously huge. If stores work on a 100 per cent mark-up and sell a $50 item for $100 then they profit $50. If those same stores increase the price of that item by 10 per cent, there is a corresponding increase in the profit of that item from $50 to $60. That’s a 20 per cent increase in profit for no increase in costs!
Now apply this example to the bottom line after expenses. If after allowing for fixed costs like rent and wages a business generally makes $10 per item or 10 per cent profit for every $100 of sales, then that business has just added another $10 to the per-item bottom line, doubling profitability from a 10 per cent increase in sales.
This is a simplistic view and obviously prices can’t just be increased infinitely without affecting demand but the above example illustrates the point. A business would have to lose a few customers in order to be worse off from raising prices by 10 per cent – a 10 per cent drop in customers, for example, would still leave the business better off after the increase.
The question is knowing what price increase is necessary to reach the level of demand resistance – that point where any further increase becomes detrimental to the business and causes a downturn in sales. This is a difficult issue but one could argue that few businesses ever reach this point because they encounter their own mental preconceptions long before they ever reach their customer barriers.
Store owners often are stigmatised about increasing prices – they feel they’ll be accused of greed and of ripping people off – but these preconceptions are not based on reality. Most retailers who are asked why anyone should shop with them will cite their exceptional customer service or their wide array of products yet they still fail to place a proper value on these things despite viewing them as advantages that customers can’t get anywhere else. Where is the value in that?
Retailers use a ‘cost plus’ mentality on the prices they set yet take no account of the extra value that is provided between receiving goods in-store and on selling those goods to the customer. By not adding in that extra value, they are making the same offer to the customer as a competitor who sells the exact same items at the same price but without the benefits of excellent service.
Building wealth
Stores that fail to factor these unique elements into their prices don’t believe their own value propositions and are not prepared to back it up. Building wealth and income is not a dirty word. The more value a store can provide people, then the more profitable that store will become.
If retailers don’t want to increase prices, it may be because they don’t feel deep down as though they have any extra value to offer their customers. If that’s the case then they need to look at how they can bring more value to the marketplace so that they can charge more.
Retailers who spend more time working on their value propositions and less time worrying about the pricing of their competitors will move their businesses forward quicker than ever before.