setting retail prices

Business Analysis & Improvement Systems

SETTING RETAIL PRICES

Setting Retail PricesPaper 151-012


1. Price Setting Is A Difficult Step

• Do not undersell

• Complex

Paper 151-012 2


2. Pricing Can Determine Profit Or Loss

• Market awareness

• Product development

• Advertising

Paper 151-012 3


3. Pricing Fallacies

• Only thing about which customers worry

• Low priced products are successful• Same level as competitors• Price low to gain market entry• Ask your customers• Lowest prices• Price is not the only thing

Paper 151-012 4


3. Pricing Fallacies cont'd....

Other factors:• Quality• Technical & backup

services• Reputation• Brand associations• Location• Guarantees• Refund policy

Paper 151-012 5


4. What Is Your Customer’s Cost?

• Risk of interrupted supply• Poor quality• Ineffective service• No back up• Hassles when placing

orders• Location• Inconvenience

Paper 151-012 6


5. Why Do Your Customers Buy?

• Competitors?

• Previous suppliers?

Paper 151-012 7


6. Competitors Intelligence File

• Record– Selling prices– Back up service– Reputation– Reliability– Location– Technical knowledge

Paper 151-012 8


6. Competitors Intelligence File cont'd....

• “Buy decision perspectives”• Charge higher than competitors• Higher prices by the most successful business• Other items which affect the buying decision

– Reliability– Back up service– Technical knowledge– Location– Understanding the customer

Paper 151-012 9


7. Customer Decision Process

• Take into account– Features– Product quality– Service– Warranty

• Know customers

Paper 151-012 10


8. Understand Customer Perception On Pricing

• Some people advocate price low to gain market entry

• Potential risks• Low price/value relationship• Difficult to remove• To change can be very expensive• Understanding a customer’s

perception of your pricing is one of the key elements in developing pricing strategies for business people

Paper 151-012 11


9. What Are The Business’ Overheads

• Costs to operate?

• Prepare:– Annual Budgets– Stock and Debtors Budgets– Cashflow Forecasts– Periodic Accounting Reports– Revised Business Overhead Cost

Lists– Weekly Performance Estimates

Paper 151-012 12


10. Customer’s Perception On Prices

• Premium goods• A superb value• Over charging• Good value• Cheap price• A rip off

Paper 151-012 13


11. Mark Up/Gross Profit

• Gross Profit Percentage?• Compare with competitors?• Sales mix?• Individual Gross Profit Percentages?• Customer’s perception?

Paper 151-012 14


12. Sales Statistics

• Sales mix• Customer’s

perceptions• Sales per product• Sales per hour• Sales per employee• Gross profit earned by

individual employeesPaper 151-012 15


13. Equivalent Of Mark Up Percentage To Gross Profit Percentage Chart

Mark-up % on Purchases Equivalent Gross Profit % on Sales

5% 4.8% 10% 9.1% 15% 13.0% 20% 16.7% 25% 20.0% 30% 23.1% 35% 25.9% 40% 28.6% 45% 31.0%

Paper 151-012 16


13. Equivalent Of Mark Up Percentage To Gross Profit Percentage Chart cont'd...

Mark-up % on Purchases Equivalent Gross Profit % on Sales

50% 33.3% 75% 42.9%100% 50.0%120% 54.5%130% 56.5%140% 58.3%150% 60.0%175% 63.6%200% 66.7%

Paper 151-012 17


14. Targeted Net Profit

• Pricing strategies

• Reasonable salary for the owner

• Reward for the investment of capital

Paper 151-012 18


14. Targeted Net Profit cont'd....

• Many other problems:– Staff– Debtors– Suppliers– Law– Tax– Potential bad debts– Potential deteriorating

stock– Labour problems

Paper 151-012 19


15. Determining Gross Profit Required

• Gross profit required is the labour and overhead expenses, plus the targeted profit

• Most important figure in determining the performance of a business is its gross profit & whether its adequate to generate the net profit target

Paper 151-012 20


16. Labour Budget

• Labour for a retail shop would normally be classified:– Managers– Assistant managers– Salespersons– Cashier– Administration

Paper 151-012 21


17. Labour Oncosts• Every business employing on a full time

basis has the following oncosts:– Annual leave– Holiday pay loading– Statutory holidays– Personal, Carers & Compassionate Leave– Superannuation– Payroll Tax– WorkCare– Training– Long Service Leave

