“Take Home More Profit When You Pick The Right Marketing Concept In Pricing”

 Every time we ponder over how to price a product, we’re into the hazy, frustrating area of marketing concept.

 “How much should I charge?”

 “Oh, no! Somebody else has a lower price.”

 “That guy said my price is too high. The bum. What did he mean?”

 Most merchants are rightfully concerned about their pricing. It’s an integral part of your marketing concept. Except for certain high status goods and services, customers constantly scrutinize and compare prices in businesses.

 Even if you’re a small town businessperson and you believe you have no competition in certain merchandise or services, you must maintain competitive prices and make a profit with them. You know your customer can still buy the balance of his needs from your competitor.

 In rural areas, your competitor may be 60 miles away. But nowadays you also know some customers don’t hesitate to drive 60 miles to the next town. So, we have to ask ourselves about the following:

 The one time a customer is not concerned about your prices (assuming she has the money) is when she truly wants something you have and price is no object to her.

 Do you have any of those kinds of customers?

1. Competitive price as a
marketing concept

 Prices, unless you have built-in additional value factors, must be competitive with other outlets.

 However, we seldom suggest you offer prices lower than competitors.

 Lowering prices below competitors leads to competitive price-cutting. When the price falls below a minimum profit level, no business can sustain itself. A failing business serves no one.

 But, customers must perceive that your price is competitive — including (in rural areas) places where they can shop as much as 60 miles away. Note how your prices compare, generally, with competitors – and whether or not they are competitive.

 If your prices cannot be competitive, what additional values do you offer that will justify a higher price in your customer’s mind? (Remember, being the city’s oldest, friendliest, most prestigious store is not sufficient justification!). List tangible additional values your customer perceives, if any, and plan to communicate those to customers as part of your marketing concept.

 Generally, you gain nothing by marking down new or regular merchandise loss leaders or selling for less than cost. If you do not mark down until closing out the merchandise or the season, you may lose some bargain hunters. However, you’ll make up for it with regular customers who come back because they know they’ll be treated fairly.

 Of course, this also depends on general economic conditions, which means you must be aware what competitors are doing. What is your policy here?

2. The “low price
everyday” position

 Recently, some of the more successful businesses have promoted the marketing concept of “low prices every day.” They advertise few, if any, sale events. Rather, they highlight items or groups of items and feature them with their low everyday price.

 Be warned, however, that it’s dangerous to try to change your position from a “sale event” oriented business to “low prices every day.”

 Most attempts to carry this off have been markedly unsuccessful unless you’re prepared to handle sales slippage while you establish the policy. Sears tried it several years ago and bombed miserably. Within six months after starting it, they went back to their old methods. Even after all this time, the egg on their face is still visible.

 Don’t be too concerned about Internet competitors. Remember that, as a real “brick & mortar” business, you maintain a competitive advantage over Internet purveyors because customers can see and touch your product. They don’t have to wait for delivery. They can take it home immediately.

 Internet competitors (who advertise on major media just like any other store) seem to do best with lower priced specialty products that are not seasonally sensitive and do not need to be manually inspected.

3. How price ranging helps
you sell better quality
products

 The “price ranging” concept means you inform your customer of both your lower priced and your higher priced products in your advertising and personal selling.

 This practice helps you position your business in the market against competition and to encourage sales of higher quality, higher priced products as part of your marketing mix. When a customer understands your price and grade brackets, it’s easier for her to include or exclude your business from her range of choices. “Exclude” works too because it saves you and your customer wasted time if she is not going to be a customer anyway.

 What’s the benefit to you? Customers looking for better quality tend to frequent your store if they know you have better quality products.

 When they don’t know about your better quality items, they often go to the next bigger town because they think they’ll find better products there.

 Billions of dollars worth of sales have been lost because most stores do not communicate about their better quality products. They tend to advertise only their low-end prices. Therefore, prospects come to believe the store carries no better quality products.

 It is not wrong to “price range” on the high-end or the low-end, as well as the middle. Customers are available for all three types of business. When deciding how to position your business in the market, ask these questions:

 Can you broaden your customer base with the marketing concept of price ranging?

 A certain percentage of potential customers in the area are attracted to higher priced merchandise. Others will go for the lower end.

4. Psychological tactics that
encourage customers

 One excellent method is to offer three grades in each category of product if you can.

