A retail pricing concept that I have seen used in manufacturing and distribution companies as well, but can be misunderstood, is that of markup. As excerpted by Entrepreneur online, the author Ronald Bond notes that a standard "markup" for retail products is 50%. That is a retailer will double the price he paid for a product, ergo a bottle of rum bought in bulk by a liquor store at $12 per bottle would in this case go on the shelves for $24.
Now, you say, wait a minute, that's a 100% increase. So it is, but it's a 50% markup to the retailer. Why is this standard and justified? Because retailers have costs beyond their direct purchase price. There is rent, insurance, salaries, benefits, heating, lighting, etc. It's a good rule of thumb to consider when selling at retail and this 50% usually results in a net profit margin for the business of 5%-10%.
As a rule it's wise to avoid discussions of markup with your customers, what they need to understand is that you price your offerings to sustain a viable business, and if value meets or exceeds the price they won't care anyway.
Showing posts with label pricing. Show all posts
Showing posts with label pricing. Show all posts
Wednesday, May 21, 2008
Friday, April 25, 2008
Pricing a New Product
My book of the month is Predicatably Irrational, by Dan Ariely. It's a good read. For small companies there are some interesting results from this book.
A primary point is made that our expectations are made (and set in stone) the first time a customer sees a new product. Example, the first time you went into a Starbucks. Now the prices were set higher than most coffee places, what did you think about that? Well, his reasoning goes, with a different atmosphere, much better coffee, and nice aromas in the stores, sure I'll pay $2 for a cup a joe! Now that first experience set a new level of expectation for you to compare to any other coffee store. Ariely shows that that expectation is far more important than traditional supply and demand theory! Your first price becomes your benchmark.
This is important for companies bringing out a new product. If you can show that your product is wholly new experience for your customers, then you can set the price you please (within reason of course), not too low because as we know it's harder to go up than down (again the first experience influence). But you may be able to get a better margin on this new product because you are setting the benchmark. So be careful, you will get what want if you do it right.
A primary point is made that our expectations are made (and set in stone) the first time a customer sees a new product. Example, the first time you went into a Starbucks. Now the prices were set higher than most coffee places, what did you think about that? Well, his reasoning goes, with a different atmosphere, much better coffee, and nice aromas in the stores, sure I'll pay $2 for a cup a joe! Now that first experience set a new level of expectation for you to compare to any other coffee store. Ariely shows that that expectation is far more important than traditional supply and demand theory! Your first price becomes your benchmark.
This is important for companies bringing out a new product. If you can show that your product is wholly new experience for your customers, then you can set the price you please (within reason of course), not too low because as we know it's harder to go up than down (again the first experience influence). But you may be able to get a better margin on this new product because you are setting the benchmark. So be careful, you will get what want if you do it right.
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