Price setting is a common task for any retail buyer; it is a really massive topic to cover. I just want to point out some key elements to take into consideration when deciding the retail price for your articles.
Every category of products has its specifics. There are many significant factors to take into account, starting with manufacturing cost or buying price, demographics of the consumer-target, promotion or campaign for the product, brand awareness, merchandising, packaging, strategy involved (profit oriented or volume oriented), competition, etc, etc.
There are some situations when, after considering all the objective parameters, you have no choice but just go with your gut for the final price.
Branded products prices are usually suggested or imposed by the vendor. MSRP* (or Manufacturer suggested retail price) or RRP* (Recommended retail price) is the way the vendor is setting (or at least trying to set) the price on the market. Easier said than done.
When it comes to price setting the golden rule is: The perceived value of the product should be higher or at least the same as the money value indicated on the price tag.
Second rule, which is originating from the first: the market is deciding the right price and not the retailer.
So, the key point in any price setting is to study well your target market. With experience price setting comes naturally for the buyer/ purchasing manager and this is not typically an issue. OEM** products are one notable exception, here the retailer decides how and where to position his own brands.
The extremes in price setting are obviously positioning to low your price or to high. In both situations there is a lost opportunity:
A. Lost opportunity to get more profit, by positioning the product lower than the market would actually agree to pay on that product (or, how I like to call it, “kill the margin”)
B. Lost opportunity to sell more volumes, by positioning the price above the value perceived by the costumer (in this case you just “kill the product”)
In most consumer minds “expensive=exclusive” or “expensive=premium quality”. Meanwhile, “inexpensive”= “cheap” in the negative connotation of inferior, poor-quality, second-rate. That’s why retailers communicate nowadays more on “affordable”, “low-cost” or – this is more politically correct, isn’t it? -“reasonably priced”. Considering this, price setting is used as an exceptional marketing tool. It is an essential part of the system set up to sell the product. Price position is one of the key-communication elements of many brands and it translates in value and benefits.
If time allows you – knowing that it is essential to have the product in the market at the right time – my advice is to use this simple method: test the price position at a lower scale or without to much advertising. Experiment, get the numbers, analyze them and decide which price positioning suites the best your objectives in sales and profit.
The decided price level can also be sustained by campaigning on the product/brand, adding value via marketing policies. The techniques used to add value will also increase the product cost.
There is an interesting case – an inflexion price point – where even if you “kill” completely the margin the sales will not necessarily increase. It may happen that a too low setting may generate question in the consumer mind, (“if the price is that low, there must be a problem with this product”) so due to the negative association price level-quality the sales will not really increase as the price decreases. A low price can drive away costumers solely by the reason of correlation like “inexpensive”=”poor quality”, or “hidden issues” or “, hmm, something is wrong with this item if it is so cheap”! Didn’t you, as a costumer, find yourself in similar situation when shopping?
On the other extreme, setting the price higher than the “proper” price position resulted from the market research might increase the sells – people will associate the premium price positioning with premium quality. Higher price position is a standard marketing strategy used by premium and luxury brands; price do not necessary express the manufacturing cost trough their price tag, but other benefits or values of the brand (exclusivity, prestige, social recognition, etc). This particular strategy has to be used carefully – the balance between getting a better sale via higher price and “killing the product” it is very fragile! Moreover, it is a must that your product appearance, benefits (in other words value perceived) is in alignment with your chosen price point.
One mistake I noticed, especially on new retail businesses or junior buyers/ assistant buyers, is when the price is set using no more than a simple mathematical formula. Meaning: I have “x” invoice price on this item, my target mark-up is 30%, so the final price will be x+30% (example, invoice price is 30 $, then the tag price will be 30$ x 1, 30 = 39 $).
Maybe, only maybe the 39 $ is the right shelf price. Remember second rule of price setting? Market is deciding. So before making a simple calculator operation, make the basic minimum research for the price. It is ok to trust your vendor, however do the least confirmation with the market. You may find out that you can make a much better mark-up than your initial 30% or sometimes that your buying price is wrong, meaning with your targeted 30% mark-up you are way out of the normal price should be. When the product is already sold by your competitors, you will have your confirmation right away.
If your item is unique, let’s say a completely original and new invented device, better to apply the first rule. You may found out either that you can generate an exceptional margin with your product or this might be a flop: the market considers the right price at a level that will not even cover your manufacturing costs.
*In lots of regions, like EU countries, MSRP is considered anti-competition policy and is forbidden for the vendor to propose retail prices. However, this does do not mean that they are not used still.
** OEM stands for Original Equipment Manufacturer = products that are manufactured by a company, purchased usually by a retail/ wholesaler company and put up for sale under the purchasing company’s brand