Tuesday, May 17, 2011

The Case Against Category Management –Pricing -1

The manufacturer’s suggested retail price (MSRP), or the supplier’s suggested retail price, or even the cost, should be only a reference in determining the price you should put on an item. Why? Because it’s obvious, neither the manufacturer nor the supplier has the required knowledge to know how that product will perform in your store… at any price.

NetMBA.com tells us there are seven steps in determining how to price an item in your store:

-          Develop marketing strategy - perform marketing analysis, segmentation, targeting, and positioning.
-          Make marketing mix decisions - define the product, distribution, and promotional tactics.
-          Estimate the demand curve - understand how quantity demanded varies with price.
-          Calculate cost - include fixed and variable costs associated with the product.
-          Understand environmental factors - evaluate likely competitor actions, understand legal constraints, etc.
-          Set pricing objectives - for example, profit maximization, revenue maximization, or price stabilization (status quo).
-          Determine pricing - using information collected in the above steps, select a pricing method, develop the pricing structure, and define discounts.

Tough to do in a small space with 2,700 unique items; however, nowhere in the above list, or anywhere else for that matter, is there a mention of MSRP, supplier’s suggested retail price, or any other recommendations related to allowing a third party to price the items in your store; neither are pricing items according to physical size, to the 9th cent, or an arbitrary markup percentage based on a category. That’s painting with a broad brush, and those days were over long ago.

The truth is, every item has a specific price that produces the best overall gross profit according to an endless array of environments and conditions. Pricing may be used to:

-          Increase or decrease inventory movement
-          Compete in the marketplace
-          Increase profits
-          Create excitement in the store
-          Affect product and store image
-          Take advantage of certain events/seasons
-          Target specific consumer groups   

But the bottom line is: the proper price is the price your customer will pay for an item; and like it or not, the only expert in the field of pricing items in your stores is YOU.

Price sends a message to your customers: “This is what I think I’m worth,” but your customers may have an entirely different valuation. If your price falls below customer expectations, they assume they will find more bargains in your store; above, and they fear you are trying to take advantage due to so-called ‘convenience’ which translates roughly into: ‘The next time I’ll remember to buy this at Walmart’. ‘Convenience’ really doesn’t have any place in this exchange. Either you have bargains or you don’t, and the store that emotes ‘bargains’ is shopped more often.

Bargains have a lot more to do with what’s in your customer’s purse or wallet this very minute than what your manufacturer thinks his product is worth. I’ve talked a great deal about ‘turns’ so far, but ‘turns’ is simply the most easily accessible indicator that will get your attention. It’s like a fire alarm that makes you get up and out of your chair. The alarm doesn’t put out the fire, but it certainly gets the process going.


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