What are some different approaches to pricing models?
How do we create a standardized formula to add to cost so that we may arrive at 4 levels of pricing (SRP 1; SRP 2; SRP 3; Main SRP)? Currently we do not have a standard basis for computing SRP and only rely on past experience, benchmark prices and who the customer is to estimate how much to sell the item for. We also delegate pricing decisions to our employees with a range of maximum and minimum prices on what they can charge the customer. I believe that this permits them with too much choice and most often they instantly offer the lowest prices because they are motivated to sell at these levels because of their commission per item. Add to this, some customers approach the bosses directly and ask for further discounts aside from those already given by our sales agents, we do not hesitate to give them some more because we understand that accommodating them and giving them a lower price is a selling point and adds value to customer satisfaction. If possible, it would be best if the employee in charge of managing prices be given a formula already to follow in setting up prices so that we do not have to decide per customer what prices we give them depending on a certain level of criteria that they should follow and gives us less variety that creates problems, for example, we do criticize that the price they gave a customer was too high or too low, may we be able to determine how much he should add to the cost and regulate price uniformity? I understand that Puregold sells competitively with fast selling commodities but retail at a higher price when it comes to high value products. I do not think that the management of these institutions choose to estimate each of these item’s prices without basis and gut feel. Does their officer in charge also assess pricing items one by one? It will be laborious to check competitor’s prices and/or study each item on the right price to sell, especially considering that they also sell thousands of different products and that some item prices are not stable. Lastly, we have thought of using percentage discounts for our electrical products, however the high value items compared to the lower ones will be too hard to sell because the percentage quotient makes it too expensive already. On the other hand, if we price the high valued items at a fair and reasonable price and interpolate this percentage to smaller items, we would not gain the greatest profit for these small items.
What happens if the prices of our items fall or increase due to the volatility in market prices, or because of the incidents indicated in question no. 4 where IF we have to factor in additional discounts into our system and get the average prices and lower down our costing some more, does that mean that we always have to be changing our SRP’s as well? Who should determine/decide on how much we will sell it for, every time?
There are many ways to approach pricing, and cost plus is not necessarily the answer. It's a complex subject, and needs a structured approach to answer it.
I suspect from this long list of questions there's no pricing strategy set by your company. It's like a flag blowing in the wind without one. In each situation, you're letting the market, the customer or the competition set the price for you. Of course these are important, but it's up to your company to decide what it wants.
The first step is to identify your company's overall business goals, i.e., gross sales, profit margin, short and long term financial objectives, etc. Then, figure out the role each area of your business plays in meeting those objectives, that is operations, marketing, finance and management (in your case, it sounds like management hasn't set any ground rules for pricing behavior). In other words, set a strategy for each area to meet those objectives. For example, in marketing, you need to consider how products, price, distribution and promotion impacts the goals you're trying to achieve. Then, how do those decisions relate to other areas of the company, i.e., finance and marketing often have to work together to set prices. My expertise is more in marketing than these other areas. It would be great if someone from finance, ops or management would weigh in here as well.
Good luck with this problem. Retail pricing is extremely hard as you need to account for the differences in the marketplace as well as the internal costs that you incur.
In regard to should you push pricing down to your employees, the answer should be only if they have an incentive to maximize the price. If you simply want to increase sales, then your employees will be more than happy to heavily discount your price. The key is to great an incentive plan that focuses on topline sales, bottom line profit and turns.
The other thing is that your vendors should be able to suggest a retail price for every item they sell you based on their experience on the retail landscape and the sweet spots where items move. A simple way the big box stores look at their retail sales is by calculating the contribution $ and % for each item. This typically enables them to justify taking a small margin on high volume items and making more money on other items. For instance, you make less money on lumber, but make a high margin on nails.
Good luck and let me know if you'd like to discuss further.
I would add to this discussion by knowing what your costs are, very Important.. Understand the difference between Out of Pocket costs (variable costs), and fixed costs, i.e. all salaries overhead items, then zero base budget your operation, organization--Then determine your break evens by specific time periods: hour, day, week, month, quarter, year... I suggest you also use ABC Activity Based Costing to determine the profits you desire, for example the more the activity the higher the cost. For example we use to make Chassis Colored Paint for Mack Truck, the black was ordered in big batches and had no color matching the easiest to make and lowest activity equals a low Selling Price...On Chassis Blue however, batches were smaller, the color harder to match hence More Activity = higher the cost = higher price. Economies of scale are very important here in your thinking.... I suggest you looking for a Score counselor to help you
Hey Robert, appreciate your insights on the matter and am researching about ABC Activity Based Costing more thoroughly, just want to ask if there are other types of costing methods so I can properly decide on what I should use if you know any other?
We are in a retail hardware business and we dont usually have a lot of "activities" related to the handling of merchandise, basically just buy and sell.
Hi Robin, wow so much to think about.
So many aspects to your question.
Like others you really do need to understand both your product cost and your operational costs.
There are other aspects that often are overlooked but at some stage they will bite you, and sometimes bite you hard.
Here are just a couple for you to consider.
1) Insurance costs. (All of them)
2) Tax . It's a cost which can bite you big time when the tax man comes.
3) Storage cost. This can also relate to stock turn.
4) Future increases in utilities, rent, product. you need to have a buffer between your sales / opperating cost and your next sales price increase.
The danger is you could be working flat out and still be going broke.
As stated before not every product needs to be priced as Cost + Margin = Sales price. To start with what is your actual cost ? a clue, it's not just the purchase price of the goods.
The other aspect is you need to run your own race. Don't be a "Me Too" company. Become a company with a sustainable advantage. Have aspects of your business which adds value.
Me Too companies will fail when it comes to a price war.
You are right in terms of sales people taking the path of least resistance. Never never give your product away as in discounting without getting something in return.
Thinking about a discount structure based on quantity ordered. even if the delivery is broken up, you have future orders to deliver, that's gotta be worth something. It's a carrot but it works.
Don't give max min ranges without application guidelines.
Set the min at a level which still gives you some negotiation room, which is outside the sales salesperson authority, so that management can get involved in the high end discussions. Everything that affects your bottom line is a high end. Manage by exceptions, but always set auto controls within the limits of authority.
I can see that you may be grading your customers, and lining them up with whatever discount structure you have.
Thats one side of the coin. You can also grade the products the same way and therefore maximize the return they provide,
That's having the products working for you. some say this is working smarter and not harder.
There are way too many ways of working through this, and like your question it would take far too long to cover them in this forum.
Pricing and price structures generally need to be tailor made to each company and industry structure.
Need more assistance you can also contact me.
Hey George, thank you for your detailed response, I understand how difficult it must be to manage pricing, what more then on how do I delegate this sensitive matter to my employees if I myself have so many factors to consider and having trouble already? Bottomline, how do we standardize pricing (with so many factors) so that I can pass the work on to my subordinates? How do the big companies do it? I dont think the owner of Amazon suggests the prices for each item.
We are in a retail hardware business with more than 5,000 plus SKU's. I dont know how im going to be able to categorize each item per variable that you have asked me to consider. and to pass it on to my employees at a level where i myself am having alot of difficulties already?
Reading through your post here, it seems getting a handle of your costs is a main priority. Once you know your costs then one of easiest ways to determine a selling price is cost divided by cost percentage and multiply by 100.
so if your cost is $75 and you desire a gross profit of 70% .. 75 divided by 30 then multiplied by 100 = $250 selling price
Hope this helps