Calculating your Pricing Strategy

For many businesses the product pricing decision has traditionally been based on simply taking the cost price and adding healthy profit margin on top plus VAT.
However an increase in fabrics and haberdashery being sold online has significantly increased price visibility. This means it is far more likely that your customers know the price of a product before going to your shop. This doesn’t mean you need to match online prices but you need to be aware that the competition is a lot wider and not always fair.
With this in mind, the following checklist of questions has been developed to assist you in making systematic, informed decisions regarding pricing strategies and tactics.
This checklist should be especially useful to a new retailer who is making pricing decisions for the first time. However, established retailers, including successful ones, can also benefit from this guide. They may use it as a reminder of all the individual pricing decisions they should review periodically. And, it may also be used in training new employees who will have pricing authority.

Understanding your customers

Which is the main reason customers visit to your shop?
How important is the product price to your target consumers?
The importance of setting prices depends on the specific product and on the specific individual. Some customers are very price conscious. Others want convenience and knowledgeable sales personnel. Because of these variations, you need to learn about your customers' desires in relation to different products. Seeking feedback from customers is a good starting point.
Demand orientated or cost orientated pricing?
Unlike cost orientated pricing which simply adds a predetermined amount to the wholesale cost of the product, a demand orientated approach considers what consumers are willing to pay and how there demand will be affected by a change in the price of a product. Competition is one factor that could affect this.

Understanding your competition

Who is/are your main competitor(s)?
Do you know what direct competitors are doing price-wise?
Do you regularly review competitor's ads to obtain information on their prices?
Watch competitors' prices so that your prices will not be far out of line - too high or too low - without good reason. Of, course, there may be a good reason for the out-of-the-ordinary prices, for example if you want your brand to be associated with lower prices or you want to use higher prices to create a perception of quality.
Which price strategy would suit you the best?
Selecting a general level of prices in relation to competition is a key strategic decision, perhaps the most important.
Should your overall strategy be to sell at market price levels?
The other alternatives are an above-the-market strategy or a below-the-market strategy.
Should competitor's temporary price reductions ever be matched?
Could selling a less known brand, be an advantage to avoid direct price competition?


Understanding your products

In this section you will be considering how selected characteristics of particular product affect your profitability.
Which are the products that drive customers to your shop?
Which products are bought by convenience?

Identifying products that drive customers to your shop, products that are normally bought together and convenience purchases; will give you an idea which products affect more your profitability and therefore you need to pay more attention to the pricing.
Is this item at the peak of its popularity?
Do certain items have greater appeal than others when they are part of a special sale?
Did you get a "good deal" on the wholesale price of this product?


And now you’re ready to set your prices…

Once you answered all the questions above, you will have enough information to set up your prices. Remember, you need to review your pricing every so often, maybe marking in your calendar the time when you need to refresh your data (customer knowledge, competitor’s understanding, etc.) would be beneficial.
Last but not least, pricing is an important part of the mix in order to attract new customers, but pricing alone will not bring customers back to your shop. Other factors like: your customer service, your expertise and the environment you create will play an important role in making sure your new customer comes back again and again.
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