Creating an Effective Pricing Strategy
Pricing your product is one of the most critical aspects in the job of any produce or department manager. Quite often we get into a pricing flow - we know our target margin, we know where we need to price in order to achieve our margin, and then we simply create a formula that works for each item. The danger with this type of pricing work flow (which is very widely followed) is it does not account for the subjective elements of pricing. Even though setting the prices may appear to be a very mathematical and objective procedure, in its finest hour effective pricing requires a good bit of analysis and introspection. The primary objective when you price your food is to create a price that allows your company to create profit and at the same time that creates a perception in the mind of your customers that you are a good and fair organization. This is a very delicate balance to straddle and yet, it is what must be ever present in your awareness each time you sit down to price your product. Here are a few strategies to consider as you begin to examine your pricing procedure:
Create a Positive Price Image - this is critical for the success of your department! To create a positive price image, you cannot simply lower your prices and not worry about your margin. Neither your job nor your store's future would last very long. The best way to create an effective price image is to think like your customers. Most shoppers will only remember the prices of a few key items, and these items become the basis on how you are judged - good pricing or too expensive. It's easy enough these days (with all the reports that cash registers can produce) to find out what your top 10 selling items are. From this list select five items that will become your pricing leaders. Because these are major moving items, you don't want to achieve a lesser margin on these products, but what you can do is to still price them at a lower target. If, for example, you price at a 44% margin to actually achieve a 35% gross margin, then we adjust downward with the selected five items. We still aim to achieve a 35% margin but we price at a 40% margin to achieve this. In order for this to work, you must work harder at attaining the necessary margin on these items through excellence in operations, and not rely on a pricing buffer. The selected items must be rotated daily, well presented, and constantly worked in order to achieve your margin results. All of this added effort will help your department present an effective price image without taking away from your margin results. Of course, another excellent strategy for creating a great price image is to have regular items on special. Taking full advantage of Albert’s Retail Marketing Program and ensuring that your specials are presented in key locations within the department with large displays is a near guarantee to help your overall price image.
Use an item as a "loss leader" - this is a common strategy in many mass market stores and can be extremely effective. With a loss leader, it is not recommended that you price any item at a loss, but rather at a break even point or slightly above. Bananas are an example of a good loss leader item. They are one of the most popular items in any food store and many shoppers can quote the price of bananas from three or four different stores - their pricing is that memorable. As a loss leader item, you could sell bananas at your cost or slightly higher. Granted this provides you with zero margin from your highest volume item, and certainly without explanation, this can seem like a ridiculous strategy. The best way to approach this method of pricing is to actually view the entire strategy as a marketing expense. If everyone in your community knew that you had the best organic banana price in town (even comparable to conventional prices) then you could safely bet that your produce sales in general would most likely increase significantly. Many stores will even take the loss leader item out of the equation when figuring margin results and transfer it to marketing. Think about it for a moment - you don't spend a dime to achieve a reputation as the best priced market in town. Sure you lose potential margin dollars, but what you gain from increased sales from new customers can easily overshadow that loss.
Make sure you are pricing correctly - it is still not an uncommon practice to use "markup" instead of margin for pricing. If you are making this mistake, you are probably losing significant amounts of money. Just to ensure that everyone understands margin here is a quick review. Margin is the difference between your cost and your selling cost expressed in terms of a percentage. If you bought an item for $1.00 and then sold it for $1.50, your gross margin is 50¢. As a percentage this is a 33% margin, as one third of the selling cost was profit. In this example if you thought in terms of markup you actually marked the product up by 50%. If, however, you mistook that number for margin (thinking your were getting a 50% margin) then you would be dramatically off by 17 percentage points! A nice little formula for figuring margin is to take the cost of an item and divide it by the reciprocal of the margin you wish to price at. So, if you pay $1.79 for Asparagus and want to price at a 43% margin, then you divide 1.79 by .57 ($3.19) and you will have your selling price at a 43% margin. The reciprocal of a number is the number that when added to the number you are working with equals one. So the reciprocal of .37 is .63 and so on.
Good luck with your price image and remember that being priced for success does not necessarily have to equate with high prices. It does mean however, that you must employ a smart pricing strategy!