Is your pricing enabling a healthy profit margin?

When a business sets its pricing policy, it looks to both make and save money while ideally increasing profit margins. This is an ongoing process that demands constant commitment through regular evaluation. Getting the pricing wrong can hurt a business and diminish its profit margins. And we all know that a solid profit margin is an essential part of financial health in the long run.

Profit margin is perhaps the most analyzed number during the company’s lifetime. It is a rather useful pointer that can help a company provide insight about a number of aspects regarding its financial performance, with profit margin fluctuations the ever-present subject of numerous analyses. In broad terms, low profit margins could suggest various problems. For this post, we are sticking with pricing, a very important factor in determining whether a low or high profit margin indicates a profitable business. We will mention different ways how pricing affects your profit margin and is it healthy enough or sustainable.

1. Have a long-term plan

Setting pricing for your goods should be a part of a larger plan, a group of multiple strategies to maximize your profits. A business needs to develop a plan that covers all the little ways of how products get sourced, distributed and sold, all the while monitoring the prices. The main focus is on the level of profitability of every product you sell. Make your items more valuable and competitive but also pay attention to those that may be losing money and turn them around quickly.

2. Avoid same profit margins for different products

What some companies fail to grasp is that price optimization leads to optimized profit. All customers have different perceptions of your goods and they assign different values to those same goods. Every product needs a price that shows the customer’s willingness to purchase it. This is a display of the customer’s perception of the value of your product that ultimately has nothing to do with the profit margin of other product lines.

Take Parker, the motion and control technologies company, as an example. In 2002, a new CEO determined to change the company’s uniform price policy across the entire range of 800,000 products. Understandably, the company was in a profit margin standstill until the change was made to switch to the new pricing scheme. As a result, the company gained over $800 million in profits during the course of seven years by solely focusing on its pricing.

3. Create perceived value with your pricing

A business should always set its pricing so it creates a perceived value for its customers. Perceived value is what essentially delivers purchases by attracting customers. You can see it all the time – people favor some shops because they believe they are getting the best deal around. This may be true most of the time, but even if it is false in reality, the perceived value is what makes them come back.

Naturally, this is all easier said than done, which is why mastering perceived value demands a thorough analysis of large volumes of data to recognize which option is best. Do you lower your prices to appeal to those looking for bargains or do you cater to those willing to pay premium prices because they believe they are getting a product with better quality? As there is plenty of market research involved, creating perceived value is complex, which is why your best bet might be utilizing some form of pricing intelligence software that significantly automates the process.

4. Don’t use cost-driven pricing

Among businesses, one of the basic calculations of setting the prices for goods is by following a simple formula:

  • the cost of the product + profit margin = price

It makes sense as you want your pricing to take into consideration the overall cost. However, even if you account the cost correctly and set a healthy profit margin, your pricing might still hurt you. Why? Because of the all-important customer perceived value. Understanding the cost part of the equation is important as there are various costs to account for (materials, time, manufacturing and distributing costs, marketing costs and so on) in order to achieve a reliable profit margin.

Still, basing your pricing on costs rather than customer’s perception of value takes away the customer’s willingness to pay as it might not believe the product is worth the price you set. The price is not the only factor that is important to a buyer. Recognizing and understanding how and why customers value your products will allow you to set a price that truly reflects that value and attain a healthy profit margin.

5. Segment your customers

As we mentioned earlier, customers have different requirements so you need to differentiate them into segments. Chances are, your company attracts a wide array of customers with particular demands and reasons. The value proposition for any of your products (or a variation of it) is different in different market segments. Hence, your pricing must reflect that difference. It should include tailoring the product and pricing strategies to specific customer segments if you want to attain the additional value created by these segments.

Conclusion

Pricing is a vital part of doing business, providing a competitive advantage and higher levels of profitability if done right out of the gate. To do that requires diligent work and keeping in mind the five point above. It all starts with a well-rounded agenda that follows the way of maximizing your profits. This includes having different profit margins for different products that have prices that best reflect the customer’s willingness to pay. Creating perceived value ensures you will attract customers and possibly retain them for multiple purchases. It’s not easy to master but with the right tools, it can be done. Avoid pricing your products based solely on costs – it does not reflect the true value of your product and it will turn your customers away. Finally, don’t treat all your customers the same as they ascribe different values to your products. Instead, align your prices with their value perceptions and enjoy increased profits.

3 Competitive Pricing Secrets You Never Knew

As pricing goes, competitive pricing is one of four major ways (the other three being cost-based, value-based and demand-based) how businesses set and develop their pricing policy. Basically, with respect to competitors, a company sets its pricing based on either lower, higher or roughly the same as it’s competition. Competition can be either direct or indirect. Direct competition happens when a company produces similar products that cater to the same group of consumers. Indirect competition exists when different companies make or sell items which, although not in head-to-head competition, still compete for the same share of the customers’ pockets.

A competitive pricing method is quick to implement as it doesn’t require as much in-depth market research as some other pricing methods like demand-based or value-based pricing. Instead, its foundation lies in the prices companies that sell similar products set. This way, a company can rapidly attract and influence customers because there is already a potential pre-established customer base. However, a competitive pricing policy has its own advantages and disadvantages that companies looking to implement should be aware of. In this post, we’ll show you three competitive pricing secrets that can help you boost your business.

