Pricing for Profit

Developing a pricing strategy

The title of this article is more than just that.  It is also the name of a book written by Bob Aiken, an authority on pricing strategies for retailers.  In his book, Aiken discusses a method of determining prices for products that is known as the “Putney system”.  Designed for items retailing for less than $2, the Putney System demonstrates how you can achieve extra profits by rounding the prices of items.

After all, if a person will pay 39 cents for an item, won’t they pay 59 cents?  And over the course of a year, how many of the items that you sell, or include as a part of a repair, are priced for less than $2?  With this additional margin, you will probably add several thousands of dollars to your bottom line.

Aiken’s book extends the idea of rounding prices to include all items and services that your business sells.  The book also contains many ideas about merchandising, signage, and profitability.  In the limited space of this article, it is impossible to provide many details of this book.

The book sells for $30, and it is safe to say that it is well worth it.  After all, if you are doing $750,000 in annual sales, Aiken explains how you can add $25,000 in profits by using his pricing methods.  While this book can become an integral part of your pricing strategy, we will discuss three other pricing strategies within the confines of this article that tie into Aiken’s methods.  These pricing tips will allow retailers to expand their overall margin for business, and improve the competitive price perception their stores display to customers. 

The first of the pricing strategies is to recognize the items that maintain a level of customer awareness in terms of their prices.  For example, you and your customers will probably know the prices of the four or five most popular spark plugs.  After all, the plugs are sold as carded products in just about any store that has even a token representation of lawn and garden items.  With these popular items, you will have to be price competitive.

After reworking these items, introduce the second pricing strategy.  Stock three grades of these popular plugs: carded plugs, low quality plugs that you can retail for less than the competition, and high quality plugs.  You will probably find that the higher quality plugs and the lower quality plugs will allow you to enjoy a margin that is in line with the rest of your plug selection, while the initial few plugs may only have a margin around 20 percent.

The third strategy involves the majority of products and services that you sell.  Give consideration to expansion of the product selection in your most profitable departments and finelines.  For instance, let’s assume that you have a fineline category that is exclusively spark plugs.  After implementing the first and second pricing strategies, you can consider increasing the overall margin in this category by two percent.  What would your financial statement look like if you added those couple of points to the entire store?

Implement these three strategies, throw in Aiken’s pricing system, and your financial statement will take on an entirely new look.  The part of this entire program that makes it saleable to your customers is how you present it.  Here are several pricing tips that will make your customers believe that you are the pricing leader.

1.   Display signs prominently in front of price sensitive items and announce the price with signs indicating this is your everyday low price.  A study by Brigham Young University found a 51 percent sales increase just because a sign was present.

2.  Watch the advertising of your competitors.  You will probably find occasions where their advertised prices are the same as your everyday prices.  You should first look to see if you could raise your everyday prices.  If your competitor’s sale price is a dollar higher than your regular price, then this is probably a dollar or two that you can regain by raising your price.

3.  When that happens, tell your customers.  One idea that works is to create a sign that promotes your pricing.  Cut out the competitor’s ad, and put it on a sign next to your product.  You can add a notation such as “Their sale price, our everyday price.”  And as you gather your competitors’ ads, make sure that you cover all types of competitors: garden centers, hardware stores, discount stores, and anyone who advertises a product that you sell.

As you gain confidence in your pricing strategy and begin to see the results on your financial sheet, you can also offer to match the price of any product at any store.  You can win the battle because you have done your homework, and you know the strategy of pricing for profit.

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