Retail pricing for the goods you sell is one of the most important things you’ll do as a business owner. It is also one of the hardest.
Set the price too low and you are leaving money on the table, too high and sales suffer. As a Point of Sale Specialist here at ShopKeep, I’ve helped hundreds of new merchants with this very problem. Using their experience, I’ve compiled a quick “Dos and Don’ts” list to point you in the right direction and show how POS Software can help you make smart, data-led decisions.
Let’s start with the don’ts…
Don’t fail to consider your profit
This is a common pitfall among new business owners. It may even feel good while it’s happening. Your store is packed, there’s a line out the door and inventory is flying off the shelf. The problem? Your business isn’t actually making any real money. Suppliers LOVE merchants like this. They move a ton of product and the supplier makes a killing. Except you aren’t the supplier. Your job is to keep your lights on, both at the shop and at home. Making 10 cents of profit on a $10 item isn’t going to do either. That’s why learning the an effective retail pricing strategy so crucial to your business. Don’t forget to think of yourself when setting prices. It’s important to be sure you are actually making money on what you sell.
Don’t be too stubborn to take a loss
This is the flip side of the profit-taking coin. Picture this: you go out and invest a heap of money in a new inventory line. You’re super excited to get it on the shelves, knowing that it’s gonna sell out quickly. After all, you love lime green lycra jumpsuits, why shouldn’t everyone else? Then the days and weeks start rolling past and the product just isn’t selling. It’s tempting to wait it out, with your fingers crossed that the inventory will sell to the ‘right type of buyer’, eventually at some mythical point in the future. The problem here? That big stack of jumpsuits isn’t just a sunk inventory cost, it’s an opportunity cost. It’s taking up space in your stock room and on your shop floor that could be used to push profitable items that your customers might actually want. The savvy business owner will liquidate this inventory, either through a clearance sale or donation to a local charity. This can provide cash to spend on new inventory, and will at least free up square footage that they can devote to new inventory that will sell. And if you run a solidly profitable business over the course of the year, you’ll find that this kind of loss can be absorbed reasonably easily. There are several ways you can ‘test and learn’ with your stock to avoid this initial risk in the first place. In our founder has written a course on this subject called Lean Retail 101 which I highly recommend.
Don’t set a standard markup/profit margin across all items
It is easy to get overwhelmed and say, “To heck with it, I will just sell everything for twice what I paid for it!’ But regardless of what you sell, this retail pricing strategy will lead you astray. For example, many restaurants require big markups on menu items – often triple the cost of food – and it isn’t uncommon for grocers to make only a few cents profit on a gallon of milk. A restaurant that tries to apply one, across-the-board markup will either be packed but not profitable, or empty and not profitable. Pricing is a nuanced game, so if you’re looking to create more general rules about markups, it’s worth breaking out your products into different departments and categories at the very least, and setting rules at that level. I know this can seem like a big deal and extremely complicated. That’s because it is, and it’s one of the most important decisions you’ll make for your business.
Don’t discount too deeply
Pay close attention to this retail pricing fact. Did you know that if you lower your prices by 10%, you need to sell 33% more to hit the same revenue numbers? And if you discount 20%, you have to sell twice as many items?! As a general principle it’s always easier to price high and then reduce if necessary, so give yourself wiggle room on your discounting and a fighting chance of turning a profit by being slow to offer aggressive discounting (unless your going for a purposeful loss-leader,(more on which later). One of the best things about modern POS Software is that you can get almost immediate feedback on the performance of this kind of discounting campaign. Stay close to the sales numbers and you’ll run a more profitable business in the long run. There are a lot of factors that should contribute into how you set prices for your items. Continue reading, we’ll discuss some of them below…
And now for the dos…
Do take your competition into account
This is probably the easiest “do” on the list. Take a walk or get in your car and visit your competition. Take a note of the price at which they are selling comparable items. If your competitor has been around for awhile, they are probably doing something right when it comes to price. There are two options once you have this information: you can undercut your competitor if you can afford to (hint: you probably can’t), or charge a premium price and convince your customers why your products, environment, service, and general brand are superior. (Who am I kidding, of course your products are superior!) Of course, great businesses are able to use a combination of these approaches, more on that below.
Do take Sales/Square Foot into account
You’ve probably heard this term thrown around before. Sales per square foot is how much money you make for the space you occupy. This is something to think about in setting prices for items. Could three small items fit in the same space as one large item? If so, I would want to make at least the same profit on the large item as I do on three small items. Otherwise I’m not using that space as effectively as I can, regardless of how well the large product is selling. By the same token, this doesn’t mean to cram as much inventory onto your sales floor as you can unless you want to look like a dollar store. Set the area that you want to devote to showcasing your inventory and take product sizes into account when pricing. If you can’t generate more money in profit from a larger item, ask yourself if it still makes sense to carry it. Remember, Apple have set a new standard when it comes to space in retail, so if you’re offering a premium product, follow their lead and give it some breathing room, so it can really shine.
Do recognize the value of a loss leader
A loss leader is a product you purposely don’t make money on to get people into the store with the expectation that they will buy items you do make money on. For example, many people know what they can expect to pay for a gallon of milk or a loaf of bread at the grocer. Not many people know off hand what a good price is for other items on their list. A savvy business owner could price milk below his/her customers expectation and mark up other items slightly. The owner would lose money on milk and bread, but they would get people into the store who will buy other items in addition to bread milk. You can employ this method with your products. What is the most common product that you and your competitors all carry? Can you afford to drop your price? This kind of initiative can work especially well when use for a defined period of time, for example you could can offer a loss-leading price on beer in the run up to super bowl with the hope of driving customers to your store and selling lots of other related items (spirits, chip, dips, giant foam fingers, etc) at the appropriate, profitable markup. The great thing is you can market this offer online, ‘Beers 50% off this weekend. Just tell your cashier the special code SUPERBEER’ and then set a special discount on your POS Software. That way you’ll be able to track exactly how much business the loss-leader promotion generated.
Do use data to find the most profitable price
Your Point of Sale Software should be able to tell you how much you are selling of a given product over a certain day/week/month. It should also allow you to change pricing relatively easily. Use this! If you have an item that you can’t keep on your shelves, raise the price by 5% for a few weeks to generate more profit. (Provided this isn’t a loss leader) Then, pull the data from your Point of Sale software to see how the price change affected sales. If sales are unchanged, you can raise the price a bit higher. If sales have fallen but not by enough that you are losing profit, you might have found the sweet spot. If sales plummeted you can always lower the price back down. This process can be done nearly any item you carry. Economists love to talk about how the perfect price is the intersection of supply and demand. Modern POS Software gives you the ability to find exactly where that intersection is – and how it varies across the year – and earn as much profit as you can.
Sadly, there is no magic bullet when it comes to retail pricing, but by taking a data led approach and following these dos and don’ts you can get a head-start on the competition. We’d love to hear more about your pricing strategies in the comments below.