1. Underpricing can harm you in the long run

A common occurrence in the e-commerce world is that companies often turn to underpricing their goods believing lower prices or being the least expensive solution will drive sales volume. While the theoretical basis is sound, the practical part carries two big downsides.

  • Pricing your products lower than your competition takes a toll on your bottom line. Sure, lower income is better than no income but you are needlessly leaving money on the table and seriously thinning and decreasing your profit margins.
  • You lose any form of brand recognition, at least the good one. Being too cheap might signal customers your product is shady and possibly of questionable quality, ultimately steering them away to your competition.

Underpricing is typically a result of lack of knowledgeable insights. It’s essential to avoid crossing the line between providing competitive pricing and underpricing. Pricing intelligence tools assert themselves as the logical solution in this case, as they will provide data driven insights to help a business stay competitive without underpricing.

2. Lower your prices the right way

Continuing the subject of lower prices, here is another thing that you might not know. Chances are, there is a group within your target audience that perceives your pricing a bit expensive. This might pose a dilemma – to cater to them by lowering your prices or not?

Consider resorting to alternative measures such as offering buyer benefits in order to be more appealing. For instance, you can offer brand club membership with exclusive coupons and discounts. The essence of this method is that you are not lowering your price in general but offering special prices to specifically targeted customers at specific times.

Lower your prices

Source: Harvard Business Review

Another way to achieve this is by offering less product or service for the same price. Taking into account your customers, product proportions and sizes and order sizes can effectively reduce your costs and produce a desired result without reducing the value to your customer base.

Fairly recently, the maker of Toblerone, popular Swiss chocolate, changed the overall look of it and reduced the overall amount of chocolate from the 170-gram and 400-gram milk chocolate bars (about six ounces and 14 ounces) to 150 grams and 360 grams in order to reduce cost because the necessary ingredients achieved higher prices. The company said the effect of the changes was less noticeable, thus continuing the established practice of companies trying to avoid price increases by reducing the contents of their product. Most consumers are not aware of the alteration because the product usually looks the same and has the same price, the only difference there is a tad less of it.

The same can be done with other aspects of your product like shipping. Instead of offering a two-day delivery, a business can switch to three-day deliveries, saving enough money to keep the existing price without decreasing its margins.

3. Reframe your product

This is an effective method that provides lots of breathing space for experimenting what works and attracts customers and what repels them. You will often find the term “psychological pricing” (also known as odd-even pricing) accompanied with the example of charging $9.99 for your product instead of $10.00. This way customers feel they are getting a fair, lowest or best possible price.

Simply switching up the product description can play a large role in selling your product. For instance:

  • Selling something that costs “$10 per month” rolls better of the customer’s tongue than “$120 per year”, even if those price points are exactly the same in the end.
  • Changing a $4 shipping fee to “only a $4 shipping fee” or “a small $4 shipping fee” could increase the response rate among those hesitant to commit to a purchase.
  • Another way to reframe your product is to provide a “free shipping” benefit with the actual shipping costs included in the product cost.

Conclusion

Balancing competitive pricing with profit margins can be a difficult task without proper tools (and secrets) of the trade. It’s important to understand what can propel you in the business environment, as well as hurt you in the long run. The most valuable pricing methods consist of constant planning and management, as well as competitive price intelligence, which ultimately points to pricing software. It joins big data with historical information to help retailers set the prices of their products in accurate and timely fashion.

Having in-depth knowledge of your market and target audience is vital. Lowering your pricing can certainly be a tempting proposal, but it can also cost you money if you lower it too much. Also important is knowing how you can appeal to customer’s price consciousness by reframing your price to appeal even to those hardened buyers. Keeping the competition factor provides a fast way of scoping the market and setting prices accordingly. By utilizing these little secrets, you will avoid the pitfalls of competitive pricing and turn them to your advantage.

Pricing Psychology Tricks: How and Why They Work

Pricing psychology is more essential than ever to position your business for success in the marketplace. In fact, its use dates back at least to the late 19th century, as newspapers battled for readership supremacy. Nowadays, consumers are inundated with sales offers at every turn, and while today’s technology makes it easier than ever to reach prospective customers, it also means that your message is more likely to get lost in the shuffle. Yet, the key to distinguishing your product or service from your competitors lies in how well you grasp the conscious and subconscious thought processes that governs the decision-making of your target customer base. Continue reading “Pricing Psychology Tricks: How and Why They Work”

The Fashion “Evolution” from a Retailer’s Perspective

The ephemeral global apparel business is a challenge to stay in and adapt to. The size of the global apparel business is growing exponentially and is expected to generate double digit growth between now and 2020, much of it coming from developing markets.

In a world so saturated with choices, retailers and manufacturers are having to change their ideas about fashion with the speed of light, or perish!

As a Data Analytics Lab, specializing in retail, with a deep and intuitive understanding of the apparel- retail industry, we at IntelligenceNODE have been studying consumers of fashion for quite some time. And our observations have been very interesting, especially from a retailer’s perspective.

