How do retailers set prices for their products? What is margin and margin? These issues concern both consumers and novice businessmen.
Everyone who is going to open their own retail store must clearly understand what margin is in trade. The concepts of margin and margins are different, although there is an obvious connection between them. The margin shows how much profit each dollar invested in the purchase of goods brings. And the margin, the formula of which is the margin / (100 + margin), shows how much profit each dollar of turnover brings. So what should be guided by setting this or that margin on a product, except for the notorious “money is needed”?
Competition and pricing strategy
If the competition in the market is very high, then, of course, the consumer chooses the store with the lowest prices, so using regular monitoring of competitors, approximately the same prices for goods are set.
In those markets where image, status or service matters, the cost of goods can vary significantly. This, for example, branded clothing stores, restaurants, household appliances and electronics stores, etc. Successful experience is cleverly copied by competing enterprises, so retailers who are trying to somehow detach themselves from competitors are forced to constantly improve in terms of service, provide additional services and goods, there is constantly “explaining” to the buyer why he should pay more and what makes the client of this particular store or the guest of this particular restaurant special. Moreover, the vague slogan “we work in the premium segment” is completely insufficient.
Cost pricing method
One of the options for enterprise pricing policy is pricing based on the cost of production. The price with this approach should cover all costs and include the rate of return.
This approach is quite acceptable if there is completely no competition in this market segment, if the product is not a consumer goods and the buyer does not notice a price increase, if the goal is to quickly and without loss get rid of excess goods. To calculate prices with this approach, it is necessary to understand very well what margin is in trade, what the cost of production consists of, what are the costs associated with the sale and promotion of goods on the market.
Consumer Value Pricing
This approach uses the interpretation of prices from the point of view of marketing. Goods cost as much as they are ready to buy. This strategy is applied in markets with inelastic demand. This sets the margin in retail for jewelry, art objects, designer clothes, status accessories and so on. Or it may be goods for the poor. Demand in this segment is also inelastic, as a pensioner will not pay more, even if the quality of products or services at the outlet improves. With the correct definition of the target audience, its needs and moods, this strategy can be very effective. The buyer does not think about what margin in trade is and what it should be if the seller found the necessary leverage to influence his client.
Lack of pricing policy
If prices in the store change too often, then the buyer suspects unfair play and may not return. The system of bonuses, discounts should be absolutely clear to the client and the store staff, otherwise it will be like trying to confuse and deceive.
No need to abuse discounts. Ultimately, this can lead to the lack of funds for the purchase of goods. This mistake is often made by beginners who do not quite understand what margin is in trade. A situation is possible when, with a fairly decent turnover, an enterprise can hardly pay for itself (well, if it pays for itself).
Neither the merchandiser nor the accountant can set prices. The first does not know anything about the cost, the second - about the positioning and portrait of the buyer.
Too frequent questions from customers about why it is so expensive are a signal of a shortage of marketers and category managers. The price is not set "for luck", it must be justified. The seller must be able to convey to the buyer why this particular loaf is special and why it costs more than around the corner. If there is no such justification, then the price will have to be reduced. An upscale marketer is a talented manipulator of consumer awareness.
