In Start Your Own Retail Business and More, the staff of Entrepreneur Media, Inc. and writer Ciree Linsenman explain ways to begin in the retail industry, whether you would like to start your own specialty food shop, gift shop, clothing store or kiosk. In this edited excerpt, the authors offer tips about pricing your products to make sure your retail success.
Your pricing strategy is very important to two reasons. To begin with, the difference between everything you pay for services or products and everything you charge customers determines your margin, which includes an immediate influence on your business’s profitability. Also, price directly affects the demand for what you need to offer-if they’re right, prices have the energy to attract customers.
To make your pricing decisions, answer these questions:
- What prices are shoppers ready to pay for the item?
- Where do you wish to be in comparison together with your competitors’ pricing: equal, above, or below?
- What’s the suggested retail price proposed by the supplier?
- What exactly are the qualities or characteristics of the item that influence a shopper’s perception of quality and value-style, be it perishable, scarcity, richness, commodity, or other?
Narrowing the decision-making process even more, give consideration to your unique pricing objectives:
- Profits on return . Establish prices that may yield a particular return-of-profit percentage on your initial investment.
- Maximum profit . Set prices made to produce optimum profit percentage you will probably earn on the products you sell.
- Sales increase . Prices should create a specified percentage upsurge in overall store sales. Usually this calls for reducing prices to market more merchandise.
- Improved cashflow . Establish short-term prices to bring increased sales dollars into your business.
In the event that you stock mostly branded goods, in that case your pricing will be largely dependant on your competition, either locally or nationally, because there aren’t usually large variations in the costs charged by the major brands to small retailers. In the end, a set of Levi’s 501 jeans may be the same product wherever it really is purchased, and it’s really readily identifiable, therefore the only comparison a person must make is on the purchase price. Alternatively, when you have products made specifically for you or if your products are mostly unbranded, then careful price planning can offer profit opportunities.
The mostly used pricing strategy retailers can employ is cost pricing. Simply stated, you calculate all of your expenses-direct and indirect-then put in a profit. The next strategy is competitive pricing. This calls for meeting the going price for similar products in your neighborhood market. The price you paid isn’t considered here. Finally, market-value pricing talks about what the marketplace will bear. This pricing is normally used for unique services or products which have few or no competing products available. You may take higher markups here.
Price points will be the specific prices you select inside your price line. They’re important because research indicates that more folks will buy something at one price than at another-even if the difference between your two is a few cents. Suppliers could help you choose the best price points. For instance, should you sell something for $12.95 or $13.50? Stick with the lower price provided that an adequate gross profit and store image could be maintained.
Applying these three pricing principles will help you reach your business goals:
1. Divide your price lines into three zones: prestige, popular, and competitive . The prestige price zone may be the one near the top of the line which will enhance the image of your store and improve the remaining line, however, not chase customers away. The favorite zone is in the centre, where most purchases are created. The competitive zone reaches the bottom, where you may price an item only to contend with another store located nearby. All prices in a line can fall into these zones.
2. Look for merchandise that will match your predetermined price lines and points. Savvy buyers are specific with their vendors. (“Have you got a silk sweater set that I could retail at $39.95 and get my regular markup?”) Such a buyer knows exactly what will attract customers under market conditions. Price predetermination is a self-disciplinary skill you’ll want to obtain. Setting specific price points prior to going to vendors will keep a fresh entrepreneur from getting started with the incorrect inventory.
3. Take care not to lock yourself into fixed lines and price points. There are plenty of reasons price lines should be adjusted upward and downward and price points changed. Stay up to date with fiscal conditions, consumer buying habits, as well as your competition in every channels.
The difference between your invoice cost and the initial retail price may be the initial markup. Maintained markup may be the difference between your invoice cost and retail sale. Maintained markup differs from initial markup by the quantity of any reductions.
Most astute retailers depend on the retail markup approach because it’s an instant and useful way to see if something is profitable that you carry. However, retail enterprises that sell custom-made items or have direct labor could be better off calculating their markups on the price basis. If something costs $9.75 wholesale, and you keystone it (double the expense of goods), you’ll sell it for $19.50. Your markup percentage, predicated on cost, is completely ($9.75 divided by $9.75 times 100). Your markup percentage, predicated on retail value, is 50 percent ($9.75 divided by $19.50 times 100). Bakeries, computer consultants, appliance repair shops, embroidery businesses, and so on usually utilize the cost approach.
There are numerous practices retailers follow with regards to markup. The approaches introduced here provides some insight in to the problems and possibilities you will come across.
In the event that you buy something for $5 and sell it for $10, you’ve taken a keystone markup. Small, less sophisticated merchants utilize this simple method. However, this process doesn’t enable individual markup selection and frequently ignores what competitors are doing with identical merchandise. This technique also doesn’t take into account the realities of retailing that lessen your margins, such as for example selling articles reduced to lower-than-retail prices, damaged merchandise, employee discounts, and shoplifting.
Particular markup percentages are usual and customary in several trade areas. For instance, the original markup for hardware is 40 percent of the retail price. For jewelry, the markup range could be 400 to 800 percent. Those that follow the principle of trade acceptance wish to be competitive with others in the trade and do not analyze singular items in determining markup.
Still other retailers believe it is best to choose the highest price for just about any item so long as you don’t drive customers away. Advocates of the theory usually focus on items which are unfamiliar to customers rather than handled by competitors. They’re guided by regulations of supply and demand, keeping prices high given that demand is high. Several retailers would prefer to sell less at higher prices than more at lower prices. Does your business concept match this model, or would another markup approach be better?
The good-buy theory is a favorite one since it rewards good buying and will improve the store’s reputation if used well. You can raise the markup on an unusually great deal and still offer your visitors a good deal when you’ve scooped your competition.
Another approach may be the high-start/quick-drop-back position. Retailers using this process are looking for an instantaneous reaction from the marketplace and are ready to drop back to less price to get mass distribution. They are able to legally advertise an item that was offered by a higher price is currently offered at a lower price. First-of-a-kind or first-in-the-market opportunities could be leveraged to skim buyers off the very best and quickly capture the secondary market by capitalizing quickly on consumer reactio