Pricing your products for Dollar Store and retailers
PRICING YOUR PRODUCTS FOR DOLLAR STORE AND RETAILERS
Pricing Your Products replaces
Pricing Your Products and Services Profitably and
A Pricing Checklist for Small Retailers
INTRODUCTION
RETAIL PRICING
Retail Costs and Pricing
General Pricing Techniques
Breakeven
PRICING FOR SERVICES
Service Costs and
Components of Costs for Services
Examples of a Cost Calculation Figuring Profit Figuring Costs
and Profits for a Consulting Service Checklist for
Pricing Policies and Strategies Summary
APPENDIXES
A. Pricing Checklist for Retailers
B. Information Resources
INTRODUCTION
The primary goal of most businesses is to make a profit. There
are many factors that affect the profitability of a business,
such as management, location, cost of labor, quality of product
or service, market demand and competition. In our free enterprise
system the right to establish a price is yours. Market demand
controls the response to your product or services.
You must understand the market for your product or service, the
channels of distribution and the competition before you establish
prices. You must know all costs and carefully analyze them. The
marketplace responds rapidly to technological advances,
international competition and a knowledgeable buying public. You
must constantly keep abreast of all factors that will affect
pricing and be ready to make necessary changes.
This publication covers retail pricing, pricing for services and
pricing for a consulting service. Appendix A is a checklist to
review pricing policies and strategies. Appendix B offers
suggestions for other information resources.
RETAIL PRICING
x Markup percentage 33%
= Markup amount
$4.00
Cost of one purse
$12.00
+ Markup amount
$4.00
= Selling price
$16.00 for one purse
The 33 percent markup must cover all operating expenses (wages,
rent, advertising, etc.) and provide some margin of profit. For
example, Lisa's Purse Shop may figure 10 percent for wages,
6 percent for rent, 4 percent for advertising and 13 percent for
profit.
The markup is sometimes expressed as a percentage of selling or
retail price instead of cost. Most retailers prefer to express
their markup as a percentage of retail price. Using the example
above you would determine the retail markup percentage as
follows:
$4.00 =
dollar amount of markup,
____________________________________ = 25% retail markup
$16.00 = retail selling price,
A business might choose to use a standard markup percentage on
all products, or it may have different markups for different
goods. A problem with the standard markup is that it doesn't
recognize cost differences in selling different products. If
product A costs far more to advertise or sell than product B, a
standard markup percentage may produce a loss on product A and a
greater-than-average profit on product B.
It is important to maintain an overall or average percentage of
markup to return the profit percentage you establish. You must
also allow for markdowns. Therefore, you must establish an
initial markup percentage, which becomes the average markup. The
initial markup is figured as follows:
Initial markup percentage =
Operating expenses +
desired profit
divided by
Net sales
Breakeven
Breakeven is simply the point at which all costs are recovered
and you begin to make a profit. Once you have established an
average markup, the breakeven point can be determined. There are
several formulas to use in determining breakeven. One simple
formula is provided here, but we recommend that you check with
your accountant or an accounting textbook to fully understand how
best to figure a breakeven for your business.
Breakeven point =
Operating expenses
Divided by
Markup percentage
example:
$50,000 = operating expenses
_____________________________ = $166,666.67 breakeven sales
30% = markup percentage
(average)
The breakeven price is figured the same for a service business as
it is for a product-based business. However, many business owners
prefer to figure breakeven for individual products or services,
so they know which products to promote or discontinue.
Suggested retail price. A common pricing practice among small
businesses is to follow the suggested retail prices supplied by
the manufacturer. This allows the business to avoid the
decision-making process and the trouble of monitoring the
competition. The suggested retail price is easy to use, but it
can cause problems. It may create an undesirable price image, and
it doesn't consider the competition.
Competitive position refers to a strategy in which a firm bases
its prices on those of its competitors. A small retailer should
compare prices with similar stores. Do not try to compete with
the prices set by large stores they can buy larger volumes, so
their cost per unit is less. Instead, look at nonprice issues.
For example, compare the services offered by the competition.
Often customers will pay more for merchandise to obtain the type
of service that they seek.
Pricing below competition means beating the competitor's price.
Many vendors have been very successful using this pricing
strategy, because they have greatly increased sales. Because this
pricing strategy reduces the profit margin per sale, a firm needs
to increase its sales and reduce costs.
