Name Your Price
By re-evaluating their approach to sales margins, retailers can identify missed opportunities for potential profit and build a stronger foundation for their business.
Customer service, merchandising, marketing, community involvement, services—for independent pet specialty retailers, there’s a near-endless list of factors that can impact the success of their business. But even for a store that seems to be getting everything right, a thoughtful and analytical approach to controlling sales margins is critical to long-term survival.
In today’s retail environment, it’s easier than ever for customers to compare prices, so retailers need to take stock of their pricing strategies to stay competitive. But at the same time, a store needs to stay profitable, which means balancing out categories where low prices are essential to sales success with products that offer greater profit potential.
By analyzing their own sales and keeping a keen eye on the competition, retailers can determine what margins maximize the potential profitability of each category or product in their store.
When deciding how to set margins, retailers have a few strategies to choose from. Mike Beebe, territory manager for pet product distributor Southeast Pet, suggests using a constant margin within different segments of the same category. For example, in food, a retailer could set a 35 percent margin for small bags, 30 percent for medium bags and 25 percent for large bags, adjusting accordingly to reflect pricing in their market. For some smaller items, keystoning, or a 50 percent margin, is the rule of thumb, but Beebe suggests setting a slightly lower margin on more expensive items. Still, retailers shouldn’t be afraid to set a higher price when there is an opportunity to do so.
“If there is an item that costs you two dollars, but you see a retail value that reflects $5.99 versus your standard $3.99, take the higher markup,” Beebe says. “You can always have a price reduction.”
Tom Shay, a fourth-generation small business owner and author of numerous books on small business management, recommends focusing on a product’s retail value when setting prices. Instead of starting from a product’s wholesale cost and applying a particular percent increase, evaluate what customers will be willing to pay.
“The cost of an item has nothing to do with what we sell it for,” Shay says. “It should be, ‘What will the market bear?’ Anytime a retailer does a multiplier, they’re going to look bad on some items and their price will be too low on other items.”
Whatever approach retailers take to setting margins, there are certain categories in which price is an especially important consideration. These categories can be key to a customer’s perception of whether the store offers good value or not.
“You need to be competitive on food, that’s the driver of what causes someone to go into a store,” says Michael San Roman, president of The Pet Firm, an Acosta company. “And then highly-researched products (i.e. a flea and tick-type product or a health and beauty-type product), you need to be competitive on those.”
When Shay was a retailer, he compiled ads from each of his competitors to assess which products were being promoted most frequently and at what times of year. Then he found ways to keep his prices on those items competitive. This strategy can also tell retailers what categories or products they may have the flexibility to set higher prices on.
“We had a list with a small number of products on it, about 100 or so,” Shay says. “These are the items that I have to watch the price on. And when I go to a trade show I see where I can get the best deal and talk to my wholesaler and say, ‘Hey, I’m getting hammered on these items, how can you help me?’”
With so many consumers comparison-shopping and researching products on the internet, it’s critical that retailers have a plan in place for monitoring online prices.
“They should definitely have an e-commerce strategy,” San Roman says. “Pick three major e-commerce players, analyze the critical products on those sites and understand what those price points are. Once you understand that, develop your strategy in store and align it with the margin opportunities on impulse items.”
For retailers looking to evaluate the effectiveness of their current margin strategy, there are a few steps that can help identify profit opportunities they might be missing.
“The first key to fixing a potential margin problem is to know how much sales, as a percent of total store sales, you are producing in each category,” says Lynn Switanowski, founder and president of Creative Business Consulting Group, a retail strategy consulting firm. “This can help you determine a strategy of marketing and in-store merchandising to go after with higher margin products. Stores should always look to maximize their stock to sales ratios to maximize profitability.”
Switanowski also advises retailers to review industry benchmarks, comparing their stores to others of similar size and seeing how they match up in category sales with others in the industry. By identifying areas where their sales are comparatively lagging, retailers can pinpoint areas to re-evaluate their approach.
There are a few categories in which retailers have an opportunity to set higher margins. With the right marketing and merchandising approach, these can balance out lower margins on other products.
“Treats is a perfect category, and any of the impulse categories,” San Roman says. “[Customers] are much less focused on what the price points are. Those are the ones you should be maximizing your margin opportunities in.”
Switanowski encourages retailers to pursue creative packaging and merchandising strategies to boost their treat sales and maximize profits in the category.
“Retailers can buy treats in bulk and package separately in unique—think dog-bone-shaped—containers, or low on the floor so when dogs come in they are attracted to the smell and owners want to buy them for their pet,” she says. “Margins on bulk treats can be upwards of 70 percent if done right.”
Accessories, toys and clothing can also have higher margin opportunities, Switanowski says, advising retailer to look to source these categories for at least a 55 percent margin.
Even with the right pricing strategy, retailers will still miss out on potential profit if they’re not supporting it with the right merchandising and marketing tactics. Experts emphasize the importance of having a wide selection of higher margin items and thoughtfully displaying those categories to encourage impulse purchases.
“Get in as many higher margin items as possible through creative merchandising,” says Southeast Pet territory manager Ingrid Berger. “I feel a retailer really cannot have too many treats or toys. I’ve seen 2,200-square-foot stores with 16 linear feet dedicated to treats with baskets on the floor under the hanging items, and the same with toys. You must have a nice selection and very visible.”
Industry consultants strongly encourage retailers to cross-merchandise products whenever possible to encourage impulse purchases along with the basics.
“For an independent store, the strategy they should use is what I would call the basket strategy,” San Roman says. “They should offer the food at a competitive price and try to build the basket with other high-margin products.”
San Roman notes that many stores are set up with food, toys, treats and other categories in distinct locations, and this arrangement misses a huge opportunity to inspire add-on purchases when a customer comes in to restock on food or another basic item. Retailers need to use their store setup to connect those staple products with other potential purchases in the customer’s mind.
“Merchandising within the store is critical to a retailer’s success in driving overall margin growth and dollar growth,” he says.
Switanowski also advises an approach to merchandising that focuses on bundling related products together and building creative displays that encourage purchases of higher-margin items, rather than only having distinct aisles organized by category.
“One idea is to set up a ‘new puppy’ display with food, leashes, toys, pets, brushes and shampoos all conveniently found in one place, so customers can buy the package,” Switanowski says. “The idea is that everything is in one place to make shopping easier for [customers], not because it’s easier for retailers to merchandise it separately by category around the store. This convenience prompts shoppers to spend more on impulse items because they’re right in front of them.”
It may not be possible for most brick-and-mortar retailers to match prices with their competitors across the board, but it is possible to influence customers’ perception of a store’s overall pricing. Retailers can emphasize their affordability and make the most of categories where they’re setting lower margins by calling attention to products where their prices match those advertised by big box stores or e-commerce outlets.
“Most customers at the retail level have a perception that large chain stores have better pricing,” Beebe says. “By using the large chain stores print ad or advertised pricing and showing your customer, you can explain that their advertised price may be your everyday price or lower.”
As a retailer, Shay found success with this strategy by displaying competitors’ ads for weekend specials next to the same products in his store.
“Next to the ad it would say, ‘this is what they call a sale price. We sell it for this every day,’” Shay says. “They put a sense of urgency to get you to come in right now. My message puts a sense of trust in it. Maybe you’re busy this weekend. Don’t worry, I’ll have it for you next week too.” PB