Paper 151-012 22


18. Overhead Expenses

• An accurate schedule of expected overhead expenses, which correlates to the expected turnover, should be prepared

Paper 151-012 23


19. Labour Budget (Detail)

• Permanent Staff:– General Manager– Managers– Salespersons– Cashiers

• Casual Staff:– Salespersons

Paper 151-012 24


20. Targeted Profit• Determine net value of the investment in

the business• Targeted rate of return should be

determined to calculate a targeted profit

• Example:– Net Investment estimated at $900,000– Targeted rate of return used is 25%– Targeted profit is $225,000 ($900,000 x 25%)

Paper 151-012 25


21. Targeted Gross Profit

Paper 151-012 26

Targeted Gross Profit is calculated by adding the following (example):

Budgeted Overhead Expenses $ 454,400

Total Employment Costs $ 743,742

Targeted Profit $ 225,000

Targeted Gross Profit $1,423,142


22. Affect Of Gross Profit Percentage In Determining Sales Figure

Paper 151-012 27

If average gross profit is:

Sales will have to be:

25% $5,692,568

30% $4,743,806

40% $3,557,850

50% $2,846,284

60% $2,371,900


23. Proof Of Gross Profit1 2 3 4 5

SALES $5,692,568 $4,743,806 $3,557,850 $2,846,284 $2,371,900

Average gross profit percentage achieved in this business 25% 30% 40% 50% 60%

This gross profit percentage is equivalent mark-up percentage of 33.3% 42.8% 66.6% 100% 150%

Less Product purchases $4,269,426 $3,320,664 $2,134,708 $1,423,142 $ 948,758

Gross Profit $1,423,142 $1,423,142 $1,423,142 $1,423,142 $1,423,142

Less:

Employment Costs $ 743,742 $ 743,742 $ 743,742 $ 743,742 $ 743,742

Budgeted Overhead Expenses $ 454,400 $ 454,400 $ 454,400 $ 454,400 $ 454,400

Total Expenses $1,198,142 $1,198,142 $1,198,142 $1,198,142 $1,198,142

Forecast Net Profit $ 225,000 $ 225,000 $ 225,000 $ 225,000 $ 225,000

Paper 151-012 28


24. Mix On Purchases & Mark Up% & Therefore Sales – What Effect On Profitability?

Product Purchase Price $

Mark Up %

Mark Up $

Sales$

GrossProfit %

1 500,000 110.00% 550,000 1,050,000 52.30%

2 200,000 20.00% 40,000 240,000 16.66%

3 250,000 180.00% 450,000 700,000 64.20%

4 150,000 89.00% 133,776 283,776 47.10%

5 50,000 33.30% 16,666 66,666 25.00%

6 25,000 60.00% 15,000 40,000 37.50%

7 40,000 70.00% 28,000 68,000 41.20%

8 55,000 150.00% 82,500 137,500 60.00%

9 153,142 70.00% 107,200 260,342 41.20%

1,423,142 1,423,142 2,846,284 50.00%

Weekly Sales Target - $54,736Paper 151-012 29


24. Mix On Purchases & Mark Up% & Therefore Sales – What Effect On Profitability? cont'd....

Paper 151-012 30

KPIs to monitor are:

Weekly Sales Target $54,736

Product Sales Share:

• Product 1 36.8%

• Product 2 8.4%

• Product 3 24.6%

• Product 4 9.9%

• Product 5 2.4%

• Product 6 1.4%

• Product 7 2.4%

• Product 8 4.9%

• Product 9 9.2%


24. Mix On Purchases & Mark Up% & Therefore Sales – What Effect On Profitability? cont'd....

Paper 151-012 31

Based on this performance, the result would be:

Sales $2,846,284

Less Purchases $1,423,142

Gross Profit $1,423,142

Gross Profit % - 50% $454,400

Less Budgeted Overhead Expenses $743,742

Employment Costs $1,198,142

Forecast Net Profit $ 225,000


25. Professional Assistance

• Your professional PHIRE POWER advisor can assist

Paper 151-012 32

setting retail prices

Business

customers paper

successful business

business people

customer paper

thing paper

complex paper

retail prices paper

business overheads costs