As retailers have varying product and service offers, providing customers with choice in product quality, appearance and functionality, it is understandable that approaches to pricing differ. It would be naïve to assume however that all retail pricing is based upon a cost of goods sold calculation with a consistently applied mark-up that provides for business profit.
Interestingly pricing is often a highly strategic decision, at times relatively unrelated to the cost of goods. Some retailers running a volume business survive on small margins and many sales, others employ luxury pricing with significant margins on low volume. Some incredibly fortunate businesses benefit from volume sales at luxury pricing. It all depends on the sector and the business model.
To learn how to steer your success as a team leader, the ARA Retail Institute runs multiple workshops on merchandising and retail buying. Join the ARA Retail Institute in their latest workshop which looks into planning product development.
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Store pricing policy
Pricing is a big consideration for retailers because all other elements of the retail strategy are impacted by it. As a rule of thumb retailers develop their pricing policy in order to get the maximum sale price their products.
Their ability to do so is determined by a handful of major influences:
- Customer
- What customers are willing to pay for the perceived value, product desirability
- Competitors
- For commodity products competitor pricing is an important consideration as customers can easily go elsewhere for the same product
- Government
- Taxes and duties
- Manufacturers and wholesalers
- Price of products into the business are the primary cost of operations, overheads, staff salaries and wages go on top and profit margin must be applied to devise the final product price
- Not as relevant for vertically integrated retailers who manufacture and ship their own products yet they must consider internal costs of production and logistics
Factors exerting an additional influence on product pricing include supply and demand, tradition, and the degree of speciality and originality. If customers perceive a certain product is more highly desirable than another, they will generally pay a premium for that product. The challenge for retailers is how to ethically influence the perception of desirability of their product.
Pricing decisions
The following questions provide a good starting point:
- How important is price stability?
- How long do prices ideally need to be maintained?
- Do prices need to be flexible to accommodate changes in costs and customer demand?
- It is necessary for the same prices to be charged for all customers buying under the same conditions?
- It a customer’s ability to bargain a necessary element of pricing?
- Is strategic pricing an effective approach to draw customer traffic?
- It is necessary that customers be eligible for discounts for purchasing in quantity?
- Is it advantageous for pricing practices to vary by department, store or product line?
Taking the time to answer these questions can provide insight into which considerations are most important for each retailer when developing their approach to pricing. Ensuring alignment with business strategy is the key to developing an approach that both works for business and appeals to their target customer.
Impact of price on service
The level of service offered by retailers has a price. Stores that offer a high level of service have higher staff salaries and wages and higher training and development costs. Those with less of a service focus have the reverse.
This results in a direct impact of the level of service on the cost of doing business. It common then that those businesses with lower priced goods or those that compete largely on price and as such have low profit margins per sale relying instead on volume, offer less in the way of customer service than other retailers.
To put it simply there is an expectation amongst customers that:
- Stores with a premium product offer provide a high level of service
- Stores selling cheap products or products at a cheap price provide little in the way of service
This works well for most retailers but not all. Many big box retailers, particularly those selling technology and home entertainment operate in a highly competitive marketplace and often compete on price. There is a growing expectation however amongst customers, that these retailers also provide an increased level of service as a point of difference from the competition. Brands such as Apple have contributed to the expectation of great service in technology. Apple however has the benefit of selling their own product, it is highly desirable and they employ a pricing policy close to luxury pricing. They can afford to have stores with lots of well-trained staff to provide a memorable customer experience.
Retailers whose primary product is also sold by their competition are increasingly under pressure to ramp up their service to increase market share but increased service increases the cost of doing business and puts pressure on to raise prices.
It is helpful then for retailers to spend time researching product trends in order to take an approach that allows them to both meet customer expectations and be competitive in the long term.
About ARA Retail Institute
ARA Retail Institute is Australia’s leading retail training provider for both accredited and non-accredited learning programs. For more information, please visit: www.retailinstitute.org.au
