Six Principles to Close Deals Faster
p. 6
What Do My Employees Need to Know about Cybersecurity?
p. 10
Compensation Must Be Fair
p. 12
63907 01SRT_07.08.18.indd 1 6/13/18 5:51 PM Published in the July/August 2018 issue of Shoe Retailing Today Copyright © 2018 National Shoe Retailers Association Tucson AZ www.nsra.org. All rights reserved. 18 JUL-AUG 18
A quick search on Google will find millions of entries on the topics of pricing psychology and pricing strategies. Time does not permit research into all of the possible contributions there have been on the topic. I have elected to recap strategies that at the very least most retailers should consider to determine “price” before simply slapping a markup formula on an item based only on its cost.
In a practice still prevalent today the retail price of an item is often determined by a buyer or receiving person applying a formula to the landed cost of an item to determine what it should sell for. Should cost really be the determining factor in what a customer is willing to pay? Does it have anything at all to do with perceived value? Of course not yet we see this all the time. I have questioned retailers about this topic for years and always get the same responses. Most typical are “double the cost and add $2 (supposedly to cover shipping)” or multiply the “cost by 2.2.” Never has the answer included the proper determination of initial markup (desired net profit percentage + operating expense percentage + markdown percentage divided by 100 + markdown percentage) as the basis for the selling price.
What Will People Pay?
One strategy that I have used with buyers at market is to determine the selling price prior to knowing the cost. To do this effectively a retail buyer must answer the question “What will our customers be willing to pay for the item?” Once the cost is revealed a determination can easily be made if the item fits within the company’s markup strategy.
The Fascinating Psychology of Price
Obviously marketplace considerations and online competitive pressures are the final word on many pricing decisions today. Let’s discuss some additional strategies that you might consider as you determine price going forward.
- Display RED prices to men. Men process ads and signage in depth and use price color to judge perceived savings. The color red becomes the focal point and men associate red with savings.
- Remove the comma. Research has found that removing commas may make the price seem lower. For example my keyword499 versus my keyword499.
- Round prices. They are more fluently processed as opposed to non-rounded price points. In other words consumers can process a round price quickly. Non-round prices need more mental resources to process. Round prices are also more effective for emotional purchases with this caveat: Try when possible to avoid price intervals like my keyword00 or $500 as consumers may make the assumption that they are artificially high and plucked out of thin air. An example of a rounded emotional price point might be my keyword9.00 whereas a non-rounded price would be my keyword9.90. The point here is that often the consumer views the two prices as the same but the retailer ends up with 90 cents more.
- Use prestige pricing. Premium prices set expectations of excellence in the mind of the consumer. Jeans priced at $200 sneakers for $250 or a car for $80000 make customers perceive higher value.
Formula for Determining Initial Markup
Outlined below is a formula for determining initial markup.
IMU = desired net profit % + operating expense % + markdown %
100 + the markdown %
Example: Let’s say that our net profit goal is 7% operating expenses are 40% and markdowns are 18% of sales. Our formula would look like this:
IMU = 7% + 40% + 18%
100 + 18%
Feel that they are buying better products.
This strategy is the complete opposite of odd pricing and involves making all numerical values end in rounded figures. Rounded numbers “feel right” because the purchase is being derived by feelings. Customers might be more willing to buy a bottle of wine for $30 as opposed to $29.95 or $30.28 for example.
Use a premium price to set an expectation of excellence.
The iPhone X (10) selling for between $999-my keyword149 is significantly higher priced than past models. Approaching or breaching the my keyword000 threshold is noteworthy. Boosting prices into the four-digit realm crosses an important psychological barrier. Here’s another example that you may remember. In 1994 after a 14-year hiatus following their well-publicized 1980 breakup the Eagles released a new album and embarked on a world tour. What was unique was that they were the first rock-and-roll band to break the my keyword00 ceiling for concert prices. Eagles manager Irving Azoff stated that the ticket cost had nothing to do with supply and demand but rather was a statement of quality. Fans would once again get to see and hear the greatest American rock-and-roll band not a “washed-up oldies” show. This really was a fascinating use of price as it created a belief of excellence in the mind of the consumer. (I saw this show – and it delivered.)
