Although it seems to many that there is nothing difficult in retail trade, and it is enough just to find a supplier that offers a cheaper product and sell it at a higher price. This “strategy” is suitable for a village kiosk, but not for a store, the owner of which in the long term wants to see himself as the owner of a chain of outlets.
This article will help you understand what a pricing strategy (PS) is, what pricing methods and strategies exist, and how to choose the most appropriate one.
What it is?
SP is a set of factors and methods that are advisable to use when setting prices for products.
Most often, differential SCs are used, which are developed taking into account the heterogeneity of consumer categories and the possibility of retailing the same product at different prices.
SC can be developed:
- taking into account costs;
- taking into account the demand;
- taking into account competitors.
In the first case, the store decides the amount of profit it plans to receive and, based on this, sets an acceptable minimum price for itself. If you choose this option, then you need to sum up the operating expenses and the cost of goods from the assortment, and add the amount of the desired profit to the resulting amount.
If a pricing is chosen that is focused on the demand of the target audience, then it is carried out depending on the wishes of buyers, identifying them in the course of marketing research. In particular, you should define a “price ceiling”, i.e. the maximum amount acceptable to buyers as payment for a specific product.
The choice of competitive pricing involves bringing them in line with competitors’ prices.
In practice, when choosing a strategy, sellers try to combine all the listed approaches, so it is better to study them together.
One of the keys to the success of retail at all times has been the ability to manipulate the minds of people. At the moment, methods such as prestigious pricing and the association of the cost of a product with its quality are actively used. The first option is used when the seller is sure that buyers will not want to buy goods if they consider them too cheap, since they consider this a sign of poor quality. The second option works well if competing products are difficult to compare on criteria other than cost.
It is no secret that one and the same product can be of different quality, depending, for example, on the manufacturer. For certain price regulation, then you can use the pricing scale method. To do this, first determine the maximum and minimum price levels for each type of goods, and then set a limited number of price levels within this range.
To establish a price, the product must first be subdivided into several categories, for example, 3: “good”, “very good” and “best”. Then, for each type of product, you will need to set a specific price range and, based on this, assign them to each specific product.
This pricing option is beneficial for both buyers and retailers. It allows the consumer to more easily understand the quality of the goods, and the sellers to plan their assortment based on the financial capabilities of the price audience. In addition, by applying this method, you will be able to more consciously choose suppliers, weeding out those who offer products that do not match your pricing scale. This way, your store’s shelves will not end up with out-of-range items, and such a deliberate reduction in assortment will lead to an increase in inventory turnover rate.
Disadvantages of a price scale pricing strategy
Experts cite 4 disadvantages of this retail pricing strategy:
- too long intervals, which forces the consumer to make a choice in favor of a more expensive product (for example, a difference of 2 thousand rubles may force him to choose a lower quality, but cheaper option);
- you will have to negotiate prices for complementary product categories;
- you may have difficulties due to inflation, to overcome which you will have to either exclude cheap goods from the assortment or reduce markups;
- you will have to make proportionate markdowns in order to keep the price ranges at the same level.
Establishing Adjusted Prices
Price adjustment allows sellers to use it as an adaptive mechanism, adjusting to factors such as competition, seasonal changes and other patterns of demand, petty theft and the cost of goods offered.
You have two options for setting the price by adjusting it: markdown and additional markup.
The markdown from the initial retail price is carried out in order to bring it in line with a lower price for the same product from a competitor, to adapt to an excess of stocks, to get rid of things that have lost their presentation due to a long presence on the shelves, to increase the flow of buyers to the outlet …
It is also possible to use an additional mark-up in excess of the original one. It is used if the demand for a particular product turned out to be much higher than expected or the costs increased sharply. Note that fierce competition in the retail space makes it impractical to introduce additional markups, as a large number of customers could be lost as a result of such a pricing strategy.
The choice of a corrective strategy can also be in the form of employee discounts. By using this method, you will raise staff morale and help improve their performance. All this will certainly affect the growth in the level of sales and profitability of the establishment.
The essence of this strategy lies in the intensive advertising and sale of some products from the assortment of your outlet at a price at which your profit turns out to be less than usual. The goal is to increase the influx of buyers and, in addition to discounted goods, to sell others, but at regular prices. As practice shows, with such a tactic, the attendance of the institution and its profit significantly increases.
One of the types of leadership pricing is bait advertising, when a product advertised as being sold at a reduced price does not appear in the store at all, and customers are offered to buy a more expensive analogue instead of the recently finished one.
Leadership pricing strategies are recommended if you have hot-selling nationwide brands with high inventory turnover in your inventory. In this case, potential buyers, having once bought them in your store at a price lower than that of competitors, will come to your establishment again and again, purchasing other products, wardrobe items, etc.
There are 2 types of “fair” leadership pricing strategies: unprofitable (prices for a particular product are set below purchase prices) and sales at prices higher than cost, but lower than most competitors.
Other types of pricing: regressive strategies
If the traditional ways of increasing the profitability of the retail business do not work, then you can try to increase sales by introducing significant discounts for the purchase of several packages of washing powder, boxes of chocolates, pairs of tights, etc., or if they buy several items in a set.
The regressive method is effective because:
- it will allow you to sell more units of a specific product;
- you can get rid of not in demand, or goods whose sales season is already running out;
- by selling goods in sets, you will increase the sales volume of related components of the assortment of your establishment.
In Russia, when talking about methods of setting prices, they often forget about flexible methods, which imply giving the consumer the opportunity to bargain. Let’s make a reservation right away that this method is only suitable for the sale of very expensive goods, for example, for jewelry stores, car dealerships, etc. With this approach, which is actively used in the United States and in some other countries, companies do not announce final prices. Their staff skillfully manipulates the mind of the client, convincing them that such a chance to buy a very expensive item at a lower price cannot be missed, but in the end the goods are sold for an amount that suits the seller.
The essence of this strategy is that you set retail prices below a certain “round” value in rubles (99, 999, 499 rubles or so on). The calculation here assumes that a consumer who comes to your store with a firm intention to purchase the necessary product at a price not exceeding 1,000 rubles, will perceive the cost of 999 rubles. as quite acceptable.
Now you know the most famous and effective pricing strategies. We hope they will help you achieve good results in your retail business.