Jun 12 2012 By Mike Parkinson, Barnes Roffe
You might think the one thing any business understands is how to set prices. Not so.
I am constantly surprised by owners lost about what they can charge. They point mysteriously to the market, as if its strange forces alone dictate such things.
There is actually a great deal that can be done to seize control of pricing, and the key is to have a balanced strategy. Care needs to be taken not to alienate customers with a price rise, of course, but against that are the tempting advantages from pure profit at no extra cost.
My advice is always to take a tip from successful supermarkets. They may come under fire occasionally for dressing up offers as deals when they are, in fact, just selling at recommended prices. But most people most of the time are still smitten by a supermarket bargain.
The key is rotation. A keen student of supermarket pricing will notice that whilst some items are reduced, other are increased slightly. The goods in each category will be rotated regularly.
Most markets have three tiers of pricing: A premium tier, which is all about quality; an economy tier, which is where price is key; and something in between that we might describe as 'normal'.
What are the principles at work? The key to making pricing structures successful is communication with your customer. Supermarkets are expert at this, promoting deals heavily in store and elsewhere. Everybody knows.
Headline offers are a well known ploy to lure in buyers, as are multi-buy discounts.
Offers also provide retailers with a chance to trial new products, or push others which might not be selling well.
There is more in the armory. Discounts will sometimes be offered if customers purchase a selection of products in a bundle, whilst at other times products that should go together are sold separately. A good example of the latter is razor blades. A new razor typically comes with just one blade, and replacements can only be purchased in packs of four or more. Delivery and collection charges are also common.
Loyalty cards also work, not only as an incentive for repeat business, but as an invaluable database of information which can be used to target future sales.
The other way to increase returns is to change products, either to push sales or save costs. There are famous examples: Increasing the size of the hole in toothpaste tubes increased usage, whilst smaller paper in toilet rolls saved costs, as did putting a flint on one side of a box of matches instead of both.
Some products sold by the kilo are now sold by the litre, which may only be 800 grams, but without any corresponding reduction in price.
It is worth remembering that increasing prices and therefore making a larger profit can compensate for any decrease in sales. For example, Our Product Plc making 1,000 sales at £100 will turnover £100,000.
If each unit cost £75 then the gross profit to Our Product would be £25,000. If the price increased to £110, unit sales could drop to 715.
Turnover would be £78,650, but the units still cost only £75 each so the cost of the sales would be £53,625, giving a slightly higher gross profit of £25,025.
Whatever else is threatening your business in these difficult times, how to charge for what you sell should not be amongst them.
Mike Parkinson is a partner in accountancy firm Barnes Roffe LLP