February 14, 2019
What Is The Right Price?
Pricing products or services is a balancing act — you want to charge enough to make a “good” profit, but not so much as to discourage sales. Today there are software programs that are designed to help you make pricing decisions, but for most of our c-store clients it is still more of an art versus a science.
Lots of issues can come into play, including, but not limited to:
- The true cost of the item (regular, promotional, before or after rebates and display allowances are applied, terms granted by the supplier).
- Are you establishing an everyday or promotional retail? Do you price based on an EDLP (Every Day Low Price) or a High Low pricing strategy?
- The positioning of the category the item belongs to. Is this item part of a traffic builder, an image creator, a profit generator, etc, category?
- Is this a category where you “price line” or individually price the items? For example, candy is a category that most retailers price line, i.e., they establish prices for all regular size bars versus a category like beer for which some retailers establish a price line based on the beer being a import, premium, value or budget.
- What is the prevailing pricing for the item (regular/promotional) in the marketplace?
- Do you have contractual obligations regarding promoting the item?
- What are the risks involved? Is this a guaranteed sale item? Something that you carry everyday or something that is more of an in and out item?
Each of these factors can come into play when determining what is the right price. Let’s first look at what we call retailing math.
One of the first issues is that Mark Up and Gross Margin are not the same. While it occurs less often that it used to, we still find salespeople who tell unsuspecting clients that they will make “X” percentage when selling this item.
What they fail to state is that they are talking about the markup on the item, not the gross margin. In dollar terms they are the same. In percentage terms they are not. For example, for an item that costs $1.00 and has $1.25 suggested retail, the $Mark Up and Gross Margin is $.25.
However, in percentage terms, the Mark Up percentage is based on a formula that uses cost as a basis – $.25/$1.00 yielding a 25% mark-up. With gross margin, the formula uses the retail price as a basis – $.25/$1.25 yielding or generating a 20% gross profit. Here are some fairly easy to remember mark up / gross margin relationships – 100% MU » 50% GM; 75%MU » 43% GM; 50% MU » 33.3% GM; 33.3% MU » 25% GM and 25% MU » 20% GM.
Percentages are a handy and useful short hand way of discussing gross margins, but no one has ever taken a gross margin to the bank. We advise our c-store clients to think in terms of “penny profit” or $ gross margin.