One of the hardest questions for retail SMEs to answer is how to set prices that are both competitive and profitable. After all, it’s not just a matter of taking ordering cost and adding a markup. Getting it right can be the difference between business success and a string of losses. So it’s important for retailers to build an effective pricing strategy, especially in a hyper-competitive retail environment. If you can resolve the following four challenges, you’ll be well on your way.
Keeping Track of the Competition
Some business experts consider that the most important factor in building a pricing strategy is to focus on the customer but, for any business in a competitive sector, this is best done by focussing on competitor pricing.
Consumers have options – depending on their tastes and values, they’ll pick the most attractive value proposition for their needs. In the pricing space, it’s important to properly understand your competitor’s pricing so that you can compete. This doesn’t necessarily mean beating the competitor price – particularly if your product is a premium product or targets a niche. Either way, it’s crucial that you know how much the opposition are charging.
Online shopping is making it easier for many businesses to monitor their competitors’ pricing. On the other hand, smaller retailers often don’t have a full e-commerce offering, meaning that it may sometimes be necessary to carry out pricing audits or mystery shops.
Understanding the Market
In a very competitive market, a look at your competitors product offerings and pricing is likely to create a comprehensive picture of the market. That said, incumbents sometimes get it wrong. Perhaps the current pricing model is shutting a particular demographic out of the market, or perhaps there is a niche segment that has not been developed to its potential.
Sometimes, there might be widespread dissatisfaction with the incumbents’ offerings. The market for prescription eyewear is a useful example. Consumers in Australia had long been dissatisfied with high prices for glasses but, despite robust competition, prices remained high. New competitors saw an opportunity to enter and disrupt, bringing pricing down.
If existing retailers are failing to meet customer expectations, carefully consider whether your business can do things differently. If so, this might form the basis of an innovative pricing strategy.
Getting Discounting Right
Not long ago discounting was much less common than it is today. More recently, discounting has become ubiquitous; in some industries, few customers are actually accustomed to paying the sticker price. This has the effect of making a pricing strategy much more complex. Businesses can no longer identify one ‘right’ price; rather, pricing teams must juggle pricing on the basis of quantity, seasonality, customer segmentation and product bundling. Oh, and don’t forget loss leaders, who sell products below the ordering cost in order to bring in new business!
Each type of discount has the potential to increase gross revenue, but it also has a substitution risk – the potential for profitable sales at the regular price to be replaced by lower-priced discount sales. In other words, the discounting challenge for businesses is to ensure that discounts primarily encourage additional sales and leave existing sales channels untouched.
For business that regularly juggle various discounting strategies, there’s also the risk of getting a discount severely wrong, such as accidentally selling a high value product far below its ordering cost. While mistaken orders can usually be cancelled later, some orders may have already been dispatched, and cancelled orders can damage relationships with your customer base.
Balancing Online and In-store Pricing
Should a business charge the same pricing online as it does in store? For many consumers, the answer is a resounding “yes”. As a matter of fairness, many consumers think that businesses shouldn’t discriminate between online and bricks-and-mortar shoppers. In truth, online and in- store shoppers are increasingly participants in different markets. At the very least, they’re two cleanly divided customer segments. Retailers offer different pricing to different customer segments all the time, which is why it makes sense for businesses to consider charging different prices online.
Of course, there are optics at play; some businesses will not want to be seen to be price gouging. In that case, a more nuanced option may be appropriate. Businesses who wish to compete strongly online may be able to offer online-only discount codes, sale days or loyalty schemes to compete with major online players while maintaining a uniform sticker price.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.