What is the price?

Developing a pricing strategy

Television has a long-running game show where contestants win prizes by correctly guessing the prices of household items. You might expect people to have a good idea what these everyday items cost, but that is not always the case.

A different version of this game is being played every day as customers shop all types of businesses for the products you sell. The advantage many of your competitors have is the ability to use one or more employees to study, create and implement their pricing strategies.

How do you feel the effects of this? It comes when you have a customer tell you how much higher your prices are than a competitor’s. Equally bad is when your customer tells you your price is lower than any other store in town.

What about when you visit the big-box store and realize it is selling an item for less than you pay for it. While that may be true, the reality is it is probably selling the product for less than it pays for it, too.

These situations can be resolved; and the solution, while not easy to implement, is simple. Many of the products you sell can be placed into one of four categories. In addition, a strategy for pricing products can be implemented to improve your margins. The key is to identify a product’s category. Let’s take a look.

Everyday Sale-Price Items. At most businesses, you will find about 100 items with known prices because your competitors advertise them so often. If you were a grocery store, these items would be a gallon of milk, a pound of hamburger meat, a loaf of bread and most of the other items you see in large displays as you enter their stores.

While these may be items on which you will make little or no profit, they are necessary because they are the means by which you tell your customer you are competitive. If your competition is selling the item for $1, and you have the identical item for $1.79, what does that tell the customer about your business? And what will the customer think about all the other items in your store?

Price-Sensitive Items. These become your secondary tier of items. They are ones about which your customer has some idea of the price, but is not certain. This can occur when a customer comes in asking for a product— often an everyday sale-price item—but after answering our questions finds the product he wants is not the product he needs.

Sometimes the price-sensitive item is simply a different size from what the customer has requested. For items in this category, we can be charging as much as 10 percent more for the item because in speaking with the customer, we have added additional value to the transaction.

Promotional-Price Items. These are the items that you advertise, and they do not necessarily have to be all the same items your competition advertises. Since you are expecting your customers to respond to this advertising, it is crucial your employees are knowledgeable about the products.

Blind-Price Items. Read the annual reports of your chain-store competitors. When you see their overall margins and then look at how many items they are selling at or below their cost, it is easy to see they are making up the difference on the thousands of items that are not in the three other categories we have discussed. These are often the items that a small business is selling for far less than a chain store. These items tend to be the products that are unique and not sold in every store.

Variable Pricing. Variable pricing is a technique that allows you to boost your profits by rounding prices. For example, look at all the items you sell between $17 and $17.99. Why are some items at $17.09, others at $17.38, and some at $17.95? Why not price all of them at $17.99? If you count the number of items that fall into this category, you will be surprised at the additional profit. Starting with items as low as $2, you are selecting certain price points that you want to hit. 

Many businesses have items in the range of $2 to $10, structured so that the ending two digits are  .29, .49, .79, and .99. As prices on products continue from here to hundreds of dollars, a similar strategy is used so that the business maximizes the potential profit.

Research has shown that you can increase your net profits by $25,000 for every $750,000 in sales by implementing such a practice.

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