Multiple pricing.
This method involves selling more than one product for one price. Buy 3 for my keyword0 or buy the first item at full price and get the second item for half off. This strategy works great for clearance items and sale events as consumers will tend to buy in larger amounts.
Discount pricing.
This is the high/low pricing strategy: Was $70 now $35. You save $35. It is important when using this strategy to frame the sale around the savings instead of around the amount being spent.
Loss leaders.
Grocery stores and other retailers have employed this strategy for decades.
As an Effective Way to Create Traffic
The idea is simple: The featured item is advertised below cost in hopes of getting shoppers into the store at which point they are likely to buy additional items. Your local grocery store does this every week. You might pick up bananas at 29 cents a pound and end up spending $50 on full-price items. What if a shoe retailer were to try this with socks that had been purchased at a special price? Might additional purchases be made? My guess is yes.
Price Lining
This works great for final clearances at season end. All remaining stock to be liquidated is inventoried by original price from low to high and an average is struck. Let’s say you have items that sold originally from $40-my keyword00 and are currently on sale for half price. If you determine the average original price to be say $60 you might mark the entire rack as follows: Values up to my keyword00 your choice $29.90. The lucky early shopper might get the few my keyword00 pieces which you lose money on but the loss is more than made up on sales of the lower-priced items.
Reduce the Pain of Paying
Uber revolutionized the taxi industry. With traditional taxi rides you watch the meter increase with each minute stuck in traffic or each mile traveled. This evokes a painful sensation. With Uber you know what the trip will cost before you start and it’s billed right to your credit card. The perception of payment is also distorted by the use of gift cards and casino chips two additional payment methods that have created a separate medium between the customer’s money and the payment.
Remove the Dollar Sign
It can remind some people of financial pain. Ever notice that many restaurants are now pricing menu items without the “$” before the number?
Don’t Irritate the Customer
The next time you are tempted to slap up a “25% off” sign and call it good
Remember that Percentage Off Pricing is Irritating to the Customer
It is tremendously overused and less profitable to the retailer. When was the last time you saw Pepsi at 20% off or 15% off Colgate? The packaged goods industry doesn’t use percentage off marketing while the rest of the retail world has gone percentage crazy.
The Psychology of Pricing
The psychology of pricing is a fascinating topic. I would encourage all retailers to experiment with a few of the points discussed in this article. You might discover a more profitable way of pricing your products.
- Ritchie Sayner of Advance Retail Strategies LLC is author of Retail Revelations: Strategies for Improving Sales Margins and Turnover available from Amazon. He can be reached at rmsayner@gmail.com or 816-505-7912.
- One strategy that I have used with buyers at market is to determine the selling price prior to knowing the cost. To do this effectively a retail buyer must answer the question “What will our customers be willing to pay for the item?” Once the cost is revealed a determination can easily be made if the item fits within the company’s markup strategy or does not.
63907 01SRT_07.08.18.indd 19 6/13/18 5:52 PM
Summary of Pricing Strategies
The article discusses various pricing strategies that retailers can implement to optimize their pricing models and increase perceived value among consumers. These strategies include using red prices to attract male customers removing commas to make prices appear lower and employing prestige pricing to set expectations of excellence. Additionally the article highlights the importance of determining selling prices based on customer willingness to pay rather than solely on cost.
“The psychology of pricing is a fascinating topic. I would encourage all retailers to experiment with a few of the points discussed in this article.”
Real-World Examples of Pricing Strategies
Here are some real-world examples illustrating the application of various pricing strategies discussed in the article.
- Apple’s iPhone pricing strategy often uses prestige pricing. By setting the price of the iPhone X between $999-my keyword149 Apple not only covers costs but also positions the product as a premium item setting consumer expectations of quality and innovation.
- Uber’s pricing model reduces the pain of paying by offering upfront pricing for rides. This approach eliminates the anxiety of watching a taxi meter climb providing a more pleasant and predictable customer experience.
- Retailers like Walmart often use loss leaders to drive traffic to their stores. By advertising certain products at a loss such as bananas at 29 cents a pound they attract customers who are likely to purchase additional full-price items during their visit.
