Pricing policy. What is margin in trading?

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:44

How do retailers set prices for their products? What is margin and markup? These questions concern both consumers and business start-ups.

Clearly understanding what margin is in trading is a must for anyone who is going to open their own retail store. The concepts of margin and markup are different, although there is an obvious connection between them. The markup shows how much profit each dollar invested in the purchase of goods brings. And the margin, the formula of which is markup / (100 + markup), shows how much profit each dollar of turnover brings. So what should be guided by, setting this or that margin on the goods, except for the notorious “money is needed”?

Competition and pricing strategy

If the competition in the market is very high, then, of course, the consumer chooses the store with the lowest prices, therefore, with the help of regular monitoring of competitors, approximately the same prices for goods are set.

In those markets where image, status or service matters, the cost of goods can vary significantly. These are, for example, brand clothing stores, restaurants, household appliances stores andelectronics, etc. Successful experience is cleverly copied by competing enterprises, so retailers who are trying to somehow stand out from competitors are forced to constantly improve in terms of service, provide additional services and goods, that is, constantly “explain” to the buyer why he should pay more and what makes the client of this particular store or the guest of this particular restaurant special. Moreover, the vague slogan “we work in the premium segment” is absolutely not enough.

Cost pricing method

One of the options for the pricing policy of an enterprise is pricing based on the cost of production. The price in this approach should cover all costs and include the profit margin.

This approach is quite acceptable if there is completely no competition in this market segment, if the product is not a consumer product and the buyer will not notice an increase in price, if the goal is to get rid of excess goods quickly and without losses. To calculate prices using this approach, you need to understand very well what a margin in trade is, what the cost of production consists of, what costs an enterprise has associated with the sale and promotion of goods on the market.

Value Based Pricing

This approach uses the interpretation of price in terms of marketing. A product is worth as much as they are willing to buy it for. This strategy is applied in markets with inelastic demand. This is how the margin is set in retail trade for jewelry, itemsart, designer clothes, status accessories and so on. Or it can be goods for low-income segments of the population. In this segment, demand is also inelastic, since the pensioner will not pay more even if the quality of the product or service at the outlet improves. With the correct definition of the target audience, their needs and moods, this strategy can be very effective. The buyer does not think about what the margin in trading is and what it should be if the seller has found the necessary leverage to influence his client.

No pricing policy

If prices in a store change too often, the customer suspects foul play and may not return. The system of bonuses and discounts must be absolutely clear to the customer and store staff, otherwise it will look like an attempt to confuse and deceive.

Don't abuse discounts. Ultimately, this may lead to the fact that there is not enough money to purchase goods. This mistake is often made by beginners who do not quite understand what margin is in trading. A situation is possible when, with a fairly decent turnover, the enterprise hardly pays for itself (well, if it pays off).

Neither a merchandiser nor an accountant can set prices. The first knows nothing about the cost, the second knows nothing about positioning and the portrait of the buyer.

Too frequent questions from buyers about why it is so expensive is a signal of a flaw in marketers and category managers. The price is not set "for good luck", it must be justified. The seller must be able to convey to the buyer why this particular loaf is special and why it costs more than around the corner. If there is no such justification, then the price will have to be reduced. A high-class marketer is a talented manipulator of the minds of consumers.

Optimal pricing approach

The right approach to pricing is possible with a clear understanding of what is included in the cost of goods, what price can be the lowest possible, and what the buyer is willing to pay (not just any, but a specific representative of the target audience). The analysis of the competitive environment should be constantly carried out, the margin in retail trade for similar products should be determined.