*Obtain the best prices possible for the merchandise.
*Locate the business in an inexpensive area or
facility.Closely control inventory.
*Limit the lines to fast-moving items.
*Design advertising to concentrate on price specials.Offer no or limited services
Below competition pricing is a difficult pricing policy to
maintain, because every cost component must constantly be
monitored and consistently adjusted. It also exposes firms to
pricing wars competitors can retaliate by matching the price
cutter, leaving both parties worse off.
Pricing above the competition is possible when nonprice
considerations are important to buyers. Nonprice considerations
that may be important enough to customers to justify higher
prices include
*service considerations, such as delivery, speed of service,
satisfactory handling of customer complaints, knowledge of
product or service, and a helpful and friendly
attitude;a convenient or exclusive location; and
exclusive merchandise. A store may carry lines of
well-known or high-quality brand names that are not
available elsewhere. A store might get particular brands for a
given trade area. The use of exclusive agreements avoids competitive pricing.
Markdowns, or price reductions, are a necessary part of doing
business because inventory levels may become too high as a result
of overbuying, seasonal merchandise, shopworn merchandise,
misjudged customer responses, poor personal selling, lack of
promotion and advertising or the competition's lowering the price
of the same merchandise.
There are a number of theories about when it is best to take
markdowns. This is a decision that will vary greatly with the
type of merchandise, amount of competition, season of the year
and amount of stock on hand. Every business should try to avoid
being left with a lot of dated merchandise that will be difficult
to sell.
Price lining refers to a marketing strategy based on price. This
strategy targets a specific segment of the buying public by
carrying products only in a specific price range. For example, a
store may wish to attract customers willing to pay over $50 for a
purse. Price lining has many advantages, among them the
following:
*reduced errors by sales personnel;
*ease of selection for customers;
*reduced inventory by limiting the number of items in
a category;reduced storage costs as a result of smaller
inventory;
*ease of merchandise selection; and
*merchandise targeted to clientele.
A disadvantage to price lining is that by focusing too much on
price, the store may overlook issues of quality or consumer
buying trends. It also limits the ability of the business to meet
competitors' prices.
Odd pricing -- with figures that end in 5, 7 and most often 9 --
is used for psychological reasons. Consumers tend to round down a
price of $39.95 to $39, rather than rounding it up to $40.
However, this is not considered to be as effective today as it
was in the past.
Multiple pricing is the practice of promoting a number of units
for a single price. For example, two for $1.98. This is useful
primarily in low-cost, consumable products such as shampoo or
toothpaste. Many stores find this to be a desirable pricing
strategy for sales and year-end clearances.
PRICING FOR SERVICES
1.
materials
2.
labor
3.
overhead
Materials cost is the cost of materials used directly in the
final product, such as sparkplugs and gaskets in the repair of an
engine. Supplies such as paper towels are part of overhead, not
materials costs. Materials costs must be determined and updated
frequently. A cost list must always be used in preparing a bid or
quoting a job. If there are shipping, handling or storage costs
for materials, they must be included in the total materials
costs.
Labor cost is the cost of work directly applied to a service,
such as a mechanic's work. Work not directly applied to the
service, such as cleaning up, is an overhead cost. Direct labor
costs are derived by multiplying the cost of labor per hour by
the number of hours required to complete the job. Use a time card
and clock to determine the number of hours of labor involved in
each service. Remember to include not only the amount paid
directly to the worker, but also all fringe benefits. These
include social security, workers' compensation, unemployment
compensation and any other benefits such as insurance and
retirement benefits.
Example:Graham's Garage Labor cost per hour Hourly wages $10.00/hr
Fringe benefits $3.00/hr (or 30%)
* Total costs $13.99/hour *30% is a common benefit percentage.
Overhead cost includes all costs other than direct materials and
direct labor. Overhead is the indirect cost of the service.
Usually there are people on a company's payroll who perform
support services that are not charged to direct labor but must be
included as a cost. Some examples of these services are clerical,
payroll, legal, janitorial and supply. Insurance, taxes,
depreciation, rent, accounting, advertising, office supplies,
utilities and transportation are also part of the overhead cost.
A reasonable amount of the overhead cost must be allocated to
each service performed. The overhead rate can be expressed as a
percentage or as an hourly rate.
