| Pricing
and Small Retailers: Questions to Consider |
By Joel R. Evans, Ph.D.
& Barry Berman, Ph.D. |
| More of this Feature |
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• Part
1: Questions for Developing Your
Pricing Strategy |
| More from Evans & Berman |
|
• Combatting the Post-Holiday
Blues • Power Retailing: Not Just for Large Firms |
| Related Resources |
|
• Retail
Pricing Strategy • Small Store Retailing |
| Books by Evans & Berman |
| Newsletter |
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How do you use prices in competing with larger retailers?
One of the most common myths in retailing is that small retailers can never enter into price competition with the Wal-Marts and Home Depots of the world. While it is true that small firms will generally have a tougher time if they try to compete on price across the board (due to the economies of scale of the power retailers), they can do so if they run sales or offer regular savings on selected items.
By focusing on special prices for 10 to 25 noticeable items, small firms can highlight that they are viable options for their shoppers and attract store traffic. This works best if a firm runs specials on different items than those featured by the large chains.
Small firms also
have a major advantage over the large chains: The latter often need some
type of upper management approval to offer sales and individual outlets may
not have the flexibility to match local firms.
Have you formed a buying group (cooperative) with other small retailers to get better terms on your purchases?
Large retailers
get good terms from suppliers and can make special requests of them because
of the buying power they wield due to the volume of business that they do
with the suppliers. Small retailers can gain in their own dealings with the
suppliers by forming buying groups; this will then enable these retailers
to account for substantial dollar purchases and lead to better terms. Buying
groups are common for hardware, furniture, appliances, groceries, and consumer
electronics. Check with your own trade
association for further information.
Do you use odd prices ($59.95) rather than even prices ($60)?
Although the impact of odd pricing on customer behavior may be overrated (after all, most people do not consider a nickel off to be much of a bargain), there is one significant reason to use this practice: Consumers are more likely to believe that a retailer plans prices very carefully and works hard to keep the prices as low as possible.
When you take a physical inventory, how do you compute the value of the merchandise remaining in stock?
The prices set
for the merchandise remaining in stock (after a selling season or before
a reorder is placed) should have some relation to the value placed on that
merchandise. For example, if a retailer knows the value of an item in inventory
is $30 at cost and the retailer wants a 50 percent markup at retail, the
selling price would be $60. The computation is easy if merchandise costs
are stable. If they are not, the firm should learn about the retail method
of inventory planning (which is based on the average of merchandise costs,
depending on the quantity bought at each cost level) and apply this concept.
Several computer software programs are available to aid in this process.
Do you understand the difference between an initial markup and a maintained markup? Do you use these concepts in setting your prices?
Initial markups need to be higher than maintained markups if a retailer is to meet revenue and profit goals. Thus, an initial markup for an item must reflect the fact that during a selling season there will be shrinkage, breakage, employee discounts, and end-of-season markdowns.
A maintained markup represents the weighted average markup for an item, which is computed as: (total actual revenues received - the cost of goods sold) / total actual revenues received.
A retailer will make a serious mistake if beginning-of-season prices represent the average prices sought for the entire selling season.
In Part 6, we conclude our series on pricing.
Next page: Everyday Low Pricing and Displaying Prices » Page 1, 2, 3, 4, 5, 6
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