Anatomy of pricing

By l{rlly Lynch P.A.LD. Associatee

IIRICINO is a merchant's value

F message to the customer. Coming in all sizes, colors and lots of options, it is applied to goods, services and combinations thereof.

Early on in the life of a retailer, pricing is used to position the company in the market. A decision is made and implemented about how the owner wants customers to perceive his business. Most owners set one of three pricing strategies: low end, middle of the road or high end.

Think of a fish, It has basically three parts-head, body and tail. A pricing low end strategy or "tail" might consist of bare bones product lines at cash and carry prices, no service, no credit, no delivery. The "body" could be thought of as middle of the road: some services, dominant product lines and pricing which includes the cost of limited service. Some service may be offered alone. The high end or "head" offers broad product choices of low to high end products with service costs included.

There are several variations on these themes. Imagine contractor sales from a compensatory basis: cash and carry, cash and delivery, charge and carry, and charge and deliver. These four possibilities also could apply to consumer sales. If implemented (not recommended), they would produce eight different prices for the same item.

The idea behind a price strategy is to convey a desired message to your customer and to manage your competition. Bare bones against bare bones, middle against middle, etc. Matrix pricing allows you to compare apples to apples and adjust accordingly. The combination breaks the competition into manageable increments.

Every retailer at some time must deal with the specifics of everyday pricing for day in and day out selling. This is dependent on the development of assorted product lines to produce the value impression, features and benefits necessary to convince the customer to buy a specific item at a set price. Such products could be described as good, better and best. The assortment could be broadened to include low end and top of the line additions. Thus, five basic price points come into being. They might be $19.95, $29.95, $39.95, $49.95, $59.95 respectively. What's important is that you are competitive and that value for the dollar amount asked isdiscernible.

Most merchants follow competitive advertising closely. This is where promotional pricing comes into its own. Your regular pricing is in place when "wham" here comes a circular that destroys your items pricewise. Promotional pricing wears at least five hats.

The first is the special item not regularly canied but bought especially to offer and blow out over a weekend or two. You know the item and there is only 100 gross margin in it at the selling. The seller is making a big price impression and because the merchandise is only in inventory a few days the GMROI is reasonable.

A second type of promotional pricing is an item offered by a supplier at a reduced cost price and a lower recommended selling price. The idea is that it can be bought at cost for 500 less in ordertoreduce the selling price of$2 or $3, thus increasing demand and sales.

A third option in promotional pricing occurs when regular merchandise for which you paid full price is offered at a reduced selling price. You see this occur in varying ways. The loss leader is often used and abused on this type of promotional pricing. Cut the price way down and bring people into the store like mad. It's supposed to demonstrate value, but sometimes it only produces cherry pickers.

Story at a Glance

Some mcrchents arc mote succcssful whcn thcy work a variation of this loss lcadcr. Imagine from ourfive item product line example that "better" is also the best sclling price point in the range. Top of thc line is the highest price point of the line. By lowering its price point to just above 'better' you let the customer easily identify value. There is margin forthe store in this kind of leader as opposed to the low end give-a-way. The other two types of promotional pricing deal with regular product line items. Seasonally, merchants promote at regular price to notify customers that products are available. New item introductions are also promoted at regularorhigherthan regular pricing to skim the cream.

In the final analysis, pricing is an item by item process with numerous external infl uences necessitating constant internal vigilance. Every area has its list of 200 to 300 price serwitive items. Tlte pricing is met or the business is lost. The savior in these transactions is the sale of items that go with the price senstive items. A stainless steel sink brings about activity of faucets, pipe, traps, etc. Quantiry prices is an old standby. One pound for 99Q, five pounds for $3.99, and l0 pounds for $6.99. Synerg istic items, such as a flashlight, virtually ensure battery sales. This improves both ticket size and gross margin dollars , Combinatiors of items: a single tool or a tool set, your choice of one or any three for the price of two. Psychological price points.' some items will sell as well at 990 as they might have at 950. A $26.95 item often will move as well as $29.99. Psychologically the customer views these items at the higher level.

The pricing of services appears tobe the most difficult for the lumber and building materials industry to handle. This is easy to understand because they either have no mechanics to measure theircosts orthey choose not to identify them. Ask yourself: what does it cost to make a delivery, what do receivables cost, how much to put shingles on a roof?

This industry produces pre-tax profits annually of about 2%. Every dollar in service expense you can eliminate or recover on this profit assumption is equal to generating $50 in additional sales. At $100 and $1,000 it means sales of $5,000 and $50,000, respectively. Price is a simple word but identifying the right price isn't easy. The need for effective implementation and vigilance is obvious.