In many businesses, more expensive equipment is used by higher
paid employees; thus, overhead cost is more closely related to
labor cost than to labor hours. In this situation, the overhead
cost is allocated on the basis of direct labor cost and expressed
as a percentage as follows:
Total overhead cost Total direct labor cost
This format is most commonly used in businesses such as machine
shops, automotive repair shops, and job shop production. When
there is relatively little difference between the hourly wages
for employees, or little relationship between worker skill and
equipment used, the following hourly rate formula is followed:
Total overhead cost Overhead rate = ----------------------
Total direct labor hours
The following examples show the two types of overhead rate
calculation:
Graham's Garage Calculation of overhead rate Total overhead costs
Overhead rate = --------------------(percentage)
Total direct labor costs= $40,000.00
$50,000.00 or = 0.8 or 80% Overhead rate = Total overhead costs
--------------------(hourly rate) Total direct labor hours,
= $40,000.00 4,000 hours = $10.00 per direct labor hour
In developing overhead costs it is important not to depend on
last year's costs. Charges must be revised to reflect current
costs, including inflation and higher benefit rates. It is best
to project the costs for the current six-month period and include
increased executive salaries as well as any other projected
costs.
Examples of a Cost Calculation
Here is an example combining the components of costs to determine
the total cost of a single job:
Graham's Garage
cost to fix Mr. Rhodes' car:
Material cost = material used + shipping cost
= $18.00 + 2.00
= $20.00 Labor cost Direct labor cost per hour x hours
$13.00 per hour x 3 hours
$39.00 Two types of overhead rate have been discussed. We will use both
to calculate overhead cost for the example:
Overhead cost = Direct labor cost x overhead rate
= $39.00 x 80% = $31.20 or Overhead cost = Direct labor hours x
overhead rate = 3 hours x $10.00 per hour
Because Graham's Garage usually uses the percent of cost overhead
rate, we will use the $31.20 figure instead of $30.00 as the
overhead cost. The total cost of the repair is tallied below.
Material cost = $20.00 Direct labor= $39.00
Overhead cost = $31.20 Total $90.20
Figuring Profit Profit can be figured several ways. One way is to add a
percentage to each of the cost factors, for example,
Material Labor Overhead Total
Cost
$20.00
$39.00
$31.20
$90.20
x percent
x
15%
x
25%
x
25%
----------
-------
-------
-------
profit
$3.00
$9.75
$7.80
$20.55
Cost
$20.00
$39.00
$31.20
$90.20
+ profit
3.00
9.75
$7.50
$20.55
--------
------
------
------
------
= charge
$23.00
$48.75
$38.70
$110.75
Another way is to decide that you wish to make a 20 percent profit. Then you can simply add all of the costs plus 20 percent
of the total ($90 cost 20% = $18;
$90 $18 = $108 = price).
There may be times when you purchase materials at a lower price
and can therefore add a higher percentage of profit.
Figuring Costs and Profits for a Consulting Service
Pricing consulting services, where primarily one's own labor or
expertise is used, is somewhat different from pricing a service
that uses materials and the labor of others. Most consultants
price their service by the hour. If they are senior consultants
they will charge more for their own time than for the use of a
junior or less experienced consultant. The rate varies depending
on the nature of the assignment and the individual's expertise.
However, it is very important that one charge for an adequate
number of hours. Travel time must also be included; usually the
travel expense is an extra charge. Sometimes a consultant is
asked to price a service on a contract basis. The contract should
take into account professional time, clerical support, computer
or other special services (such as printing) and overhead
expenses (rent, utilities, equipment, supplies, sales and
marketing expenses, insurance and fringe benefits).
The following is an example: Law Firm of Dixon & Wesley
Charges for services in month of August
Professional charges:
Senior consultant 10 hours $75.00 = $750.00 Junior consultant 15 hours
$35.00 = $525.00
Clerical
7 hours
$18.00 = $126.00
Total
32 hours
$1401.00
Overhead rates: $10,300 Overhead expense per year
----------------------------------
1,030 Chargeable hours per year
= $10.00 per hour
Overhead charge rate = chargeable hours x overhead
$10 = $320.00
Travel: ,
Airfare at $275.00
x 2 trips
=
$550.00
Per diem at $120.00 per day x 3 days =
$375.00
Contract total
= $2646.00
In selling consulting and other professional services it is
unlikely that 100 percent of spent time will be billed to
clients. Therefore, hourly or contract fees must be substantial
enough to cover costs during slow periods. It is for this reason
that one-half of the total normal yearly work hours is used in
figuring overhead rates. It is desirable to obtain a long-term,
monthly or contract assignment whenever possible.
