Pricing products can be one of the harder parts of running a retail store, but it’s one of the most important. Global consulting firm McKinsey estimates that just a 1% price increase can improve the bottom line by 8% in large companies (costs and sales constant). The impact is probably even bigger in smaller companies, where margins and costs can be tighter.
Every store has a different approach to pricing. One that works well in your industry or location may not work for another store. We’ve talked with thousands of small retailers across three continents and we think that the tips in this guide will help you find the pricing strategy that works best for your store. Ready? Let’s begin.
Start with the bottom line
You can get an idea of how changing your prices will affect your bottom line with this simple template. Comparing your sales to your costs will help you decide if a price change is a good idea.
Some of your biggest costs will be rent, wages, and freight. Keep in mind that you might start selling more or less of something if you change its price.
Common ways to price
Three common ways to set prices are:
MSRP, MAT, MAP, etc. – Prices suggested or set by manufacturers
Margins or markups – Based on personal or industry benchmarks
Demand – What customers will pay
If your manufacturer sets prices (as with MAT or MAP) your job is done and you can focus on competing in other areas besides price (that’s a good thing!) It’s when products don’t have a manufacturer-required price that you need to get strategic.
With so many buying options available to your customers, using more than one of these pricing strategies will help keep your store competitive. The above three methods are just the tip of the iceberg, so let’s dig a little deeper.
Look at your closest competitors (and think like your customers)
Besides visiting your competitors’ stores or websites, there are a variety of tools you can use to survey their prices. One handy option is the ShopSavvy app, which scans product barcodes using your smartphone camera and shows you prices from local, national, and online stores. (But remember that online and in-store prices are sometimes different).
Now that you’re armed with your competitors’ pricing info, ask yourself these questions:
What keeps our customers coming back? What’s our competitive advantage?
Amazon and Walmart can easily compete with low prices because of their size. But besides price, customers value the things smaller stores do best, like product selection, service, marketing, convenience, or any number of things. They might prefer your store because they don’t like waiting for delivery or they want to chat with your employees about their purchase. This is your competitive advantage. Remember, it’s not pricing that drives sales, but what sets you apart from your local, national, and online competitors.
Can we match our competitors’ prices or even beat them?
That being said, maybe your costs are low. It might be because of a good relationship with a supplier or efficient operations. If this is your competitive advantage, you might be able to compete with lower prices, so capitalize on it!
Different products might benefit from different pricing strategies. For example, you wouldn’t be able to get away with a 200% markup on Coke, but for product that’s hard to get, like Jones Strawberry and Lime, you might. Also, for small items, your customers probably care less about price and more about the convenience of getting it at your store. But for more expensive products that are easy to ship, like a power drill, they would probably be more willing to wait for shipping to save a few dollars. In the end, finding out how price-sensitive your customers are for different products can make your store even more competitive.
Key Value Items
One product-specific pricing strategy used by the big stores that you can put into practice today is Key Value Items (KVI) pricing. KVIs are the products that your customers value most, and it’s usually only a small handful. But 50% of your customers’ perception of value comes from how these items are priced (think bananas and bread in the supermarket). If their prices go up, customers will start to see your store as more expensive overall. If their prices go down, customers will start to see your store as less expensive overall. Such perception changes take place over long periods of time (months or years).
You probably already know what your KVIs are. They see an increase in sales when their prices go down and a decrease in sales when their prices go up. Revenue Analytics recommends keeping the prices on these products low. For products that respond less to price changes, you have more flexibility on pricing.
Don’t forget about promotions
Fun, valuable promotions could give your prices just the boost they need. Examples of popular promotions are buy-some get-some free or bundle discounts. Some stores even give customers small items for free just for coming in or making a purchase. John at Fence Depot & More in Cornwall, Canada, works with manufacturers to hold drawings that his customers love. For example, 1 in 100 people who buy a hunting brand’s hat will win a a free bow. While promotions might lower your margins, they can drive foot traffic and increase customer loyalty.
Don’t be afraid to change your strategy
Changing your prices and how your customer perceives your pricing takes patience and concerted effort. Raising your price levels could mean increasing prices on all but your non-KVIs and strengthening your competitive advantage, whether it’s your great service, expertise, in-store experience, marketing, or unique selection. But the only way to find the right pricing strategy for your store is to test, test, test. So take a deep breath and have confidence, but don’t be afraid to change your strategy after a few months if you’re not seeing the results you want.
At the beginning, you can experiment by putting various products on sale. You’ll be able to see what has the biggest impact on your sales before making the decision to permanently change the price. Another approach is to test prices in one department and expand to the rest of the store when you find something that works. That’s not something the big-box stores have the flexibility to do!