 Psychologically, this “rule of three” gives customers the right number of choices. Two are too few and your customer feels disappointed. Four are too many which means she has a harder time deciding.

 How do you promote price ranges in your advertising?

 If you communicate that your price is neither too cheap so buyers are afraid of your quality – nor too expensive so they might feel uncomfortable if they’re short on money, your store has positioned itself as one they can safely shop.

 You communicate this idea better if you give not only the low price, but also the higher price of the range of merchandise you offer.

 With this tactic, your customer includes your business as a shopping possibility. To use price ranging, simply tell people about your lower priced items and their companion higher priced items in the same ad. For instance, “Gizmos for just $15. Gizmos with extra stabilizing legs and a guarantee for $25.”

 Notice how you simply quote price on your low end item, but include extra features and benefits that justify your higher priced companion item.

 Don’t be afraid to talk about your higher priced products. Price ranging does not scare your true prospect away. On the contrary, it actually gives her confidence your merchandise fits within her ability to pay. If it’s wrong for her, she disqualifies herself before she walks in the door.

 That means you’ll have to deal less often with unqualified prospects (tire kickers) and no customer has to be embarrassed or leave with hard feelings.

 Review how you “price range” your products both with merchandising/display signs, sales talk inside, and in advertising outside.

 To follow through in your store when you display the product, let your customer see your lower-priced product first and then the higher priced items as she moves further onto the floor.

 Your price range communicates a definite image to the customer. For instance, if your prices range from medium to high for medium to high quality merchandise, the customer receives the impression of high prices if she samples the higher grade merchandise first.

 To correct that impression, your salespeople must educate her about your total price and grade range. A customer’s attitude depends on her financial means, as well. What’s high to her may be low to someone else.

 Your price range is important in the marketing concept of your business’ merchandising. It’s even more important when you communicate it through advertising.

5. How variable or selective
pricing positions you as
a winning competitor
against discounters

 Big discounters take advantage of a common failing among smaller businesses – their propensity to price all their merchandise with the same percentage of markup.

 Discounters use “variable” or what is sometimes called “selective” pricing.

 That means they mark up frequently-shopped items a very small amount, which gets favorable reaction from customers.

 On back shelves, they mark up seldom-shopped items much more steeply. Then, they average markups to attain their desired overall gross margin.

 If you’re in competition with them and you don’t practice variable pricing, you can get caught in a “perceived” disadvantage.

 It’s this. When customers shop both stores, they see higher prices on certain items they have cross-shopped between you and your competitor. This price discrepancy reinforces customers’ belief that the discounter has lower prices.

 Yet, many times I hear the complaint from smaller merchants, “My price is actually lower than Walmart.” The terrible truth is often I find they’re right.

 To dispel the impression discounters give, adopt variable pricing if you don’t already use it. Then, shop your competitors constantly. Price your heavily shopped items competitively with discounters – and display them front and center.

 Obviously, you have to work harder but, you really can beat the discounters at their own game when you do.

 One more thing. Variable pricing is neither illegal nor immoral. It simply may be you feel uncomfortable with it. Your customers never get cheated as long as everybody pays the same price – whatever the product is marked.

6. Price lining or price zoning
puts you smack in the
middle of the market

 Another marketing concept. Some merchants use price lining or price zoning when buying and selling merchandise. It’s closely related to price ranging.

 With this method, you predetermine highest and lowest prices at which you will sell goods. Then you buy products you can sell profitably within that range. “Dollar stores” represent a classic example of this strategy – nothing over a dollar – and it works extremely well. It’s not uncommon to see Dollar Stores do $300,000 to $500,000 per year – a dollar at a time.

 Price lining or zoning, combined with correct advertising, can help you appeal to specific customer targets. When you go to market, you’ll also know which assortments and price lines you’re looking for. It saves buying time and limits inventories (which is a good thing generally).

 For instance, one of our furniture store client’s research revealed they were attracting people with higher incomes to their store. But, fewer with middle and lower middle incomes were shopping there and the store needed both.

 Management deliberately searched out quality, lower cost merchandise to mix with their higher priced goods. Then they communicated their pricing in advertising to appeal to their lower income customers. This move broadened their appeal.

 Within a few weeks, both lower and higher income customers began coming in. Think how you might use the price lining or price-zoning concept.

