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Hi, I’m Bob Negen. And in this episode of Real Retail TV you are going to learn how to pick the low hanging fruit of retail. What I’m talking about is the three rules of profitable retail pricing. As I mentioned in the introduction, pricing is the low hanging fruit. And when you understand how to strategically price your goods so that your people don’t care that you’re paying a little more, but you’re getting a little more, good things start to happen. Because pennies turn into dollars, and dollars turned into tens of thousands of dollars, and tens of thousands of dollars turn into hundreds of thousands of dollars. I learned this the hard way.
You’re going to hear the story in just a moment. But I have dozens, and dozens, and dozens of stories from retailers large and small, just like you, who have taken what is in this video from the Retail Mastery System and turned it into significant money. So, here is the three rules of profitable retail pricing from the Assortment Planning Module of the Retail Mastery System. In this video, I’m going to share with you one of the most often overlooked sources of sales increases in higher profits. I’m talking about pricing.
As you plan your assortment, pick your products, you’re going to have to decide how to price them. I’ve discovered that there are three timeless rules of profitable retail pricing that can help you make these decisions. So here they are. Profitable pricing rule number one is, price based on value not on cost. Let me tell you a quick story.
So my first couple of years in retail were tough. Really tough. I was just 23 years old and I had opened a kite store in Northern Michigan– a seasonal kite store– in an area where short, summer seasons were my reality. Sales were abysmal and because I had no money, I had no social life. And as a young, single guy this made me sad. Very sad. Then one day I found our first really hot seller. It was this silly toy. A whistling balloon helicopter. They sold like crazy. In the early 1980s when I started my business, a common pricing formula was, buy for one, sell for two. In other words, the price I charged was double what I bought the item for. Keystone pricing is what it was called. And that’s how I priced my whistling balloon helicopters. We bought them for $0.65, and sold them for $1.29. Keystone.
Now it didn’t sell too many of those whistling balloon helicopters to get the few extra dollars needed to go out on the town and have a couple of cheap, draft beers. That made life good. After a couple of weeks of selling whistling, balloon helicopters at $1.29 my brother Steve, who was also my business partner, said to me, Bob, I think we can get $1.49 for these things. Well, this created a real dilemma. We weren’t sure if it was OK to charge more than keystone. So we discussed it all at length one night over a couple of cheap, draft beers, of course. And then we decided to try it. And the next day, we peeled off all the old price stickers and took out the trusty monarch marking gun, and went $0.29 $0.39, $0.49, bam, bam, bam. And you know what? They still sold like hotcakes. No one even batted an eye. And then all of a sudden we had enough money to get a burger with our draft beers.
So a few days later Steve came to me again and said, you know what Bob? I think we might be able to get $1.79 for those whistling balloon helicopters. So out outcomes the marking gun. $1.49, $1.59, $0.69 $0.79. Bam, bam, bam, bam, bam. About a week after that we raised the price to $1.99, and still no one batted an eye. Sales stayed the same. Think about that. That’s an extra $0.70 on every unit we sold, and we sold hundreds. Now, we sold thousands of those things. Now, we’re drinking Heineken’s, there’s bacon on our cheeseburgers, and life is really, really good. Why? Because we finally figured out that we should be pricing based on the value of the item to the customer, not what it costs for us to buy it. The important lesson we learned was that price is one component in the value of an item but not the only one. If the perceived value to your customer– what they think an item is worth– is higher than what you’re charging, there’s a value gap and you have room to raise your price.
Now, I’m certain that you have items in your store right now where you could increase the price and it wouldn’t affect your sales on that item at all. In fact, sometimes increasing your price can actually increase your sales. But that’s in profitable retail pricing rule number three, and we’ll get to that a little later. So take a look at your merchandise and think about where you might have a value gap. What are your whistling balloon helicopters? Where are you underpricing your products? One thing I used to do when a new item would come into my store, was I would go out and I would ask my staff what they thought that item was worth. Before they knew the cost, or what I was considering for a price, or anything like that, I asked them what their perceived value of the product. What I found was the perceived value of my staff was often higher than my standard pricing formula.
A standard pricing formula is a great place to start, but don’t default there simply because it’s your policy, or because it’s just easier. If you do that you’re missing out on tons of extra profit. Of course there’s some items that might be highly competitive in your industry, or that most customers know the going price for. You need to stay competitive on those items. But for most items keep in mind profitable retail pricing rule number one. The price you charge for an item should not be based solely on what the item cost. It should also be based on what the item is perceived to be worth by your customer.
So here’s profitable pricing rule number two. End your prices with $0.99. This pricing tactic has been around for at least a century, and no one knows where it first started but we definitely know it works. Ending a price in 99 is based on the theory that because we read from left to right, the first digit of the price is what sticks with us the most. Our brains tend to ignore the stuff to the right of the decimal point in order to make things easier. That’s why shoppers are far more likely to buy a product for $4.99 than an identical one for $5.00. Yes, everyone knows logically that it’s just a penny more. But subconsciously and emotionally the item that starts with a four just seems like a better deal than the one that starts with five. Make sure that every item in your store is priced with a $0.99 ending.