A common mistake of many new or inexperienced consultants is to
underestimate the number of hours and additional charges or
expenses that they may incur. If the policy is to charge only an
hourly rate plus travel expenses, be sure that the hourly rate
will cover salary requirements, operating expenses and the profit
percentage you desire.
Checklist for Pricing Policies and Strategies
The following list of questions will help you select the pricing
policies and strategies that will best suit your business,
allowing you to remain competitive and providing you with the
profit you want. Do you price all items at a level that provides an
adequate profit margin? If not, why?
2.Do you constantly monitor costs and make price
changes to provide for continued profitability, particularly in
periods of rapid inflation?
3.Do you price to cover your variable costs and fixed
costs?
4.Is your goal to find the price-volume combination
that will maximize profits?
5.When setting a price strategy, do you consider these factors:
a. channels of distribution?
b. competitive and legal forces?
c. annual volume and life-cycle volume?
d. opportunities for special market promotions?
6. Is your price consistent with the product image?
7.Because customers often equate the quality of
unknown products with their price, do you adjust prices accordingly?
8.Do you reduce prices whenever the added volume
resulting from the reduction produces sufficient sales revenue
to offset the added costs of increased production?
9.When reducing prices, do you consider your competitors
probable reactions?
10.Do you want your firm to be a price leader?
11.Do your initial markups cover
a. operations, particularly selling expenses?
b. profit?
c. subsequent price reductions?
Does your company break down costs by product to
price effectively? Does your company practice price lining?
Does your company practice odd pricing?
To avoid retaliation by competitors, have you tried
adding extra services, providing warranties or paying transportation costs rather than lowering prices?
16 Do you realize that facilities have certain costs whether you use them or not?
Use the next few blank lines to write in question that may be of
specific concern to your business's pricing structures.
17.
___________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________________________________________
Summary Remember, although it is your right to establish prices for your
products and services, it is your customers who will decide
whether they are willing and able to pay your price, and your
competitors will influence your customers' buying decisions. We
recommend that you do extensive research on your industry or
business, your products or services, your customers and your
competition. This publication is intended to be an overview; we
advise that you check with local bookstores, libraries and
universities for additional sources of information on pricing and
profits. Accounting textbooks are often helpful. You may also
want to obtain other U.S. Small Business Administration
publications (see Appendix B: Information Resources)
It is difficult to say which component of pricing is more
important than another. The key to success is to have a
well-planned strategy and established policies and to constantly
monitor prices and operating costs to ensure a profit. It is very
important that you project the percentage of markdowns
anticipated and build them into your initial price to obtain the
projected profit. For a consulting business, you should project
how many hours of your services you will need to bill.
It is important to remember that the image of your business is
crucial to obtaining and keeping the clientele and that your
pricing structure and policies are a major component of your
image.
PRICING CHECKLIST FOR RETAILERS
would be a better special sale item than men's
suits that often require free alterations.
29. Will rain checks be issued to consumers who come
in for merchandise that is temporarily out of
stock?
_____ _____
Rain checks are required in some situations.
Consult your lawyer or the regional Federal Trade
Commission office for specific advice regarding
whether they are needed in the sale you plan.
Nature of the Merchandise
In this section you will be considering how selected
characteristics of particular merchandise affect planned initial
markup.
Yes
No
30. Did you get a "good deal" on the wholesale price
of this merchandise?
_____ _____
31. Is this item at the peak of its popularity?
_____ _____
32. Are handling and selling costs relatively great
due to the bulkiness of the product its low
turnover rate or its requiring much personal
selling installation or alterations?
_____ _____
33. Are relatively large reductions expected due to
markdowns spoilage breakage or theft?
_____ _____
With respect to the preceding four questions "yes"
answers suggest the possibility of or need for
larger than normal initial markups. For example
very fashionable clothing often carries a higher
markup than basic clothing such as underwear
because the particular fashion may suddenly
lose its appeal to consumers.
34. Will customer services such as delivery alterations
gift wrapping and installation be free to
customers?
