the balancing act between prices and profits – it's within your control

An Epicor® White Paper

The Balancing Act Between Prices and Profits—It’s Within Your ControlRetail Best Practices Series

Table of Contents

Developing the Right Price Image ..........................................................1

Fine-tuning Price Image (and Your Customer’s Perceptions) for

Your Retail Business ................................................................................3

Get Your Retail Prices in Shape with Rounding Strategies ......................4

Trade Secrets of Promotional Pricing and Discounts ...............................5

It’s Got to Be Done: Price Maintenance Strategies ................................7

The Balancing Act Between Prices and Profits—It’s Within Your Control

IntroductionPricing and profits used to be fairly easy. You could focus on product assortment without worry about over analyzing prices, and you could rely on loyal, relatively uninformed, customers and turn a decent profit. Well, that may not be the case in today’s highly competitive market. Big boxes and online retailers are thought to control the price wars, however…that’s not the complete picture.

There is more to retail success than focusing on low price. How you differentiate yourself from the competition is key to your success. And how you balance prices and profits is essential too.

If you’re like many other independent retailers we speak to, you may be losing money by missing opportunities for improving margins. Learn how you, as an independent business, can walk the fine line and set prices the market will bear while maintaining, or even gaining, higher profits.

Take control with strategies on:

• Establishing Price Image

• Fine-tuning Price Image

• Rounding (Creating a familiar price shape)

• Promotional Prices

• Price Maintenance

Tap into some simple steps leading retailers rely on, and you too can discover the balance between prices and profits.*

* This document contains our ideas regarding certain best practices that have evolved and developed over time based on our customer experiences. Each customer has unique circumstances and your results will vary. Please see the note at the end of this document for important information.


1

Developing the Right Price ImageWhen a consumer thinks of an independent retailer, they often think of two things: Great service and higher prices. We know you’ll deliver the former, but how do you change the perception on the latter without sacrificing profits and margins?

Here is our first lesson on balancing price and profit: The key is to create the right price image for your retail business.

Decide on the Price Image Strategy that best fits your business.1. Everyday low pricing

2. Full price with heavy promotional activity

3. Full price with promotional activity AND everyday low prices (The Combo)

See the table below to get the quick breakdown of each strategy.

Go for the Combo!That’s right. Full price with regular promotional activity AND everyday low prices on highly visible, price-sensitive items has great potential.

Here’s how THE COMBO can work for your store!

What happens when your customers see low prices on those highly visible price-sensitive items? In other words, what happens when they walk by an end cap set up with commonly purchased items that are priced lower than your competitors?

They have the perception that your store has good prices…on all items even though that’s not necessarily the case.


Back to the Basics Quiz

Q. What are the most price-sensitive items in your store?

A. Fast-moving categories are most price-sensitive

Why are Fast-Moving Categories More Price-Sensitive?

• Consumers buy fast-moving categories often and from different retailers. They know the price of these types of items (think light bulb) and have set expectations

• Conversely, consumers are less familiar with prices on slower-moving categories (e.g. a shower head or adhesive), and don’t have the same strong price opinions

Everyday Low PricingGOAL OF PRICE IMAGE STRATEGY

Strive to create the imageof having merchandise discounted

all the time. Everyday is a good time to shop.

COMPANIES USING THIS STRATEGY

Wal-Mart or Home Depot

Full Price and Heavy PromotionsGOAL OF PRICE IMAGE STRATEGY

Quality brand name and private labels are marked up but then promoted and discounted to create a must-buy-now response from customers.


Department Stores like Macy’s or Kohl’s

The ComboGOAL OF PRICE IMAGE STRATEGY

Everyday low prices on some items create the perception of low prices

and promotions create a must-buy-now response.


Independent Retailerslike You

2

Meanwhile, you’ll have the ability to make up for low prices on fast-movers in the following ways:

• Sales volume should increase with low-price promotions because you’re creating that must-buy-now perception

• If you can accurately select which fast-movers will fly off the shelves, you will be able to further increase sales volume (See how Epicor can help you determine these items below)

• And you’ll also have the ability to make up for those low-priced items by aggressively marking up slower-moving items, the type of item that your customers don’t mind paying extra for because it’s convenient or it’s a rare item. This is the time to identify items that only you sell. These items are price-indifferent and will sell in spite of more aggressive markups

It’s Time to Find Out What’s Popular, and What’s NotWho has time to fiddle with reports when they have to run a business? There are many advantages (i.e. profits) to putting in a little time every day to better understand the popularity of your inventory and price items accordingly.

You need a few tools to make this happen: 1) a system that categorizes items by department, class, and fine line 2) a method to rank an item’s “popularity.” ERP systems have algorithms ranking products by popularity from fast-moving high-margin to slow-moving low-margin and dead items.

