Sunday, December 21, 2008

Pricing Strategy for Small Retailers

Contributed by Richa Kapoor

One of the most crucial areas of decision making for retailers is pricing. Yet, we have found that small firms often do not have well-conceived pricing plans. A retailer's prices influence the quantities of various items that consumers will buy, which in turn affect total revenue and profit.
Hence, correct pricing decisions are a key to successful retail management. Key to small retailers prosperity in today's discount-oriented environment is guaranteed only if they have a good understanding of their niche in the marketplace.

With this in mind, the retailer should first prepare a checklist of questions that will assist him in making systematic, informed decisions regarding pricing strategies:

What is the overall pricing philosophy of the company: It's critical for the retailer to define the overall price positioning of the store… A choice has to be made between high-end…. Low-end

Target Consumer and Retailing Mix: Before fixing up the prices of the products a retailer must focus on his target consumer…. His characteristics, identify reasons of their choosing a retail store (for low prices, for convenience, for service, etc.) then a comparison should be made if the target consumer is consistent with the overall pricing philosophy.

The Central Concept Pricing: Before starting to price the products the retailer needs to decide: how do you compute prices…. When calculating prices do a retailer take is operating cost into account??

Supplier and Competitor Considerations: Before pricing the products in one's store a retailer must study the prices, price margins etc.. Costing done by its competitors… This can be done by visiting competing retailers to check on their prices, checking competitors' ads for prices, and plan a reaction strategy. These points emphasize that a retailer must watch competitors' prices so that his prices will not be far out of line--too high or too low--without good reason. Of course, there may be a good reason for out-of-the-ordinary prices, such as seeking a special price image.

Initial Markup: A retailer must look inside his business, taking into account sales, expenses, and profits before setting prices. The point is that the initial markup must be large enough to cover anticipated expenses and reductions and still produce a satisfactory profit. Retailers should estimate sales, operating expenses, and reductions for the next selling season, establish a profit objective for the next selling season

After estimating sales, expenses, and reductions, plan initial markup
This figure can be calculated with the following formula:

Operating expenses + reductions + profit
Initial markup percentage = ----------------------------------------
Net sales + reduction (Reductions consist of markdowns, stock shortages, and employee and customer discounts. )

Nature of the Merchandise: Retailers must consider the effect of selected characteristics of particular merchandise affect planned initial markup. Retailer must consider the wholesale price of merchandise, popularity of the item, handing and selling costs, reductions expected due to markdowns, spoilage, breakage, or theft, If the answers of these questions is yes, then a larger than normal initial markups is required

This check-list will help the retailer in laying down solid foundation of effective prices and build retail profit

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