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There are many influences that affect profitability and the bottom line for your convenience store. Pricing is a critical source of influence over shopper purchase behavior, and the pricing decisions you make directly affect category sales, inventory positions, and category profitability.
A change of a few cents can profoundly impact both sales and profit for your categories, and your stores. So, there’s an opportunity to become more strategic in your pricing for your store, ultimately driving sales and profit.
There are three important areas you need to consider in order to move to more strategic pricing:
1. Develop your pricing strategies and guidelines;
2. Set regular and new item pricing; and
3. Set promotional pricing.
Each of these three components is important to understand for your c-store. Each will give you the foundations to make the right decisions for pricing in your convenience store.
Develop Your Pricing Strategies & Guidelines
Retail pricing strategies strongly influence who shops within your store. Some of the most common pricing strategies in convenience stores are:
High/low pricing: This most common c-store strategy focuses on temporary price reductions as a means to advertise products and draw traffic to the store.
Competition-oriented pricing: The retailer reviews competitive pricing in their market and sets their prices accordingly. Under this strategy, you may make competitive pricing decisions through price matching on known value items or KVIs. This allows you to price competitively within your market on the most important items for your shoppers. Or you can set pricing rules relative to your competition. This strategy allows you to price specific items within a certain percentage or dollars and cents vs. competitors.
Manufacturer or supplier suggested retail price: The amount of money for which the supplier of a product recommends that it be sold in stores. This includes items that are pre-priced by the supplier. This price strategy takes away decision-making from the retailer and also promotes “sameness” in the market.
Once you define the overall pricing strategies for your store, you need to define other guidelines for how you will establish prices, including:
- Consider Your Target Shopper — You need to determine the most important items for your shopper and establish what they are willing to pay for each item.
- Flexible Margin Strategies — If you have margin strategies, they shouldn’t be the same across categories, nor should they be the same for the brands and items within a category. You need to be more strategic than that.
- Profit Objectives by Category — You will need to establish profit objectives for each category (and then develop a plan of how to attain the gross margin dollars).
- Develop Pricing Strategies by Category — This will help you achieve your category sales growth and profit goals.
- Understand Price Elasticity for Your Categories and Key Items — This will help you respond most effectively when you need to respond to pricing changes. Because changes in price up or down can significantly increase the quantity sold, have no effect on demand or significantly decrease the quantity sold, price elasticity is a very important analytic when making price decisions.
Setting Item Pricing
Now that you have determined the pricing strategies for your stores and categories, it’s important to have a process for setting prices in your store. This process should be based on things like gross margin or markup percent, manufacturer suggested retail price, competitive pricing, and psychological pricing guidelines.
When establishing regular retail prices, you need to first know how to calculate retail price using your gross margin percent or markup percent objectives as part of the retail strategies and guidelines you have already established.
Remember, not all items in a category should have the same objectives based on shopper acceptance to prices, market pricing, and the role the category plays for your store.
Understand the difference between gross margin and markup:
- Gross margin: You can easily calculate profits from a sales total. If the margin is 38 percent, then 38 percent of the sales total is profit. If the markup is 38 percent, the percentage of sales profit will not be the same.
- Markup: You may use markups because it is easier to calculate a sales price from a cost using markups. If the markup is 63 percent, the sales price will be 63 percent above the item cost. If the margin is 38 percent, the sales price will not be equal to 38 percent over cost.
Make sure you have a strong understanding of not only how to calculate these important numbers, but also the proper interpretation of them and how to make the best pricing choices to drive both sales and profit for your stores.
Determining New Item Pricing
You also need to know how to set new item pricing. You are introducing new items into your mix frequently, and you need to have guidelines for consistency in pricing practices.
Here are some of the ways you can determine new item pricing:
Line extension pricing: If the new item is part of a line extension and is the same cost of current items being carried.
Competitor pricing: If your competitors already carry the item and you want to price it competitively.
Key value items: If the item is one that drives price perception for your store, you may need to price it more competitively.
Margin and markup objectives: So that the items reflect the pricing strategies and objectives you’ve established for the category.
Pre-priced or MSRP. If products like books, newspapers and candy have pre-priced or manufacturer suggested retail price (MSRP) that can be used.
Retail pricing is a very important component of your c-store strategy, and you need to take the time to be strategic in how you set your pricing now more than ever. Keep an eye on your KVI pricing vs. your competition; establish gross margin objectives that result in acceptable prices for your shoppers; generate enough margin for you to be profitable; and continue to evolve your strategy by never taking your eye off your pricing strategies.
Develop some overall pricing strategies and guidelines for your store. This should include both overall store strategies, as well as ones specific to your categories.
Once you’ve developed these strategies, you should share them with your store staff and provide them with an understanding of some of the considerations I’ve shared with you above. This will help them make better pricing decisions for your stores.
Once you’ve defined your pricing strategies and guidelines, you should complete some pricing analysis on your categories to reflect some of the new considerations from the pricing strategies and guidelines you’ve developed. Start to understand price elasticity for your key items, considering how you may want to adjust margin and markup objectives on some categories/brands/items based on shopper perception and market pricing.
By becoming more strategic and analytic, with pricing that considers market dynamics and the needs of your shopper, you will sell more product and bring more money to the bank.
Editor’s note: The opinions expressed in this column are the author’s and do not necessarily reflect the views of Convenience Store News.