7. Customers buy more often
with the right price tags
and price rounding

 The way you display prices on your merchandise is another marketing concept that can affect sales. Eric Mitchell, publisher of The Pricing Advisor, 3277 Roswell Road, Atlanta, GA., gives good advice on pricing merchandise from his own research. These are just a few of Eric’s suggestions –

  • Items priced under a dollar sell very well when the price ends in 9’s like 89¢ as opposed to 87¢.
  • For items between one and ten dollars, ending in 5 is just as good as 9; for instance, $1.75 versus $1.79.
  • Above $10, Eric says to drop the 9’s and use $.25, $.50, and $.75.
  • When you are pricing above $100, he recommends that you use whole numbers, i.e., $129 and $175. You drop the zeros and no longer place 89 or 99 cents at the end of the price. Customers perceive whole number pricing with no zeros as less. And it’s easier to advertise big-ticket items without the cents on the end.

 Make a note to check your price procedures.

8. Optimum pricing helps
you sell more and
get better margins

 Suppose you have a brand new product. What’s the optimum price at which you can sell the most of this product at the most profitable price?

 This marketing concept has puzzled business owners since camels carried trinkets across trackless wastes – well before recorded history.

 Here’s the usual practice. Figure all your costs, decide what gross margin you want, add it on to the price, and then try like blazes to sell it. It’s still a shot in the dark.

 Some years ago researchers discovered that, often as not, you can price a product too low as well as too high.

 Example: An old friend, a TV commercial producer, sold TV ads in his home city for $800. His commercials were high quality & he decided he could get $8,000 each in Chicago! No sales. Too high? Wrong. Why? Chicago merchants normally paid $19,000 each. Prospects were afraid to buy. They thought his $8,000 price too low.

 Your optimum price is what your customers perceive it’s worth. It really doesn’t matter your cost for the product. If your customer perceives a product is worth $20 and you’ve priced it at $25, eventually most of it will sell for about $20 after markdowns – if you haven’t waited too long to mark it down before it loses its sales momentum altogether.

 But here’s an amazing fact. Surprisingly, customers often perceive a product is worth $25. But when you offer it for $15, those customers buy less because they think there’s something wrong with it. Or maybe in some secret mental recess, it just doesn’t feel right to them.

 The whole pricing process can be terribly frustrating. In many ways, it’s a marketing concept shrouded in a blanket of mystery.

 So, how do you price a product? There are pricing specialists who go through a long research process to recommend a price. They charge as much as $15,000 dollars for this service.

 However, a man named Ken Evoy has just come up with a new way to test prices with the help of the Internet. When you click here, you can learn about his Perfect Price. Ken says you can get a close estimate of the optimum price (the one more people are willing to pay and that will sell more products) you should charge.

 The testing takes less than an hour . . .

 . . .and it costs less than $100 per product to find out.

9. How you cut prices during
sale events can make or
break you

 We suggest you never significantly cut prices across the board in every category.

 Often, merchants reveal they open with 20% or 25% discounts across the board on all items during sales.

 According to an article in Installation News magazine, when your gross margin (gross profit) runs 25%, and you reduce all prices just 5%, you must handle 25% more merchandise and do 10% more gross volume to get the same profit.

 If you cut all prices 20%, you must handle 400% more merchandise, and do 300% more volume to get the same return!

 The legitimate purpose for sale events is to trim out outdated, or shopworn merchandise that hasn’t sold. Customers find this merchandise more attractive when you offer it at lower prices.

 As one old pro says, “There’s a price for everything. You just have to find it.” Then you can use the cash you get out of it to buy new product that will sell.

 When you cut all prices at once, your customers “cherry pick” the product they want most. They leave the old merchandise so you still have to deal with it.

 We suggest instead you significantly cut prices on shopworn and obsolete merchandise (chop it deep) only. If you want to “sweeten the pot,” cut your new merchandise by only 10%, assuming your margins are 40% and above.

 That way, you can advertise discounts “up to 50%-60%, etc.,” yet not obliterate your profit. Customers normally buy more of your deeply discounted product (which is what you want to get rid of) and less product with minimal cuts, thus protecting your profit margins. When they do buy higher-priced product, you reap a fair profit.

 Think through how you mark merchandise for sale events.

10. Financing methods

Financing plans –yes or no?