If you’re not abiding by an ERP system’s order points and suggested orders, when you rank your items, you might discover that 65% or more of your inventory is tied up in the bottom 15% of sales movement.

Once you identify your fast-moving items, you can set competitive prices and design end caps featuring their strikingly low prices, while you aggressively mark up your slower-moving items, thus establishing the right price image for an independent retailer like yourself.

One Last Price Imaging Suggestion: Step Out of the Suggested Retail BoxCo-ops do a great job of researching the market, analyzing cost and prices, but they don’t take into account the exact location of your retail store. Why not leap out of your comfort zone and try new prices that better reflect your specific location? For example, if you are the only one with plumbing supplies in your area, you can assign a higher markup to those items, and stay competitive on items commonly sold locally.


Epicor Eagle Does That!

Use the Eagle® system to

designate both common

and hard to find products,

so that you can assign

the best markup for

each category.

!

3


Have you used Eagle Pricing

Planner? You can easily identify

your price-sensitive items, and

then delve deeper into analysis.

Conduct “what-if” analyses on

proposed price changes before

implementing them, saving you

on costly trial-and-error pricing

methods. You can also use the

Eagle system to set up a pricing

matrix to offer various levels of

pricing to your customers.


Fine-tuning Price Image (and Your Customer’s Perceptions) for Your Retail BusinessYou’ve started to set more informed prices. How do you continue to fine-tune your prices and align them with your business goals?

Here is the second lesson on balancing price and profit: The key is to fine-tune your price image for your retail business.

Fine-tuning Pricing: Best Practices ChecklistAre you doing everything in your power to price accurately? Follow the checklist below to see how you’re doing:

3 View price as more than markup from cost; it has a direct relationship to your business goals. It’s a crucial strategic variable—use it as a tool for marketing and for profit.

3 Discover how your customers perceive your business. Are you considered a price leader or a service leader? Are you a destination store or a convenience store? As you begin price imaging, it’s important to understand how your customers perceive you. You’ll have an opportunity through price imaging to either reinforce their opinions or change them.

3 Price by category: discount only what your customers need to give the impression of being a price leader. Here’s an example: you can give a painter a trade discount that applies to paint and paint supplies while leaving the rest of your merchandise at regular price.

3 Tailor Pricing Further—Use the Matrix: This is a more complex variation of pricing by category. Here, you tailor pricing and give discounts based on different items and customers. This works best for retailers who have many customers on account.

3 Identify what customers buy out of convenience or impulse and price those products higher. To help customers with impulse buys, provide them with suggestions for complimentary items and plenty of opportunities to purchase last-minute items at the checkout counter.

3 Experiment with Higher Markups without the Fear of Impacting Margins. For those of you looking for that extra edge, use technology that measures item elasticity which predicts the demand of an item when a price change is made. In other words, it identifies the most price-sensitive items—which is exactly what you need for easy price imaging. Not only does it identify price-sensitive items, when you propose price changes, you can analyze the impact the proposed price changes may have on sales and margin dollars, and make adjustments before your price changes go live.

4


The Price Rounding Table in

the Epicor Eagle system allows

you to enter a group of items

by department, class vendor,

or location. The system will

automatically recalculate a

new retail price after it runs

through the pricing table. Add

to that the additional features

of Pricing Planner and you’ll be

able to round to the right and

the left of the decimal!


Get Your Retail Prices in Shape with Rounding Strategies

Here is our third lesson on balancing price and profit: The key is to create the right price shape for your retail business.

Marking up from cost yields odd price points: $5.77 or $6.53. But consumers are accustomed to seeing a 9 at the end of a price. Rounding, in its simplest form, is changing the number up to the nearest 9. From our odd price points, we would change the price to $5.79 or $6.59. This provides your customers a familiar price shape while adding cents to your bottom line. But there’s more to it than rounding to the nearest 9. Learn how to really get your prices in shape.

For every $1 million in revenue, approximately 200,000 items are sold. If you added just 3 cents to the price per item, you would see $6,000 added to the bottom line. Now that’s not bad!

Before you begin, make sure your costs are accurate. Since you’re base rounding (and pricing) on cost, it’s best to get that in line first.

Getting Your Prices Into Much Better Shape with Some Rounding Heavy Lifting

3 Start Small. With rounding, you don’t have to make large adjustments to the price. A cent here, a cent there, and soon you’ll see dollars added to the bottom line.

3 Now Think Big. For lower priced items, rounding to the nearest 9 makes sense. But for higher priced items, you should be rounding more aggressively. Why? It’s all about what the market will bear. Higher priced items will weather aggressive rounding better than lower priced items. Remember, sometimes 100% markup or even 300% markup will be fine.

