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How to Set Prices in a Retail Business

A Step by Step Guide to Pricing in a Retail Store (Pricing Strategies)

How to Set Prices in a Retail BusinessThis guide will walk you step by step through all the essential phases of setting optimal prices in a retail business. You will learn exactly how to set prices in a way that will allow you to make money and still be competitive

Table of Contents

1. Introduction
2. How to Set Prices for Optimal Profitability
3, Target Consumers and the Retailing Mix
4. Supplier and Competitor Considerations in Setting Prices
5. Setting a Price Level Strategy
6. Setting Prices Store Policies
7. Taking in Consideration the Nature of the Merchandise
8. Market Environmental Considerations
9. How to Raise Prices Without Losing Customers
10, Calculating Hourly and Project-Based Pricing

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Sample Content

This Setting Prices in a Retail StoreGuide is a checklist for the owner-manager of a retail business. These 51 questions probe the consideration - from markup to pricing strategy to adjustments - that lead to correct set prices decisions. You can use this checklist to establish setting prices in your new store, or you can use it to periodically review your established pricing policy.
A retailer's set prices influence the quantities of various items that consumers will buy, which in turn affects total revenue and profit. Hence, correct setting prices decisions are a key to successful retail management. With this in mind, the following checklist of 52 questions has been developed to assist retailers in making systematic, informed decisions regarding pricing strategies and tactics.
This checklist should be especially useful to a new retailer who is making pricing decisions for the first time. However, established retailers, including successful ones, can also benefit from this Guide. They may use it as a reminder of all the individual pricing decisions they should review periodically. And, it may also be used in training new employees who will have pricing authority.

How to Set Prices for Optimal Profitability

A major step toward making a profit in retailing is selling merchandise for more than it cost you. This difference between cost of merchandise and retail price is called markup (or occasionally markon). From an arithmetic standpoint, markup is calculated as follows:
Dollar markup = Retail price - Cost of the merchandise.
Percentage markup =
Dollar markup
______________
Retail price
If an item cost $6.50 and you feel consumers will buy it at $10.00, the dollar markup is $3.50 (which is $10.00 - $6.59). Going one step further, the percentage markup is 35 percent (which is $3.50 divided by $10.00). Anyone involved in retail pricing should be as knowledgeable about formulas as about the name and preferences of his or her best customer!
Two other key points about markup should be mentioned. First, the cost of merchandise used in calculating markup consists of the base invoice for the merchandise plus any transportation charges minus any quantity and cash discounts given by the seller. Second, retail price, rather than cost, is ordinarily used in calculating percentage markup. The reason for this is that when other operating figures such as wages, advertising expenses, and profits are expressed as a percentage, all are being based on retail price rather than cost of the merchandise being sold.

Target Consumers and the Retailing Mix
In this section, your attention is directed to price as it relates to your potential customers. These questions examine your merchandise, location, promotion, and customer services that will be combined with price in attempting to satisfy customers and make a profit. After some questions, brief commentary is provided.

1. Is the relative price of this item very important to your target consumers?
The importance of setting prices depends on the specific product and on the specific individual. Some shoppers are very price conscious. Others want convenience and knowledgeable sales personnel. Because of these variations, you need to learn about your customers' desires in relation to different products. Having sales personnel seek feedback from shoppers is a good starting point.
2. Are set prices based on estimates of the number of units that consumers will demand at various price levels?
Demand-orientated pricing such as this is superior to cost-orientated pricing. In the cost approach, a predetermined amount is added to the cost of the merchandise, whereas the demand approach considers what consumers are willing to pay.

3. Have you established a price range for the product?
The cost of merchandise will be at one end of the price range and the level above which consumers will not buy the product at the other end.
4. Have you considered what price strategies would be compatible with your store's total retailing mix that includes merchandise, location, promotion, and services
5. Will trade-ins be accepted as part of the purchase price on items such as appliances and television sets?

Supplier and Competitor Considerations in Setting Prices
This set of questions looks outside your firm to two factors that you cannot directly control - suppliers and competitors.
6. Do you have final pricing authority?
With the repeal of fair trade laws, "yes" answers will be more common than in previous years. Still, a supplier can control retail prices by refusing to deal with non-conforming stores (a tactic which may be illegal) or by selling to you on consignment.
7. Do you know what direct competitors are doing price-wise?
8. Do you regularly review competitor's ads to obtain information on their prices?
9. Is your store large enough to employ either a full-time or a part-time comparison shopper?
These three questions emphasize the point that you must watch competitors' prices so that your prices will not be far out of line - too high or too low - without good reason. Of, course, there may be a good reason for the out-of-the-ordinary prices, such as seeking a special price image.

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