Pricing Apathy – Why You’re Not A Profitable Business

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This is an excerpt from my new book, The Retail Doctor’s Guide to Growing Your Business (Wiley & Sons)

Since many owners or managers have never taken a course on pricing or they “feel bad about charging too much,” they tend to mark up less than necessary, what I call “welfare pricing.”

As a customer, we love it when you price too low but as the merchant, your apathy towards what you need that widget to produce – profits – is killing you!

Your merchandise should be marked up enough to make the business profitable. An item has value if it is worth the price a customer is willing to pay. Here’s an example.

There’s a deli truck in the park by my house that sells soda for 50 cents. I figure that the vendor can get a six-pack for a buck at the local big-box. She might be telling herself she’s getting three times cost; but what would a customer pay for the convenience? A vending machine would charge at least $1. But she gives you a cup and ice. Would that be worth $1.25? I think so.

Sometimes you have to consider the value you provide to the customer and charge what you think the market could afford, not what you personally would pay.

You also have to consider breakage, spoilage, or other items out of your control before you set a price.

For example, a baker who has to bake a dozen rolls at a time might know they typically only sell seven of a certain roll every day.  So they factor in that five might remain, and price the seven to make the profit of all twelve.  It’s therefore a bonus if they sell out occasionally.

And how do all the coupon programs factor in?  If you price too low to begin with, you often are selling the item for less than it cost to buy and ship to you when discounts are applied.

Any Accounting 101 student can tell you that the profit earned by the average business is only one to three cents on the dollar. This fact flies in the face of a common perception that small business owners are raking in the dough.

So realize when you’re considering giving $10 off an item that you have to sell at least $300 more just to earn back that $10 in profit.

When you analyze discounts, you find that — like a sugary cola drink — they give you an added boost when you’re tired. But like that sugary cola drink, the high is temporary and you eventually crash.  Discounting does nothing for your (or your company’s) long-term health.

Coupled with a broken pricing strategy, is it any wonder so many owners have to dump money into the business rather than taking it out?

To learn more, purchase the book.

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