3 Don’t get stuck at what is convenient. Tailor your rounding to reap additional profits. If you have the same rounding strategy for items between $5 and $10, it’s time to reconsider. Use your ERP system to generate tailored rounding using rounding tables. There you can assign a rounding scheme of .29, .49, .69, .79, .99 for items between $4-4.99 only. Create a new level for $5-$5.99 which will round to .49, .79, or .99 only. For $6-7.99 set it to round to .49 and .99 only, and for $8 and up round to .99. The more tailored and aggressive the rounding, the more profit.

3 Round up to the right and the LEFT of the decimal if the product is blind or non-comparable. For products you stock that none of your competitors have or for items that a customer rarely purchases more than once (think wax toilet ring or toilet flapper), you have an opportunity to assign more aggressive rounding. For example, do your customers know enough about a toilet flapper to balk at a price of $11.99 versus $6.99? This is your opportunity to create custom rounding—including rounding up dollars and not just cents.

!

5

Did You Know?

Promotions do not always

involve price discounts. You

can advertise your product

offerings without discounting

price. Consumers will assume

your prices are good because

of the effort you’ve gone

through to put those prices in

front of them, when in fact,

you are simply building brand

and awareness.


Trade Secrets of Promotional Pricing and DiscountsPromotional pricing strategies aren’t trade secrets. But retailers often underestimate the power of promotions and how they function.

Here is our fourth lesson on balancing price and profit: The key is to create the right price promotions for your retail business.

Promotions are time-based offerings that discount merchandise from its regular retail price for a specified period of time. They are a great way to keep your retail business top-of-mind and drive store traffic and sales. They add color and fun to the shopping—and retailing—experience. If promotions are not executed flawlessly, however, they can confuse the customer, slow down point of sale, and cost you loyalty and profits.

To help ensure that you run streamlined promotions, use these best practices below to guide you:

Promotional Pricing Secrets to Success

3 Keep an eye on the entire market basket of goods customers buy, not just promotional items. The trick is to select the right products to discount in the right seasons AND select the right complimentary non-discounted items to merchandise alongside promotional items. This combination, along with increased sales volume from the promotion, will offset the lowered price and drive up the transaction total. One way to select the right product mix of promotional and regularly priced items is to rely on an ERP system.

3 Don’t underestimate the BOGO (buy one/get one free, half off, etc.). BOGO promotions are important for any promotional strategy. They support your price imaging strategy of discounting price-sensitive items, and foster impulse buys and an exciting customer experience.

3 Offer Coupons—It’ll be Worth It. The interesting fact about coupons is that they attract two very different audiences: both first-time customers AND your regulars. You’ll be appealing to first-time customers with low-priced items and feature tantalizing sales that make them eager to try your store. At the same time, you are training your customers to read the ads and look for great deals. Coupons become a vehicle for developing customer loyalty as well as attracting potential new customers.

3 Don’t forget the discount. More than anything, the straight discount will help you steer customer behavior. If you’d like customers to buy in bulk at your store, consider offering volume discounts, or if you’re hoping to improve days outstanding, offer prompt-payment discounts. Or you can provide discounts on certain days for a certain class of customer, perhaps senior citizens or your VIP customers, to further encourage sales AND customer loyalty.

6



You can use the Eagle

system’s Dynamic

Promotions module to

run time-sensitive “start

and end” promotions in

advance. The system will

preprint signage, shelf

labels, and prepare POS to

charge the sales price for

the merchandise. Advanced

features allow you to

run BOGO and coupon

promotions, along with set

special prices for a certain

type of customer. The

system enables you to easily

track the results of your

promotions, too.

3 Measure a Promotion’s Success. If you aren’t tracking and measuring the success of each promotion, you’re missing out on a key step in mastering the art (and science) of promotions. Not only is it important to run promotions effectively, but it’s also important to track them so that you can better understand how well these items performed—so that you can offer even better promotions the next time (and gain additional revenue). Measure the performance of sales items and the transactions they drive. No matter what items you put on sale, or the prices you decide to charge, you need to measure what happens with your promotions. For example:

{ Did the number of transactions increase?

{ Did your average transaction size increase?

{ Did sales of related items increase?

{ Were you able to remove overstocked or short-dated items from your inventory?

You should expect to see increased sales volume offsetting the discounts and higher overall transaction levels (and sizes). If an item performs poorly on promotion, do not use that item for the next promotion.

