Pricing your way to retail profit
The success of any retail business ultimately comes down to your ability to start making a profit and keep doing it. When you want to increase your profit, there are three main approaches you can take: you can raise your prices, reduce your costs, or make more sales. Sounds simple, right?
The tricky part is that these three things rarely move independently, so pricing your products can be a bit of a balancing act. For example, if you raise your prices, some customers may choose to shop elsewhere, reducing your number of sales. So, when it comes to setting your product prices, you’ll need to weigh up your options and find the sweet spot to maximise your sales and profit margin.
Here are three questions that will help you do exactly that.
How much can I charge for my products?
Most retailers want to charge the highest amount their customers are willing to pay. It makes sense—if you can raise the price without raising your operating and selling costs, you’ll increase your profit per item. And if you can keep selling at a similar rate, your total profit will climb.
But consumers have expectations about what they can get for their money. So if you want to boost your profits by increasing your prices, you’ll need to convince them that you’re worth paying more for. One way to do this is by positioning yourself as a prestige brand that carries only the highest quality products and provides remarkable in-store experiences.
Another approach is to position yourself as a best-value brand by giving customers a little more bang for their buck, such as a small gift with each qualifying purchase. This could be a low-cost promotional item, like a product sample or special edition tote bag, but savvy sellers will spot another opportunity here. If you’ve been tracking your inventory, you’ll know which items aren’t selling as well as forecasted, and this is your chance to move those items as an add-on incentive. You’d be surprised how many customers are willing to spend an extra $20 in store to qualify for a “free” product that they’d never have bought outright.
How low can I go with my prices?
With 34% of Australian shoppers using their mobile devices in-store to compare prices, retailers can’t afford to ignore their competitors’ prices. But that doesn’t mean you should necessarily match them. If lowering your prices pushes your margins dangerously low, it’s unlikely you’ll be able to increase your sales enough to compensate. For example, if you’ve been operating at a 30% margin and you want to discount prices by 5%, you’ll need to sell 50% more stock to maintain your profit. That’s a lot!
But there’s another way to improve your margin, and it’s one that also lets you keep your prices down: lowering your costs. If you can make it cheaper to buy, store and sell your stock, you can make the same amount of profit at a lower price point. So how can you do this?
Your first thought might be to buy more stock so you qualify for bulk discounts, but remember this will also increase the costs associated with holding and managing your stock, like retail and warehouse leases, wages, utilities and insurance. It can be more effective to reduce your costs through better inventory management instead. Tracking your inventory will help ensure you always have enough stock on hand to meet demand without incurring extra storage expenses for your surplus.
How should I offer discounts?
Discounts are a great incentive to attract new customers and bring existing ones back to your store, leading to an increase in sales. But that will only improve your bottom line if you’re selling enough extra stock to make up for the reduced margin on each discounted item. So it’s wise to plan discounts in a way that encourages each customer to buy more of the stock that’s not selling at full price.
This is where it pays to use good inventory management software, so you can keep a close eye on which products are performing well and which are underperforming. If customers are happy to buy something at full price, discounting that item is unlikely to increase your sales, but it will decrease your profit. No one wants that! So, while a standard percentage discount across all items in your store is an easy promotion to run, it’s rarely the most effective option.
It’s in your best interest to get rid of items that aren’t selling, particularly if they have a limited lifespan like fashion, technology or perishables. You’re only making a margin on the things you actually sell, and if they didn’t sell this year, they’re unlikely to sell next year—you’ll just be spending more money storing them and further reducing that margin. By discounting only your less popular products, you’re more likely to make the sale—and the profit.
Being creative about how you offer discounts on slow-selling lines can also help boost your sales. For example, let’s say you want to discount some $20 t-shirts that haven’t been selling well. If your discount is presented as a “buy one, get the second for half price” deal, customers will buy two t-shirts for $30. That’s the same as offering a 25% discount on each t-shirt, but you’ve just encouraged customers to buy two, instead of one.
Inventory management also helps you perfect the timing of your promotions, because you’ll be able to see when demand for a particular product line dwindles and take action to discount the items, recover your costs, and clear space for newer, more appealing items. That’s why it’s common to see heavy discounts on themed products just after special occasions like Christmas or Valentine’s day, and why it’s standard practice for fashion retailers to hold end-of-season clearance sales.
Finally, a word of caution: if you’re trying to establish yourself as a discount brand with “everyday lowest prices”, it pays to keep in mind that your customers may only be loyal until they find a lower price elsewhere, unless you offer them something more than just low prices.
Weighing up your options
The best price for you as a retailer is the highest price that a customer will pay and still feel like they got value for money. That way, they’re more likely to come back and bring their friends. And the best price for a customer is the lowest one that you can offer while still making enough profit to grow your business. If you keep on top of your operating costs and inventory management, you’ll be able to offer year-round competitive pricing and well-timed discounts to stay relevant in your market vertical and deliver on your customer promise.
You’ll only be able to set your pricing for profit if you’ve got the right systems in place to manage your inventory and sale pricing. Neto is the first all-in-one ecommerce platform with built in inventory and the only one that seamlessly syncs stock & orders between your retail, online and eBay stores. Cloud-based and designed for growing retailers, we enable anyone to sell anything, anywhere—from web, mobile, eBay and social media, through to bricks-and-mortar stores.