Understanding store pricing policy and decisions for your storeBY Australian Retailers Association
As retailers have varying product and service offers, providing customers with a choice in product quality, appearance and functionality, it is understandable that approaches to pricing differ.
It would be naïve to assume, however, that all retail pricing is based upon the cost of goods sold calculation with a consistently applied mark-up that provides for business profit. Interestingly pricing is often a highly strategic decision, at times relatively unrelated to the cost of goods.
Some retailers running a volume business survive on small margins and many sales, others employ luxury pricing with significant margins on low volume. Some incredibly fortunate businesses benefit from volume sales at luxury pricing. It all depends on the sector and the business model.
Pricing is a big consideration for retailers because all other elements of the retail strategy are impacted by it. As a rule of thumb, retailers develop their pricing policy to get the maximum sale price for their products. A handful of major influences determines their ability to do so. These include:
1. Customer: What customers are willing to pay for the perceived value, product desirability
2. Competitors: For commodity products, competitor pricing is an important consideration as customers can easily go elsewhere for the same product
3. Government: Taxes and duties
4. Manufacturers and wholesalers: The price of products, the primary cost of operations, overheads, staff salaries and wages all head towards profit margin and must be applied to devise the final product price.
For retailers to make sense of factors impacting their pricing policy decisions it can be helpful to investigate their market and customers buying sentiments.
The following questions provide a good starting point:
- How important is price stability?
- How long do prices ideally need to be maintained?
- Do prices need to be flexible to accommodate changes in costs and customer demand?
- It is necessary for the same prices to be charged for all customers buying under the same conditions?
- It a customer’s ability to bargain a necessary element of pricing?
- Is strategic pricing an effective approach to draw customer traffic?
- It is necessary that customers be eligible for discounts for purchasing in quantity?
- Is it advantageous for pricing practices to vary by department, store or product line?
Taking the time to answer these questions can provide insight into which considerations are most important for each retailer when developing their approach to pricing. Ensuring alignment with business strategy is the key to developing an approach that both works for business and appeals to their target customer.
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ABOUT THE AUTHOR
Australian Retailers Association
Founded in 1903, the Australian Retailers Association (ARA) is Australia’s largest retail association representing Australia’s $310 billion sector, which employs more than 1.2 million people. As the retail industry’s peak representative body, the ARA works to ensure retail success by informing, protecting, advocating, educating and saving money for its 7,500 independent and national retail members throughout Australia. For more information, visit www.retail.org.au or call 1300 368 041.