Page 189 - DMGT550_RETAIL_MANAGEMENT

Retail Management

Notes 11.1 Consideration in Setting Retail Prices

Price setting is a common task for any retail buyer; it is a really massive topic to cover. I just
want to point out some key elements to take into consideration when deciding the retail price
for your articles.
Every category of products has its specifics. There are many significant factors to take into
account, starting with manufacturing cost or buying price, demographics of the consumer-
target, promotion or campaign for the product, brand awareness, merchandising, packaging,
strategy involved (profit oriented or volume oriented), competition, etc.
There are some situations when, after considering all the objective parameters, you have no
choice but just go with your gut for the final price.

Branded products prices are usually suggested or imposed by the vendor. MSRP* (or Manufacturer
suggested retail price) or RRP* (Recommended retail price) is the way the vendor is setting (or
at least trying to set) the price on the market. Easier said than done.
When it comes to price setting the golden rule is: The perceived value of the product should be
higher or at least the same as the money value indicated on the price tag.
Second rule, which is originating from the first: the market is deciding the right price and not
the retailer. So, the key point in any price setting is to study well your target market. With
experience price setting comes naturally for the buyer/purchasing manager and this is not
typically an issue. Original Equipment Manufacturer (OEM) products are one notable exception,
here the retailer decides how and where to position his own brands.
The extremes in price setting are obviously positioning to low your price or to high. In both
situations there is a lost opportunity:
1. Lost opportunity to get more profit, by positioning the product lower than the market
would actually agree to pay on that product (or, how I like to call it, ”kill the margin”).

2. Lost opportunity to sell more volumes, by positioning the price above the value perceived
by the costumer (in this case you just ”kill the product”).
In most consumer minds “expensive = exclusive” or “expensive = premium quality”. Meanwhile,
“inexpensive”= “cheap” in the negative connotation of inferior, poor-quality, second-rate. That’s
why retailers communicate nowadays more on “affordable”, “low-cost” or – this is more
politically correct, isn’t it? -”reasonably priced”. Considering this, price setting is used as an
exceptional marketing tool. It is an essential part of the system set up to sell the product. Price
position is one of the key-communication elements of many brands and it translates in value
and benefits.
If time allows you – knowing that it is essential to have the product in the market at the right
time – my advice is to use this simple method: test the price position at a lower scale or without
to much advertising. Experiment, get the numbers, analyze them and decide which price
positioning suites the best your objectives in sales and profit.
The decided price level can also be sustained by campaigning on the product/brand, adding value
via marketing policies. The techniques used to add value will also increase the product cost.
There is an interesting case – an inflexion price point – where even if you “kill” completely the
margin the sales will not necessarily increase. It may happen that a too low setting may generate
question in the consumer mind, (“if the price is that low, there must be a problem with this
product”) so due to the negative association price level-quality the sales will not really increase
as the price decreases. A low price can drive away customers solely by the reason of correlation
like “inexpensive” = “poor quality”, or “hidden issues” or “, hmm, something is wrong with

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