Pricing is a delicate process. If the price is too high, the product will have a great profit margin, but not many units will sell. If the price is too low, the product will move quickly, but the store won’t make a very good profit. The key is determining the highest price that will sell the maximum number of units.

Choosing the best price for each product requires retailers to evaluate products individually. According to Rick Segel, CSP, author of Retail Business Kit for Dummies, and president of Rick Segel Associates and The Retailer’s Advantage (www.ricksegel.com), when pricing new merchandise, consider factors such as competition, perceived value, brand, setting and, finally, initial cost.


Looking Beyond Cost
The first thing retailers should consider is their competition for that product category and for that specific product, says Segel. What other stores nearby may offer the product, and at what price? Retailers should make sure they aren’t pricing a product higher than their competition. 

To Lynn Switanowski, founder of Creative Business Consulting Group (cbc-group.net), the most important consideration in pricing is the perceived value of the product. What a customer perceives a product to be worth is significantly more important than the retailer’s cost, she says, and figuring out the perceived value of an item all starts with understanding who your customers are and what they need.

Segel and Switanowski agree that the best way to figure out what a customer thinks a product is worth is to ask them directly. According to Segel, when retailers bring something new into the store, they should ask customers, “This just came in, what do you think of it? How much do you think it costs?”

Next, retailers should consider “the setting” for the product–in comparison to other products in the store, does the new item look better or worse? Generally, it is recommended that retailers carry a “good-better-best” selection in each product category; retailers should decide which label fits the product most accurately, and price accordingly. According to Segel, if the item has more of an upscale look than other products in the store (putting it in the “better” or “best” category), you can increase the markup; if it is of lesser quality (the “good” category), retailers should offer it at a lower price.


Finding the Right Number
Too often, retailers make the mistake of only considering what they paid for an item. While the cost of the item should definitely be factored in, a retailer should not apply the same markup formula for every product. “The biggest mistake [retailers make] is they use only one approach,” says Switanowski.

According to Switanowski, retailers can plan to get a set markup on basic products, and a higher markup on other classifications. Varying the markup on different items allows products with a higher profit margin to offset those with a lower profit margin, improving the store’s bottom line.

Once a retailer has decided where a product fits in the store’s product mix and has taken into consideration all of the above factors, it comes time to pick a specific number. According to Segel, retailers need to understand some basic psychology at this point. For example, it’s helpful to know that many shoppers tend to round prices up to the nearest whole dollar, unless the last digit before the decimal is a five. Based on this theory, customers will see both $34.99 and $35.99 as $35.00, says Segel. This creates an opportunity to add a dollar that is, essentially, invisible to the customer. 

It’s also interesting to note that when the last digit before the decimal is an eight, most customers will round the price up to the next ten-dollar increment–for example, $18.95 will be seen as $20. With this in mind, a retailer may want to price the product at $19.95 instead.  

Ending a price with $.99 or $.95 versus rounding them up to a whole number is optional–and, according to Segel, many stores successfully use both strategies by using whole numbers for luxury items and taking off that penny or nickel for more basic products.

Of course, finding the perfect price is also partially a matter of trial and error–if one price doesn’t work, retailers can always mark the item down or try another price, until they strike the proper balance.


Running a Sale or Promotion
Pricing for a sale or promotion brings its own unique considerations. There are many reasons for retailers to run a sale or promotion–and the reason for running it directly impacts the way retailers will achieve their goals.

The most obvious reason to have a sale is because a new product simply isn’t selling the way a retailer expected. “If you’re doing retail right, you will always be trying out different types of merchandise, and sometimes that merchandise won’t sell,” says Segel. “That’s okay, because you’ve got to keep trying and doing different things.”

According to Switanowski, retailers must be vigilant in evaluating the performance of new products, and respond accordingly, because the stakes are high. “Inventory is the biggest cost of any small business today, so [retailers] have to analyze what is working and what is not working,” she says. “And when something is not working, you have to mark it down and move on.”

Segel recommends retailers have a “last call wall,” or a location within the store to place merchandise they just need to get rid of, and then progressively mark that merchandise down on a weekly basis.

Getting rid of unsuccessful merchandise is not the only reason to hold sales or promotions. These events can help to generate increases in customer traffic, overall sales volume and, ultimately, store profits.  Promotional events like Senior Tuesdays encourage customers to come in during a time when sales might otherwise be slow, and because they receive a discount during that time, they may be inclined to buy more items.

Coupons are another great promotional tool; emailing or mailing customers a $2-off coupon, no strings attached, drives them into the store. “But the key is to give them a tight expiration date,” says Segel, noting that it shouldn’t extend more than eight days.

Retailers can also offer “bounce- back” coupons–coupons given out when a customer spends above a certain amount in a given day, requiring them to come back to the store a few days later for additional savings.
The motivation here is to increase traffic. If a retailer wants to increase the number of units per sale, one option is to hold a buy one get one 50-percent off event, or to have a bin with toys marked “buy three for $9.99.” 

Much like pricing, the key to finding the perfect promotion or sale for an individual store is a matter of trial and error. Retailers should write down their goals for a given event before it begins and then write down the results of the event afterward to determine its success.

Every variable should be recorded– when the sale or promotion began and ended, the price level or specific promotion used, and how successfully the event achieved the predetermined goals. This type of tracking will allow retailers to create a history of all their promotional events and help them to better decide which events to hold again in the future to achieve each goal.