SCORE Small Business Blog

Setting and Raising Your Prices
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Setting a price for your product or service is certainly an endeavor not to be taken lightly. I’ve walked through the process with many business clients and have the following recommendations for how to do it the right way.

Competition

You must KNOW the competition in your trading area.  Visit each competitor several times and different times of the day (the same hours you should expect to be operating).

Understand the allocation of space to each category in each of the competitors.  As an example, if you are going to open a convenience store, you should know the number of cases dedicated to soda, water, juice, tea, milk, beer/wine etc.  You should also do a linear analysis of products on the floor: number of feet dedicated to candy, chips, household items, etc.  This exercise will help you to understand who your customer will be.

While doing this exercise you should be cognizant of pricing, especially the branded merchandise.  Are they using manufacturers’ “suggested” retail, do they have a “loss leader” in some categories?  Are the prices competitive with grocery stores in the trading area?  They most likely will not be competitive with the grocery store because the grocery store usually has much lower markup requirements. Their higher volume will create greater positive cash flow and their buying power can get lower prices from the manufacturer.  But, you must know the consumer knows what they pay for highly frequented purchases.  Or, they can use a free app to find the lowest price in the trading area.

Know the service each competitor offers.  Are they neatly dressed?  Do they greet or welcome you?  Do they offer to assist you?  Understand the customer service aspect as well as you do the merchandise assortments.  Service can differentiate you from your competition, if you train them correctly.  It does not always have to be a price war.

Assortment Plans

Now that you know the competition, you know their strengths.  You have surfaced voids or opportunities for you to be unique.

Build your assortment plans by category.  Each category can have a different markup and a different turn factor.  Build this from the bottoms up.  By doing so you can determine if you can “afford” to get into a price war.  Sometimes, it is best to be competitive and offer other distinguishing factors…service, clean bathrooms, safe environment.

Raising Prices Down the Road

You just can’t raise prices across the board.  You must know what part of your business is hurting the overall profitability the most, then develop different approaches to correct.  Always keep in mind what the competition is doing.  One way to appear to be more competitive and drive incremental sales are to offer “two for’s”:  If they buy one the price remains the same, if they buy more the price is much better. Another option may be to change prices on everything in a category except a highly recognizable item and have it be a loss leader.  Working with SCORE can help you make a more educated analysis.

If you are faced with a manufacturer’s increase, take the increase and adjust your prices.  Your competition will eventually raise their prices or lower their profitability.  You can also drive sales from a price increase by in-store advertising.  “Manufacturer Increase on October 1, 2013 on xxxx.  Buy now and save.”  You are making a friend and driving sales and will not get a black eye for raising  the price in the future.

Everyone in business knows it is far easier to reduce prices than raise them.  A SCORE mentor will carefully navigate you through all pricing decisions while developing a business plan and the five year financial forecast.

John McClymondsSCORE Mentor, Houston SCORE
John has 37 years of department store merchandising and regional store management experience with Foley’s and Macy’s. As a former Regional Vice President/Sr. Vice President of Stores, his expertise includes driving sales, increasing profits and improving customer service.
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