Welcome to my Blog! I plan to use it to share my thoughts on some of the ways a business can use data to solve problems and develop strategies. I hope you find it interesting and find a nugget relevant to you! This post is about the importance of having a well-planned pricing strategy.
Ideally your pricing model should not be based on a single fixed margin across your range and through the year, rather it should be based on a set of thoughtful decisions which bring to life through pricing what your brand stands for; what is important to your customers and how you differentiate yourself vs your competition.
Let’s consider first a real life example: a drugstore chain with 4 main departments: prescription medicines; OTC medicines; Vitamins & Supplements and general Health & Beauty products (HABC). For prescription & OTC medicines, their strategy is to charge a fair margin that reflects all of the costs associated with offering these products: product cost; freight; labor; utilities; licensing & waste-factor. The aim though is to keep this margin tight as it is important to them as a company to offer these products to their customers at a reasonable price, similar to their competitors. This drives loyalty in the part of their business that can benefit most from it. For Vits & Supps and HABC though, they use a tiered margin structure. Firstly, they take a healthy margin on their everyday value / generic brand items, low enough to be competitive and to offer a range that suits their ‘value-seeking’ customers. On their mid-tier range of well-known brands, they take a slightly higher margin but use some of these funds to run big quarterly promotions with deep deals which help to drive traffic into the store and deliver sales uplift during these periods. On the higher end items like cosmetics and skin-care they take their highest margins. They work hard to bring brands that are different from their competition / exclusive to their store; they use premium merchandising stands; offer samples of the items and bring seasonal ranges to keep their customers excited. Though not the biggest part of their business, with the higher margin this section plays an important role and the additional margin enables the business to invest in sourcing new brands and marketing these products.
We can see from this example that this pharmacy chain has given some thought to its pricing structure and how to use it as a tool to meet customer needs and to drive certain areas of the business in different ways.
To create a pricing strategy, it’s important to ask the following questions of your business:
What are the true costs of my products?
The invoiced cost of an item will not include all of the associated costs like freight & taxes/duties as well as product-specific factors like insurance / yield or waste-factor / secure or temperature controlled storage. In industries like foodservice, the true cost will also include the preparation of the menu-item and everything that comes with that. This true cost needs to be established first before margin is applied to make sure every item covers itself
What is important to my customers and why do they come to my store?
You likely have different customer groups with different needs and values. Their perception of your store and your pricing is important: for some it will dictate whether they shop with you regularly or for a treat; for others they may only buy specific categories in your store but not others. Bear in mind too that new shoppers will use it as an indicator of ‘value’ with a combination of other factors like customer experience to decide whether or not to return at all.
Who are your competitors and do you want to compete with them on price?
Depending on what your product range is, how you price vs your competition may be of critical importance or not matter too much. Understanding your competition and how your customers choose where to shop is the key and should help to shape your pricing strategy too.
What role do price promotions play and how can I build this in?
Some price promotions are funded by suppliers and others by retailers themselves. Building a buffer into your everyday margin to create a promotional fund can be a smart way to use discounts to drive new shoppers into store; to reward existing shoppers and to move any slow-movers or end-of-lines. Understanding whether you want to offer everyday low prices or have a high-low strategy will clarify the role of promotions and how you use them to drive sales. I’ll have a separate blog post on promotional strategy since it can be such an important sales driver so watch out for that!
What is the role of each department and should your pricing strategy differ between them?
As with the drugstore example above, pricing can play different roles for different departments. Even within one single department, pricing can serve as a tool to encourage your customers to consider different brands / product-tiers and can help you to drive trial with a ‘category-entry’ strategy. Equally, if one department is more labour intensive and has a higher operating cost, ideally the pricing for that department should take these into account and not dilute margin elsewhere.
Once you are clear on each of these elements, it becomes much simpler to create a margin strategy and model a couple of different margin ranges to test the weights and reach a final weighted margin position you’re happy with.
So there you have it, pricing can be so much more than just a flat percentage onto your first cost. It can shape your business; ensure you’re competitive and that you’re optimizing your range while meeting your customers’ needs.
Having a clear pricing strategy means when any of these factors change or if the performance of any one business area shifts, you can easily take a step back and review what needs to change to adapt to a changing environment. Data is just as important in reviewing and maintaining your pricing strategy as it is in the development stage.
Thanks for reading! I’d love to hear your thoughts at liz@una-solutions.com