_____ _____
The alternative is to charge for some or all of
these services.
Environmental Considerations
The questions in this section focus your attention on three
factors outside your business: economic conditions laws and
consumerism.
Yes
No
35. If your state has an unfair sales practices act
that requires minimum markups on certain
merchandise do your prices comply with this
statute?
_____ _____
36. Are economic conditions in your trading area
abnormal?
_____ _____
Consumers tend to be more price-conscious when
the economy is depressed suggesting that lower
than normal markups may be needed to be
competitive. On the other hand shoppers are less
price-conscious when the economy is booming which
would permit larger markups (on a selective basis).
37. Are the ways in which your prices are displayed
and promoted compatible with consumerism one part
of which has been a call for more straightforward
price information?
_____ _____
38. If yours is a grocery store is it feasible to use
unit pricing in which the item's cost per some
standard measure is indicated?
_____ _____
Having answered these questions you are ready to
establish retail prices. When you have decided on
an appropriate percentage markup 35 percent on a
garden
hose for example the next step is to
determine what percentage of the still unknown
retail price is represented by the cost figure.
The basic markup formula is simply rearranged
to do this:
Cost = Retail -
price
markup
Cost = 100% - 35% = 65%
The dollar cost say $3.25 for the garden hose is
plugged into the following formula to arrive at
the retail price:
Retail price = Dollar cost = $3.25 = $5.00
----------
------
Percentage cost
65% (or .65)
One other consideration is necessary:
39. Is the retail price consistent with your planned
initial markup?
_____ _____
Adjustments
It would be ideal if all items sold at their original retail
prices. But we know that things are not always ideal. Therefore a
section on price adjustments is necessary.
Yes
No
40. Are additional markups called for because
wholesale prices have increased or because an
item's low price causes consumers to question
its quality?
_____ _____
41. Should employees be given purchase discounts?
_____ _____
42. Should any groups of customers such as students
or senior citizens be given purchase discounts?
_____ _____
43. When markdowns appear necessary have you first
considered other alternatives such as retaining
price but changing another element of the
retailing mix or storing the merchandise until the
next selling season?
_____ _____
44. Has an attempt been made to identify causes of
markdown so that steps can be taken to minimize
the number of avoidable buying selling and
pricing errors that cause markdowns?
_____ _____
45. Has the relationship between timing and size of
markdowns been taken into account?
_____ _____
In
general markdowns taken early in the selling
season or shortly after sales slow down are
smaller than late markdowns. Whether an early or
late markdown is appropriate in a particular
situation depends on how many consumers might
still be interested in the product the size of
the initial markup and the amount of merchandise
remaining in stock.
46. Would scheduled or automatic markdowns at
specified intervals be appropriate?
_____ _____
47. Is the size of the markdown just enough to
stimulate purchases?
_____ _____
This question stresses the point that you have
to observe the effects of markdowns so that you
know what size markdowns are "just enough."
48. Has a procedure been worked out for markdowns on
price-lined merchandise?
_____ _____
49. Is the markdown price calculated from the off-
retail percentage?
_____ _____
This question gets you into the arithmetic of
markdowns. Usually you first tentatively decide
on the percentage amount price must be marked
down to excite consumers. For example if you think
a 25 percent markdown will be necessary to sell a
lavender sofa the dollar amount of the markdown is
calculated as follows:
Dollar markdown -
Off-retail percentage
x
Previous retail price
Dollar markdown - 25% (or .25) x 500 = $125
The markdown price is obtained by subtracting
the dollar markdown from the previous retail price.
The sofa would be $375 after taking the markdown.
50. Has the cost of the merchandise been considered
before setting the markdown price?
_____ _____
This is not to say that a markdown price should
never be lower than cost; on the contrary a price
that low may be your only hope of generating some
revenue from the item. But cost should be
considered
to make sure that below-cost markdown
prices are the exception in your store rather
than being so common that your total profits
suffer.
51. Have procedures for recording the dollar amount
percentages and probable cause of markdowns been
set up?
_____ _____
Markdown analysis can provide information to help
calculate initial markup to reduce errors that
cause markdowns and to evaluate suppliers.
52. Have you marked the calendar for a periodic review
of your pricing decision?
_____ _____
This checklist should help you avoid making
careless pricing decisions and lay a solid
foundation of effective prices to build retail
profits.