 Many Americans buy on credit because they can’t afford their purchase any other way. That means you can do much with financing when you incorporate it into your marketing concept.

 Retail and service selling, especially of more expensive products, has grown tremendously with the help of the many forms of credit buying. Ease of financing helps your customer to decide in your favor.

 Do customers need financing plans in your type of business? Are you missing sales you should have without them? In considering whether or not you need a credit plan, do competitors have them, especially national chains? If they do, they may have the advantage.

 If you sell large items priced at $1,000 or more, your own bank may be interested in financing purchases for you. Banks usually don’t like to finance purchases less than $1,000 because of high administrative costs. In that case, you might check with personal finance companies. They often seek business in lower ticket items.

 Your advantage is twofold: you get your money immediately, and people who do not have ready cash may often qualify for credit.

 There’s one exception. In rural area selling to older customers, many of my customers find that payment plans make little difference. Their customers long ago formed a lifetime habit of paying cash and seldom adopt a payment plan. Bless them.

Charge accounts

 What about charge accounts versus credit cards in your marketing concept? Of course, in recent years many businesses have dropped charge accounts in favor of credit cards.

 However, charge accounts let you retain a personal touch with your clientele. Some stores that have close relationships with long-time customers have kept their charge accounts with little or no losses. Their customers consider having such an account a badge of honor and seldom abuse it.

 Of course, credit cards hold an advantage. They’re universally accepted and you can limit your liabilities with slow pay and bad accounts. But should you consider some charge accounts anyway because of the personal factor?

Layaways

 This old standby is still a good way to encourage customers to buy, in lieu of financing, especially if your salespeople remember to offer it. Although credit cards have stolen some of its thunder, not everyone – particularly older customers like to use credit cards. Investigate the idea of offering layaways, if you don’t have it now.

Do you accept charge cards?

 Visa, MasterCard, Discover, Amex, and others have become absolutely necessary for most businesses because many people use them in lieu of cash.

 If you have a small business and don’t accept credit cards, think through whether or not you should. When a customer wants to use a credit card and you refuse it, they may go ahead and pay cash. But you run the risk they may not come back because of their dissatisfaction. Often, the increased business you get from cards justifies the few points you pay for them.

Does your customer feel she
gets the best value for the
price she pays?

 It’s part of your marketing concept. Your customer must feel she’s getting as much or more value than the dollars she spends. And, the value she receives can be more than just the merchandise or service.

 Does she perceive a good value for the price asked? In the case of an item for which there or few other outlets, and if the customer perceives a definite value over other comparable products, you can justify a higher price.

 If a nationally branded product or service is easily had elsewhere, your customer often will refuse to pay a higher price simply for the privilege of shopping with you. Even though you’re her friendly hometown or neighborhood merchant, if the customer perceives no greater value to her than that, she may leave the item on your shelf.

 You can justify higher price when you construct a value package of other company services around your products. But you must educate your customer about those other business services right along with the product.

 For instance, when you offer special help that no lower-priced store would give, that’s an extra value you’ve built-in (provided you inform the customer of it).

 Rate yourself on how well you communicate extra value to justify a higher price. Do you talk about it in your ads, in your in-store signs with merchandise, through your sales force?

Compute your gross profit
in terms of markup

 You need a fair profit for your labor. So, how do you figure markup? Express it as a percentage of the retail-selling price, as opposed to a percentage of the cost of the item.

 I’ve observed that when businesses compute gross profit as a percentage of cost, they often fail to allow enough for selling and business maintenance expenses.

 When you compute markups as a percentage of the retail-selling price, it’s also easier to compare in relation to store expenses, which are usually expressed as a percentage of total sales.

 You need to know how to compute markups as part of your marketing concept.

Math for Merchandising : A Step-by-Step Approach (3rd Edition) If you’re not sure how you compute markup, Evelyn Moore has written an excellent book colleges use for classes in business and retail math. You’ll learn more from Math for Merchandising than just markup. It broadens the way you think about your marketing concept.

If you like this article and want more marketing concept, go to the top of this page and sign up for the free Maverick Strategy Newsletter. You’ll get no SPAM because because we never share your name.

I wish you well.

Rod Rademacher
Maverick Strategy
4148 S.W. Emland Drive, Suite 7
Topeka, Kansas USA 66606
Phone: 785-783-7756 or
Email us here

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