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Pricing for Profit

by Lily O'Halloran

Price points are one of the most important factors of attracting new customers. While some customers are willing to pay top dollar for certain products, most customers are looking for a bargain. Price-conscious shoppers are always on the lookout for the lowest price available. Be that as it may, creative pricing strategies will allow you to attract even the thriftiest consumer.

The two most common types of pricing strategies are everyday low pricing and high-to-low pricing. Both types of pricing strategies can be combined with various types of price adjustments to draw new customers and create customer loyalty. Loyal customers are an essential facet of a successful business.

Everyday Low Pricing

Everyday low pricing uses price points that are lower than competitor’s non-sale prices. Price points are often set just below the Manufacturer Suggested Retail Price (MSRP), but they may be set at a deeply discounted rate instead of just below the standard price. Low pricing enables a store to boast low price guarantees. Although everyday low prices are set low, they may not actually be the lowest price available. Wal-Mart is an example of a store that uses everyday low pricing.

Everyday low pricing offers many benefits, such as: creating customer loyalty, reducing competitor price wars, reducing the amount of advertising needed, increasing customer satisfaction, and allowing for easier product inventory management. Customers show loyalty to stores that use everyday low pricing. They feel that they are getting a good deal on a product, even if the product is not on sale. Loyal customers make larger and more frequent purchases than other customers. Everyday low pricing reduces the chance of price wars occurring with competitors, and reduces advertising expenses. Catalog or ad prices remain at a steady low price, which allows them to be used longer. Steady prices also help to control inventory fluctuations. Managing inventory becomes easier, and stores are less likely to run out of a product. In-stock items help generate customer satisfaction.

High-to-Low Pricing

High-to-low pricing strategies can make customers feel that they are getting a good deal. Here is how high-to-low pricing works: The store charges higher prices than its competitors, but it frequently run sales with huge markdowns. Advertising is utilized to promote sale events. In the past, department stores used high-to-low pricing as a method to clear out seasonal merchandise. However, customer response was so great that many stores switched to this pricing method year round. Macy’s is an example of a store that uses high-to-low pricing.

The benefits of high-to-low pricing include: merchandise the appeals to a diverse demographic, customer excitement, improved product turnover ratio, and an emphasis on quality merchandise. Higher priced merchandise targets fashion-conscious, trendy consumers on an everyday basis. Price-conscious shoppers are attracted to the big sale events that enable them to buy high-quality, name brand merchandise at sale prices. Thrifty customers are attracted to the largest markdowns that allow them to buy great merchandise at frugal prices. High-to-low pricing generates customer satisfaction in a wide variety of consumer types. Merchandise turns over more quickly with frequent sales. Sale events excite customers and lead to satisfaction and loyalty.

Price Setting Approaches

There are three main price setting approaches: cost-oriented, demand-oriented, and customer-oriented. Cost-oriented price setting adds a fixed percentage to the cost of the product. For example, a product that cost $10 would be sold at $14 with a 40% fixed percentage using cost-oriented pricing.

Demand-oriented pricing is often used for hot products. Retailers create a price that they feel consumers are willing to pay. Prices are adjusted as demand fluctuates. A really hot item may cost a store $100. However, the store can price the product at $300, if they know it will sell at that price.

Competition-oriented price setting involves pricing products competitively. Retailers charge competitive prices, rather than pricing on demand or cost. For example, a product costs $30. A competitor is selling the product for $55. The retailer using competition-oriented pricing will compete with the other store by charging $49.95 for the same type of product.

Types of Price Adjustments

Price adjustments attract all types of customers. Thrifty shoppers are far more likely to make an expensive purchase, if they are offered an opportunity to have the price adjusted. Customers who are not budget-conscious are attracted to price adjustments as well, although they often do not follow through with the adjustment. Common types of price adjustments include: markdowns, coupons, rebates, price bundling, multiple-unit pricing, and variable-unit pricing.

Markdowns are price reductions. Retailers choose to markdown items for several reasons. Seasonal merchandise is marked down at the end of the season. Markdowns are also taken on slow-moving and obsolete merchandise. Markdowns are generally used with high-to-low pricing methods. The regular price of the merchandise is higher than competitors pricing, so reductions do not cause the retailer to lose money. This high-to-low strategy allows retailers to promote sale events and generate excitement. Markdowns benefit retailers, because merchandise clear out faster – making room for new merchandise, store traffic is increased, and cash is generated through sales.

Coupons are discounts offered on specific products. Coupons attract new customers, as well as price-conscious consumers. They also encourage customers to purchase multiple products. Coupons enable a retailer to protect their share of the market.

Rebates return a portion of the money spent on a product to the customer. Rebates attract many types of consumers. They can encourage a thrifty shopper to spend money on something that they otherwise wouldn’t buy. Customers who pay high-end prices are attracted to rebates as well, and they often do not go through the process of obtaining their rebate. This is why rebates are also known as phantom discounts. Rebates are most often used on higher-priced products; this allows the consumer to feel that the rebate is worth the time and effort required to process it. Rebates are similar to coupons, except the manufacturer does not incur handling expenses.

Price bundling increases sales by bundling two products together for one low price. Price bundling encourages customers to purchase multiple products, thus generating more sales.

Multiple-unit pricing is similar to price bundling, except multiple units of one product must be purchased to receive the lower price.

Variable-unit pricing is a strategy used by retailers with stores in different markets. The same product will have different price points at each store depending on how the market influences the demand for a product. Variable-unit pricing enables retailers to compete for market shares.

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