In the current competetive markets, pricing is crucial. Yet, I have found that many small firms often do not have well-conceived pricing plans. And many such firms seem to panic (or ignore the problem) when large discount-oriented retailers enter their trading areas.
This is not necessary; small retailers can prosper in today’s discount-oriented environment, as long as they have a good understanding of their niche in the marketplace.
When developing your pricing strategy, there are a number of things to keep in mind. First, you’ll have to think about some basic parameters, such as your place in the market (high end, medium, or low end), whether you want to use manufacturer suggested list prices —I would suggest to raise them; see below—, how often you want to change prices and run sales…
Only when all those points have been cleared out, you can set prices for your items. Your Point Of Sale software can help you developing your pricing strategy.
The first thing you’ll need to do is to make sure that all costs are entered in the EPOS system. Whenever you make a purchase, do not only enter the purchase price of the item, but also think about adding transport costs, administrational fees and the cost of the handling time to your purchase documents. This is a very important step, as only when all costs are known, the POS system will show you the correct margins. Getting your costs correct may be the difference between making profit and losing money.
If your manufacturer suggests you prices, you have an easy job: just take the suggested price, and make it a little bit higher. Why would you want to raise the suggested price? The most important reason is that a little higher price won’t be significant enough for your customers to go somewhere else. And by raising your prices only a little bit, you’ll maximize your profit.
Imagine an item that cost you €0,50 and that has a suggested retail price of €1,-. Imagine also that you would sell 1000 units under those conditions.
If you raise your price by 10%, your margin raises by 20% and you only have to sell 833 units to obtain the same profit!!
The same principle holds for discounts: if you lower your price by 10%, your margin sinks by 20%, and you will have to sell 1250 units (25% more!) to get the same profit.
A good POS system will show you the obtained profit at the price level you choose, and will let you make price changes in a very easy way.