3 After the sale, close the loop with returns. Are items being sold at promotional pricing but returned at retail price? If so, you’re giving money away, and fixing the gap is imperative. Close that loop by relying on an ERP system’s promotional software to accurately provide the right dollar amount to return at the POS.

7

Did You Know?

In some states, the retailer can

be penalized for charging at

point of sale a price greater

than the lowest price posted on

the shelves. In these states, it

becomes doubly important to

make sure that system pricing

matches shelf pricing to keep

customers happy and to avoid

penalties. For more information

on the pricing laws by state go

to http://www.nist.gov/pml/

wmd/metric/retail-pricing.cfm


It’s Got to Be Done: Price Maintenance StrategiesOnce you have your pricing strategies in place, it’s important to protect those strategies long-term. To do so, you must ensure cost fluctuations are reflected in the price…in both the system and out on the sales floor.

Here is our fifth lesson on balancing price and profit: The key is to create the right price maintenance strategies for your retail business.

If you can maintain your prices (and make sure your system prices match shelf prices), you’ll be creating a guard against lost profits (and penalties).

Price Maintenance at its Best

3 Walk the Store. Periodically, you need to take a visual inventory of your store. Check it out. Are the prices in the system consistent with the prices on the shelves?

3 Watch for price change exceptions at POS. Are you protecting your prices only to have employees giving away your margins at the checkout counter? Set up alerts—most ERP systems will have them—to see when clerks are making price exceptions. This can help you maintain your prices.

Did You Know?Employees making price exceptions at POS can account for an approximate 2% loss in gross profit. 2% adds up. If you earn a gross profit of $1 million, 2% is $20,000 lost at the POS counter.

3 Give up manual updates to cost: There is enough great technology out there to warrant giving up manual cost adjustments. It’s time to automate. Leverage your ERP system to change costs throughout the system. For example when your vendor informs you of a 5% price increase, don’t sweat it. Update your replacement cost by running a simple report. You can then program the system to take the new costs and update your retail prices and print new labels.

3 Multi-store synchronization. Now that you have pricing strategies for one location, expand it to multiple locations. Maintain the same price for some items and create store-specific prices for other items—your ERP system can help you determine which items merit which prices.

Did You Know?Lowe’s used to have four zones of pricing, now they have 200 zones across the country; individual SKUs vary in price by as much as 14% across zones.

http://www.nist.gov/pml/wmd/metric/retail-pricing.cfm

8


Epicor Eagle Does That

The Eagle system can

automatically change

prices based on the Price

Maintenance strategies. To

assist you in verifying prices

on the shelves versus the

system, you can download

price files by location to

your mobile device (or

scanner). You can walk the

aisle, scan the labels, and

verify that the price in the

system is the price on

the shelves. Also, the

Price Change Screen

allows you to update your

replacement cost very

quickly and accurately.

The Golden Rules for Changing PricingDo you have a difficult time determining the right moment to change prices when new costs come in? Try the golden rules below to guide you:

3 If new cost is higher than the merchandise already in stock, you will want to mark up price to reflect cost immediately.

3 If new cost is lower but higher-cost merchandise is still in your possession, the price point should hold steady until the higher-cost merchandise is sold.

3 If new cost is lower and there is not much higher-cost merchandise left in inventory, prices should be reduced.

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This document is for informational purposes only and is subject to change without notice. This document and its contents, including the viewpoints, dates and functional content expressed herein are believed to be accurate as of its date of publication, July 2013. However, Epicor Software Corporation makes no guarantee, representations or warranties with regard to the enclosed information and specifically disclaims any applicable implied warranties, such as for fitness for a particular purpose, merchantability, satisfactory quality, and reasonable skill and care. As each user of Epicor software is likely to be unique in their requirements in the use of such software and their business processes, users of this document are always advised to discuss the content of this document with their Epicor account manager. All information contained herein is subject to change without notice and changes to this document since printing and other important information about the software product are made or published in release notes, and you are urged to obtain the current release notes for the software product. We welcome user comments and reserve the right to revise this publication and/or make improvements or changes to the products or programs described in this publication at any time, without notice. The usage of any Epicor Software shall be pursuant to an Epicor end user license agreement and the performance of any consulting services by Epicor personnel shall be pursuant to the standard services terms and conditions of Epicor Software Corporation. Epicor, Business Inspired, the Epicor logo and Epicor Eagle are trademarks or registered trademarks of Epicor Software Corporation or its affiliated companies registered in the United States and certain other countries. All other trademarks mentioned are the property of their respective owners. Copyright © 2013 Epicor Software Corporation. All rights reserved.

the balancing act between prices and profits – it's within your control

Technology

balancing price

price wars

right price image

retail prices

price maintenance strategies

higher prices

perception of low prices

visible pricesensitive