If you have merchandise priced at 29, 49 or $0.95, raise it up to $0.99. Yes, even if it feels gimmicky or fake to you, no one is going to not buy that item because of a few extra cents. There is essentially no impact on their wallet. But for you the impact can be significant. Even if you’ve only changed your prices from $0.95 ending to $0.99 ending, you end up making $0.04 a unit. And that can really add up. For example, if you sell just 25 items a day on average, that adds up to nearly $500.00 a year. Year in, year out. Pretty soon you’ve made thousands of extra dollars just by moving your prices from 95 to 99. That’s a lot of bacon cheeseburgers. But it’s not just the cents endings to the price that can make a big difference in your customers buying behaviors and in your profit. It’s also the whole dollar amounts.
So here is profitable retail pricing rule number three. Price dollar amounts ending with two, four, seven, or nine. Two, four, seven, and nine are the best numbers to have right before the decimal point, with four and nine being the very best. Let’s take a look at the psychology of it. Four and nine are the best numbers because they squeak in right under actual dollar bill denominations. $4.99 is less than a $5.00 bill. $9.99 is less than a $10.00 bill. $19.99 is less than a $20.00 bill. $49.99 is less than a $50.00 bill. You get the idea. Two’s and seven’s are good, but not great. They fit between zero and four, and four and nine, and people are used to them. People are used to seeing items at $2.99, $7.99, $12.99, and $17.99. And there are times when you need to use two’s and seven to keep your kite prices competitive on popular items. In general, I only like to use two’s and seven’s for merchandise under $20.00. Over $20.00, I like to try to use four’s and nine’s. $24.99 and $29.99. $34.99 and $39.99. $44.99 and $49.99, and so on, and so on.
Think about it. If someone is willing to pay $22.99, is $24.99 going to dissuade them? Probably not. The psychology of numbers is such that people will buy for $24.99 what they will buy for $22.99. Same thing goes with $32.99 and $24.99. So why wouldn’t you get the extra two bucks? And whenever possible, I recommend that you skip the four and go straight to the nine. Even though you’d expect to sell fewer of an item if you raised the price, ending your prices in nine can actually increase the number of items that you sell. About five years ago, a couple of professors from the MIT business school and the Northwestern business school, teamed up to do a study. And what they found was fascinating. They asked a national catalog company to do a test and offer the same dress at 34 and 39. The $39.00 dress sold about 30% more than the same dress at 34. They also tried a test with 34 and 44 and found no difference in the number of dresses sold at both price points. It’s the power of that nine ending that really works in your customers brains.
So take these three rules of profitable retail pricing all together and you’ve got a sure fire action plan to put more money in your bank account. First, make sure that all your prices end in $0.99. Move them up from 29, or 49 or $0.95. Move them to 99. This simple step alone could be worth thousands of dollars a year. Second, look at your pricing and make sure the whole dollar amounts end in two, four, seven, and nine. Stick to the four and nine whenever you can, and use the magic nine whenever possible. So for example, if you’ve got something priced at $36.99, move it to $37.99, or even better, move it to $39.99. Third, after you’ve done steps one and two check your value gap. Are there items that have greater perceived value than what you’re charging? Close the value gap by bumping up those prices. If you do all three of these steps, my guess is that you can increase sales and profitability by tens of thousands of dollars every year. Even hundreds of thousands of dollars depending on the size of your store. And the cost to get those sales increases? Pretty much nothing.
All that money goes straight to your bottom line. And the impact on your customers? Also, pretty much nothing. Because you’re spreading the increases out over all of your products, and over all of your customers, and because you’re taking advantage of the brain psychology of numbers, they will generally not feel the difference in their pocketbooks at all. Like I said in the beginning of this video, this three part pricing strategy is one of the most overlooked sources of revenues and profits. I hope you use these techniques and make more money. There you go. Your action items should you choose to accept them. And I hope that you’re choosing to accept them.
The first thing I want you to do is to walk around your store and look where the opportunities are. Look for your 49’s and the 97’s and the 29’s. Look where it’s easy to do. Just get a feel for the potential and the opportunity. The second thing to do is to print out a list of all of your merchandise and then just go through. Mark it up with a pen and apply what you’ve just learned to your list. Then, you can do it one of two ways. You can either change all your prices at once in one fell swoop.
Sit down, change the prices in your point of sale system, or you can change the prices as new orders come in. But there is too much money in what you just learned for you not to take advantage of this pricing strategy. If you don’t have the Retail Mastery System yet– the Retail Mastery System that this video came from– I would encourage you to go to retailmasterysystem.com. The Retail Mastery System– it’s awesome– it is the best resource for independent retailers anywhere. 11 modules, 11 critical skills, in depth. 24 hours of high quality, money making information that’s going to help you take your business to the next level. So again, if you don’t have it yet invest now. www.retailmasterysystem.com