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  • Writer's pictureThe Pink Elephant Lady

Explain Your Prices.

How Do Small Retailers Determine How Much They Charge for Their Products?

The total amount of money a retail store gets for the things it sells is called revenue. This is NOT the same thing as profit. If I sell an item for $10, and it costs me $10 to make it (packaging and labeling, the product itself, the rent, the utilities, paying employees), there is no profit. I have $10 of revenue, but no profit. ‘Operating expenses’ (rent, utilities, paying employees) and ‘cost of goods sold’ (packaging and labeling, raw materials) are subtracted from revenue to arrive at profit. So, if my cost of goods sold is $4 and my operating expenses are $5, my profit on the item is $1, quite different than the $10 in revenue for selling the product.

Some retailers sell their own product (think Bath & Body Works or LUSH), some sell only the products of other manufacturers, and some carry both their store brand and other brand names. If a store is retailing items it does not manufacture, it must respect the MAP (Minimum Advertised Price) policy that the manufacturer has in place for their product. What a MAP policy means is that, as a retail store, you CANNOT advertise the product at a price lower than the price it has set as the minimum. For example, if GladRags has set $39.99 as the minimum price for its 3 pack of reusable pads, I CANNOT advertise them at a lower price. If I do, they may terminate my ability to sell their product at all.

Covering expenses is, of course, not the only factor a retailer can consider in its pricing strategy. What other retailers are charging for a similar product is also relevant.  If other retailers are charging considerably less for a very similar product, there must be a very compelling reason for the product to cost more.

So, Why do ‘green’ products and products from small businesses often cost more?

· Glass or metal packaging is more expensive than plastic. That’s why the vast majority of massive, multinational companies are packaging in plastic – it’s cheap, light, and does not break easily.

· 99% of what a business buys is far cheaper when it’s bought in large volumes. Buying 100 glass bottles? Maybe you’re paying $3.00 a bottle. Buying 10,000 bottles? It’s more likely you’ll pay less than a dollar. That can leave the small business at a significant disadvantage when it comes to pricing.

· Natural ingredients, like all ingredients, are subject to ups and downs in pricing. Pure vanilla is a perfect example. If the cost of vanilla skyrockets, and you refuse to use synthetic vanilla, you may have to raise your prices to cover the change in cost of raw materials.

· Lower quality ingredients are often cheaper. Higher quality, safer ingredients often cost more. Fair trade chocolate from a company that is cooperatively owned by the cocoa farmers cost more than, say, Nestle bars. In order to pay its operating expenses, a business has to at least cover its costs.

· Processed food can sit on store shelves far longer than fresh food. Fresh food has to move in the store, otherwise, it results in significant losses for the seller because it’s a sunk cost – expired or spoiled food cannot be sold. Carrying fresh food in a store that does not sell at high volumes can be expensive.

· Many service sector/retail companies are NOT paying their employees a living wage. Wages are a cost of doing business – lower costs, and you increase profit. Which is exactly what many businesses do. An employer who pays a living wage has to sell enough merchandise to cover the cost of those wages.

· If a small business is creating its products by hand (for example, handmade soap, hand-poured candles, knit or hand-sewn apparel, etc.), pricing may be higher because creating the product is very labor-intensive. A handcrafted item is one not created by the automated systems and machinery of mass production. And mass production means lower costs.

Beyond these factors, gimmicks unfortunately can be a factor in pricing. A company may charge more than is necessary for its 'green' product simply because it can. And, as long as consumers are willing to pay that price, they will continue with that pricing strategy.

The bottom line is that a store must charge enough for its products to pay its expenses and keep the doors open. If a store slashes its prices but expenses have not also been slashed, the store will be unsustainable and cannot remain in business for very long. And no one wants that!

This Burberry tshirt is $160!

Other Pricing Strategies

Sometimes a store will establish what’s called a ‘loss leader’. This is a product the store knows it will lose money on, but does so because it accomplishes some other goal. For example, during back to school shopping season, a store may sell a box of crayons for 25 cents that it normally charges $2.59 for. The hope is that the attractive price on the crayons will drive customers to the store, where they will then purchase all of their other school supplies.

Some stores (JoAnn Fabric and Kohl’s come to mind) tag their items at a price they never intend to actually charge the customer. They advertise an immediate ‘sale’ on the product such as 40% off as soon as the product is on the shelf. Consumers are more likely to purchase an item they think they’re getting a good deal on.

And some brands will charge far, far more than its product costs to produce in order to establish its ethos as a status symbol (think a $160 Burberry t-shirt). Brands like Tiffany or Burberry are never on sale - these brands have no interest in being perceived as a 'discount' brand. While it may seem hopelessly illogical to pay $160 for a t-shirt, the supposed 'value' to the consumer is not in the product itself, but the status it provides.

Why Do Some Retailers End All Their Prices in ‘99’?

Why is this product $4.99? Why not an even $5.00? In William Poundstone’s book Priceless, he picks apart eight studies on the use of ‘charm prices’ (prices those ending in an odd number, like 9), and found that they increased sales by 24% on average when compared to their nearby, ’even’ or rounded price points. And for some reason, the number 9 reigns supreme when it comes to many retail pricing strategies. Researchers at MIT and the University of Chicago ran an experiment on a standard women's clothing item with the following prices $34, $39, and $44. Guess which one sold the most? Pricing the item at $39 even outsold its cheaper counterpart price of $34!

Prices that end in '99' are more likely to get consumers to buy.

Why Do You Sell Other Brands Besides Your Own?

We often get requests for toilet paper not wrapped in plastic. Unfortunately, there is no company that doesn’t wrap its toilet paper in plastic that offers wholesaling at this time (for example, Who Gives A Crap wraps its rolls in paper, but does not sell to retailers). Due to the requirements of production, there are some products that are nearly impossible to produce on a small scale, such as paper products and trash bags. Generally, toilet paper, facial tissue, feminine hygiene, and diapers are only produced by fairly large manufacturers. Order minimums for private labeling of such products is often in the ten thousands (private labeling is when a third party produces a product and labels it with your brand). In contrast, contract manufacturing is when you specify to a third party exactly what you want your product to be like (ingredients, packaging, etc.) and they create it for you, with your own branding.

Beverage bottling is another product category that is often done at a very large scale. It is challenging to produce bottled beverages at a small scale at an affordable price point. This is why many of your favorite ‘small’ brands of tea, kombucha, and juice are actually owned by PepsiCo or Coca-Cola Bottling Group.

Industry Trends

Consumers are increasingly turning up their noses at the large, well-known brands that have traditionally dominated the grocery and drugstore shelves. The blue box of Kraft Mac & Cheese is turned down in favor of Annie’s Organic Mac & Cheese, soda is being replaced with bottled teas, and consumers are demanding safer ingredients in their cosmetics and personal care products. Big brands have responded by either changing their legacy products or buying up the smaller brands that threaten the market share of those products. For example, Johnson & Johnson removed ingredients consumers didn’t like in their baby care products. As with bottled beverages, many of your favorite ‘small, indie’ brands at the grocery or drugstore are actually owned by massive multinational companies like Unilever and Proctor & Gamble.

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