As a retailer, you have several weapons in your armoury and one of those is pricing. Admittedly, pricing options are limited to three only: up, down or no change. The up is limited by the amount the customer is prepared to pay and the down is limited by your need to make a profit.
Now hear this: if you are going to sell you products at high prices which are above your competitors, you'd better have a unique selling point that sets you apart from those competitors. Here is a list of some unique points that may justify higher prices:
(i) your store may be far nearer to the main catchment community than competitor stores
(ii) your store may have exemplary standards of customer service and hygiene
(iii) you may sell an exclusive range of goods or have the exclusive license for lottery or other services
(iv) you may offer a loyalty scheme where customers can have cash back or money off in return for historical purchases
If you cannot demonstrate any of the above advantages (or any others I have not listed) that benefit most of your customers, then you are in the thick of the battle and you simply cannot afford to overcharge for the products you are selling. If you do, life will be one big struggle as most potential customers go elsewhere.
If, once you have added up your product purchase costs and overheads, you find that the prices you must charge are typically higher than your competitors then, as you no doubt know by now, you are in trouble. You have no choice but to either (i) reduce your costs or (ii) give your store a competitive edge outside of the price. Take the list above: see if you can match one of those criteria. You may wish to read the last article in this series: Go Local! This article discusses the possibility of a store selling goods from local producers. If you choose option (i) reducing your costs and lowering prices, be careful. Do not go from one extreme to another. You could decide to draw a fraction of your normal salary from the business and live on jam on toast for a year, sack your weekend staff and work round the clock yourself in order to bring down costs and then reduce all your prices across the board. In the very short term you may be disappointed. The word takes a while to spread, even with advertising. I guarantee that the extra customers you gain will NOT make up for the loss of profits. Over the medium term things will surely pick up as customers get the message. Despite this, you will still not see a greater profit and will probably still be on your diet of jam on toast. At this stage you will be the archetypal busy fool, working your socks off for peanuts. Then, something will happen that you may not have anticipated. The store down the road will hit back, lowering their prices to match yours and even below yours. Now you are in trouble. With a family to feed, you are working every hour that God sends for a pittance in return, and what is more, you are back to square one! What went wrong? The answer is in the phrase “reduce you prices across the board". Wrong, wrong wrong! Do not go to these extreme. Do not antagonize your competitors. Unless you have virtually unlimited access to money (and you are not running a charity, by the way), do not start a price war. Normal business practice gives way to personal pride when one competitor decides to go over the top and reduce all their prices. This is not on and cannot be sustained. The answer is strategic pricing.
What is strategic pricing? It is an intelligent way of pricing medium and fast selling goods that keeps your customers and your competitors on their toes. You cannot afford - nor (usually) is it desirable to keep these prices permanently lower than those of your competitors (see above). Instead, choose a medium trading day and reduce prices across one or two ranges for that day only. Customers do not like prices fluctuations and price rises are even less welcome, so make it clear with decent point of sale messages that this is a price cut for “today only". Of course you will need to observe any laws in your juridisction that govern the criteria for describing something as a price cut. You could have cuts across a wide range of goods and call it something like “Super Tuesday". The following Tuesday you could target different ranges with price cuts. That way customers know that Tuesday (or whatever regular day is appropriate) is a the day when they will see bargains at your store. You will hopefully build up some trade on this particular day and take some away from your competitors. Knowing that these price cuts are eating into your own margins, try to place some higher profit lines near to the cut price items. For some stores, day to day price changes may be time consuming. If you cannot find a method of doing this without incurring extra cost, then you should still strategically cut prices at least on a weekly basis. Remember to talk with your supplier. You can often negotiate lower prices if you can convince them that you are carrying out a genuine promotion on a product. They will often supply you with supporting point of sale material. If you are very lucky they may even extend a regional/stateside campaign to your area.
Selling at a loss is generally not a good idea. It is often banned by some suppliers and even against the law for certain products in certain jurisdictions. However, if it is allowed, then just now and again go for it. Just as you might invest in advertising, you could invest in pricing. See if you can afford to get some ads on local radio and in the local press and pick one or two lines and sell at a loss. You will rarely see advice like this anywhere else. Why? Well, apart from the rules and regulations governing loss-leading, it is true, that over the promotion period you will have not made any extra profit and in fact made quite a loss, not just on the promoted products, but across the board. Now, it depends on your timescales as to whether this kind of thing is a good idea. If you are wanting to make a fast buck, then forget it. If, however, you are trying to build trade and attract a following then this kind of activity will pay off over time. What you will be doing is changing customer's habits. If they know that your store is known for genuine bargains, some customers that you won from the opposition are likely to stay with you. Over time this will pay off - but only if you persist with the practice. Remember what I said above, though. Do not antagonize your competitors. Such deep cuts must only be for a limited period.
Sometimes prices are reduced in order to clear perishable lines or lines that are stuck (they are refusing to sell). Take the first category, perishable goods: I have seen many stores, including large multiples, reduce perishable goods at the same time each week. Frankly, that is very dumb. What these stores are doing is creating a trade within a trade - a trade in low (often below) cost goods. If you regularly reduce perishables at 4.15pm each Saturday then many customers will leave their Saturday shopping until just before 4.15pm each Saturday, knowing they will get a bargain. You may respond by saying “I can't pick and choose when perishable goods are overstocked and therefore I can't choose when to reduce prices". Oh yes you can. As the goods are getting nearer to their shelf life expiry, you can do an inventory. You will usually know 24 hours in advance that certain goods are likely to be overstocked. you will also know the extent of the overstock. What is more sensible is to take a quantity that is equivalent to (or just less than) the amount of estimated overstock, and reduce it early, say about 10:00am. Do not reduce all of the stock. Have one display at full price and another at the reduced price (if customers are confused, then temporarily take the full priced goods from sale). Once you have cleared most of the reduced price goods, then you can sell the remaining stock at full price. The 4:15pm rush will turn up as usual, but this time they will have to pay full price! You are unlikely to loose many customers: in fact they will be more evenly spread across your trading week, and may improve your store's efficiency. What is certain is that, over time, your profitability will rise for these perishable goods.
If you take end of line or products that are stuck, consider a two-for-one sale. Your main aim is to clear the stock so that faster sellers can take their place. You could also consider lumping together a profitable line and the stuck line: “if you buy one of these, you get one of these free". Ok, so you are writing off the stock, but the stock is dead anyway, isn't it? At least this dead stock can do you one last favour of helping you move a more profitable line.
Strategic pricing cannot always be in one direction. Keep an eye on your competitors. When they raise prices on a certain product, which they inevitably will do, you would be advised to follow suit, otherwise you will be underselling. You don't need to be told that you need every bit of profit - it is your livelihood after all.
Whether prices are strategically cut on certain days, or a week here and another week there, or (ideally) both, then you are creating the impression that you are a store that regularly sells products at bargain prices, even though these bargains may be sporadic. You will create interest from customers. Even if they are planning to buy most of their groceries at your competitor, they might stop off at your store in the way, or pop in on odd days, simply because there is a high chance of getting a bargain. You will build up more trade and the really good thing is that customers will inevitably buy other goods at higher margins.
Strategic pricing keeps your competitors guessing and demonstrates to your suppliers that you are seriously pushing their products, which may help you negotiate prices and obtain marketing support. Above all, strategic pricing makes your offer vibrant and exciting with customers getting into the habit of coming to your store.
Vernon Stent is the content writer for AboutRetail.net