We discovered 3 main types of fashion consumers:

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From the Runway to the Roadway: The Vero Moda India Story

These days, whenever one looks at the huge store front of the Vero Moda store, Mumbai, there is, almost always, a sale going on. With so many offers, discounts and an amazingly intuitive collection, Vero Moda offers affordable style to the modern Indian woman.

There are many international brands in the Indian retail market today- and yet, Vero Moda is one of the few that has queues outside on sale weekends, beginning from early in the morning- hours before the store actually opens. The atmosphere is like the entry to an elite club, complete with bouncers allowing one person inside at a time.

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How Mobile Commerce Reshaping Consumer Behavior

Mobile is becoming the integrated platform to get almost everything done today. And retailers are very aware of this fact. A lot of know- how, reports and miscellaneous facts exist online and offline about mobile platforms.

This knowledge is now becoming a healthy return on investment for many businesses. Consumers are now using mobile devices to shop, exchange ideas and create personal histories. Ecommerce websites and etailers are cashing in on this deluge.

It is not just a passing fad though; it is a way of life. According to forecasts, worldwide business-to-consumer e-commerce spending increased by 20 percent in 2014, reaching $1.5 trillion in sales. Ecommerce has clearly outpaced many other industries today. It has in fact become a medium for most industries to increase their customer base.

Mobile commerce is, for most intents and purposes, user centric. It focuses on the consumer. Everything from aesthetics to ease of use that you might wish for, as the consumer you get it! In fact, after taking years to build an online presence, retailers are only now beginning to cash in on all that hard work.

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Refurbished goods, An offshoot e-tail industry – A booming business

E-Tail has become a booming business all over the world. While online retail contributed just about 0.4% of the overall retail market in 2014 (India), it is expected to reach 3 per cent of the total retail at $32 billion by 2020, according to a Technopak study.

This is supported by the mobile internet traffic statistics as well. Mobile data traffic in India is projected to grow 24-fold between 2013 and 2018 at a CAGR of 88 per cent. Clearly, an indication of the way the winds blow.

But as amazing as the ecommerce numbers sound, there is an aspect of e-Tail that we all have not given much thought to. Ever wondered what happens to those products that we order online, maybe try out, and send back to the e-Tailer?

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The Internet of Things: Transforming the Retail Industry

2015 has brought with it a revolution, when it comes to disruptive technologies and innovative methods of utilizing the same. One of the most popular trends to grace the world today is the Internet of Things(IoT). Actually calling it a trend would be counterproductive.

IoT is not really a trend- because it is definitely here to stay and spin the world in new directions. IoT has already made itself indispensable. From smart cars to smart homes, IoT exists in the grey area between accepted technologies and awesome new gizmos that rule the market today.

The surprise though, is that in spite of IoT being a buzz word, it has not become as mainstream as, say the internet or the mobile, or even virtual. Not everyone everywhere is aware of the huge implications that IoT already has and will have in their lives.

This is largely because IoT is not retail ready. Of course there are many new gadgets coming up every day that are collectively termed as IoT. But can you really imagine one person wearing or using 50 different objects to harness the power of the Internet of Things?

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Ethnically Yours- Big Data

Every culture in the world comes with a set of norms and rules. And the way one should dress happens to be one of those unspoken norms that govern popular conscious. Society decides what is appropriate and what is not for various gender, ethnic groups, etc.

Although these days dress has become mainstream everywhere, there are still groups of people that adhere to traditions. And ethnic wear is one of those long standing traditions that have gripped the imaginations of designers everywhere.

Which is why, the ethnic wear industry in India today comprises 75% of the total women’s wear market, at USD 10.82 billion. This is a huge number, considering the fact that the Indian Apparel market is presently valued at USD 39 billion and expected to grow at a CAGR of 9.5% to reach USD 60 billion by 2017.

With more than 10 million women joining the workforce, the apparel industry is expected to gain a potential 35 million consumers by 2020, according to a Technopak report. These numbers are clear indicators that modern and comfort based dressing will not erase centuries of traditional ideals.

Ethnic wear, especially in India today, is most popular during the wedding (read winter) season in India. Weddings see a variety of ethnic and traditional dress styles coming together. The challenge for most designers and retailers, though, lies in deciding what will earn those profits as well as brand recognition.

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The Promise of Large Retail Sales- Webrooming

You wish to buy new boots; you have been looking for a good design sometime now. You trawl various online marketplaces, looking for options, prices and ideas. You select a few popular brands; add them to your wish list on many of your favorite websites. You narrow down you list to three possible choices.

Now you are sure that you will buy one of the three pairs this weekend. Why weekend? Because that is when you can go to the mall of course! You can go to your favorite shop, try out a few other pairs just for fun, and finally get that coveted pair of boots too! And the trip to the mall means checking out all the new stuff, in person and even splurging a little more than you initially intended. All in all, a good day, then.

If you have done this, you will be pleased to know, you are not alone. There are many who check out products online, but end up buying at brick and mortar stores. The marketers have a new buzz word for what you are doing. They call it ‘webrooming.’

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