How do you determine the cost of an item and when do you mark it down? Savvy retailers know pricing products to sell and turn a profit is an art—and a science.
Paul Erickson, retail expert from Management One was onsite at the MAGIC Seminar Series to share pricing tactics proven to increase long-term profits. Learn his insider tips here.
How to price your markups
1. Mark up items every dollar and cent you can. An increase from a 52% markup to 55% can make a small impact on your customer, but a big impact on your bottom line. The truth is every little bit counts. In an incredible example, one year Delta Airlines added a mere 20 cents to each ticket. After selling 180 million tickets, the small increase earned them an extra $36 million. As Erickson states, “Every dollar you can add to your initial markup is an express elevator to your bottom line.”
2. Sell your items at the intrinsic retail value. It’s common for novice brands and retailers to sell the item at roughly double the price they paid for it. This is a huge mistake. Find out what the market dictates, and what your audience is willing to pay for an item and price it accordingly.
3. Know the customer always rounds down. It’s proven that customers see a price like $19.99 and think of it as $19. Don’t be afraid to add $.99 to your markup (or $.90 if you’re worried $.99 looks cheap.)
4. Research your competitors’ prices. Erickson once encountered a retailer selling a tie for $119 when Nordstrom was selling the same tie for $129. They lost significant revenue just because they didn’t do their homework. Don’t make the same mistake.
5. Premium products need premium prices. Consumers don’t just buy based on price, they buy based on feeling. There was a study done on a luxury champagne brand. One site priced it at $80, and another site priced it at $79.50. The $80 one sold more, likely because it was more expensive—and felt more extravagant.
6. Remove the comma or dollar sign if you want something to seem more affordable. Fine dining restaurants are known to remove the “$” from their prices because it reminds people of the money they’re spending. Manufacturers of high-ticket items that want to de-emphasize price often remove the comma from the dollar amount (ex: $1299 as opposed to $1,299) because the comma makes it feel too expensive.
How to price your markdowns
1. Don’t take markdowns lightly. Any reduction of the original selling price is a markdown. As Erickson states, “Markdowns are every bit as real an expense to your store as the light bill, the rent bill, your payroll, your advertising, and your travel except for one thing: You don’t write a check.” So be sure to take them seriously.
2. Know the difference between a good markdown and a bad one. Good markdowns keep your inventory fresh. Bad markdowns can cost you more than anything in your store.
3. Understand the power of new. Erickson says the #1 cause of excessive markdowns is not buying based on the notion of time. Mark things down within a 10-week window. As he shares, “It’s not how much inventory you have, it’s how much new inventory you have.”
4. Don’t use percentages off. Frame your markdowns in a positive light. To the customer, saving money is good and spending money is bad so don’t make the process more painful by making them do math. Make your markdowns a clear dollar amount off. After all, $50 off sounds much better than 15% off even when they mean the same thing.
5. Know how many markdowns you can make and still get to your profit goal. It’s common to just want to move merchandise when it isn’t selling, but you must keep your profit goal in mind when buying an item, pricing it—and putting it on sale.
6. Make your markdowns an educational experience. Discounted items are part of the business, but each time you mark something down learn why so you don’t have to make the same mistake again.
7. Tell the customer why it’s on sale. You don’t want your store or merchandise to look like it’s always on sale. Explain to your shopper why they are buying things at a discount. It could be an end of season sale, a special buy—anything, really—just make sure you give them a reason.
8. Keep your goal in mind. The whole point of marking down an item is to sell it and get your money back quickly so you can reinvest it. So make your first markdown your cheapest. There’s nothing sadder than items that have been discounted many times.