MONEY MATTERS: PRICE POINTS THAT SELL PRODUCTS

By Peter Cox March 10, 2016 Industry news

A good pricing policy is vital in any retail or service business. Formulating a price is a balancing act – it is the outcome of a variety of factors such as overheads, supplier costs, margin required, customer’s needs and perception of value from the product or service.

There are two types of products and services you regularly sell and both need to be priced accordingly.

 

1. CASH COW PRODUCTS

These products and services are the basic commodity lines: a tax return in an accountancy practice; tyres in a tyre dealership; paint in a hardware store; chemicals in a rural merchandise outlet; milk & bread in a supermarket; termite fumigation in a pest control operation.

A major motive in customers buying these basic commodities is price and as such these products generally generate a lot of turnover but at a low margin.

Their prices are set by the marketplace and competition and are generally easily compared. Price is very much part of the consumer’s decision making process.

 

2. IMPULSE OR STAR LINES

Unlike cash cow products, which cater to basic needs and usually bought on price, what I call impulse or star lines are purchased for other reasons.

These lines are customers’ “wants” and as such price is not as important.

They are bought on impulse because the customer has seen them or has been prompted by the salesperson to purchase. Chocolate bars in a service station are a classic example; tape measures in a hardware store; flowers in a supermarket; and accessories for a new car.

Prices are set that have no correlation with the price purchased from the wholesaler or manufacturer and as such have a high Gross Profit Margin.

The prices are based on the notion of the benefit the consumer obtains. Consumers subconsciously set price points in their mind when obtaining products and services.

The common price barriers are 50 Cents, $1.00, $1.50, $2.00, $3.00, $5.00, $7.50, $10.00, $15.00, $20.00 and multiples thereafter.

For the consumer, if a product is priced at 95 Cents or a service can be obtained for $99.95, it is seen as a good deal but at $1.05 and $105 respectively it appears expensive.

Also if a product is priced at $1.30, as it is now past $1.25 and has moved on to the $1.50 price barrier, it appears cheap in relation to the next consumer price point barrier of $1.50 (or $1.45).

For example: 

Major price barrier

Price point should be

$1.00

95 Cents or $1.25

$1.50

$1.45 or $1.75

$2.00

$1.95 or $2.25

$3.00

$2.95 or $3.25

$5.00

$4.95 or $5.25

$7.00

$6.95 or $7.25

$10.00

$9.95 or $10.50

$15.00

$14.95 or $15.50

$20.00

$19.95 or $20.50

$25.00

$24.95 or $25.50

$50.00

$49.95 or $55.00

$100.00

$99.95 or $110.00

$150.00

$149.95 or $175.00

$200.00

$199.95 or $225.00

Try this test. Next time you go to a supermarket you will be staggered how many times the number 9 appears after the decimal point.

 

REALITY EQUALS PERCEPTION

Reality equals perception when it comes to pricing. Consumers have a preconceived idea of the point at which a product becomes expensive and at which it is cheap.

Pricing your impulse and star lines with these perceptions in mind can dramatically increase the profits of your store.

I always use the rule that 80% of dollar sales cover the overheads with a residual amount of profit achieved (cash cow lines), while 20% of dollar sales (star /impulse lines) generate 80% of the Net Profit.

As you can see, the way you set about pricing products is a crucial part of the process of good margin management.

 


Peter Cox is a senior consultant for Macquarie Advisory Partnership based in Sydney. He has over a decade of experience training and consulting in the retail hardware industry. He conducts key-note addresses, and management and sales workshops, which are aimed at improving profitability and liquidity in one of Australasia’s most competitive retail environments. Phone 0061 438 712 200 or visit www.petermcox.com.au 

Missed an episode of "Money Matters"? You can find all of Peter's regular NZ Hardware Journal columns right here.

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