Variable Pricing

Last time, we mentioned competing with the “big box” stores. To do that effectively, you have to master the concept of variable pricing. Variable pricing means that you don’t apply the same gross profit percentage to everything you sell. It’s how the big boxes set their prices and if you’re going to compete with them, you’re going to have to use it too.


The average big box store carries thousands, even tens of thousands of items. Out of this huge assortment, there are a few hundred items that are highly price sensitive. They’re the ones that you and I, as consumers, are most familiar with. They’re things we buy often and we have a pretty good idea of their price. For example, we all use 100 watt frosted white light bulbs. As a general rule, they cost around $1.25 to $1.50 each in multiple packs. They may be 2 for $2.99, or 4 for $5.00, but they’re going to be somewhere in that neighborhood.


By comparison, a 150 watt bulb will set you back something closer to $2.75 – $3.00 each. Why? Does it cost twice as much to produce a bulb that gives off 50% more light? No, they cost twice as much because we’re not sure how much they’re supposed to cost. We assume that if the store is competitive on the prices that we know, they must be  competitive on the prices that we don’t know.

It’s all in the customer’s perception. If you happen to sell light bulbs and your price on the 100 watt soft white is $2.50, you’d better believe the knowledgeable customer is going to be sure that your price is twice as high on everything else.


So, how do you use variable pricing to your advantage? First, make a list of the items that you sell that you suspect fall into the price sensitive category. Then take your list to your big box competitors, all of them. What are they charging? If you find a big variation, you know that the item isn’t price sensitive. If they’re all charging about the same, you’ve found what you’re looking for.


Now, you have two choices. Beat the chains at their own game by pricing the items close to their price. Notice I didn’t say lower than their price. You don’t have to be lower. You don’t even have to be the same. You just have to be close. Normally you can get away with a price difference of about 10%. The typical value shopper will pay that much for the convenience of avoiding the big parking lots and long lines at the chain store.


Your second choice is to not carry the item. Offer the customer better alternatives. If you choose door number two, you still need to know what the big guys are charging for the price sensitive item and have a story to tell your customer explaining why your item is better and worth the additional cost.


As we mentioned before, every retailer no matter how big or how small has to cover expenses. Every item can’t be a loss leader. According to their most recent annual report, Home Depot’s overall gross margin for last year was 33.5%. That means that for every dollar of sales at 10%, there had to be another dollar of sales at 57%. It’s important that you understand this principle yourself. Don’t buy into the story that the big guys are always cheaper on every item. It’s just not true.


There’s another important thing about variable pricing. Remember that shopping list? Keep it handy because you need to repeat this process often, at least monthly. Something may change. You have to be aware of what your competition is doing all the time.  They’re checking on you.


Two friends of mine used to be in the retail gift business. They sold figurines and knick knacks and assorted dust catchers. They had a very simple pricing strategy. Whatever they paid for something, they doubled it. It was a simple system.  There was no complicated math.  They knew what they were making every time they sold something.  And, horror of horrors, they didn’t care if their customers knew it.  It worked for them because their competitors all did the same thing.

Then Cracker Barrel came to town. If you aren’t familiar with Cracker Barrel, it’s a chain of restaurants with gift shops. Or maybe it’s a chain of gift shops with restaurants. Either way, they sell a lot of gifts. You almost always have to wait for a table in the restaurant and you spend your waiting time in the store. Brilliant! These two ladies were convinced that Cracker Barrel was going to put them out of business because of their low prices.


Don’t ask me how, but I know for a fact that Cracker Barrel’s margins range from the single digits to well over 50%. Given the difference in product lines and the fact that my friends sold a lot of exclusive lines, they shouldn’t have even considered CB a competitor.

To summarize variable pricing:

You have to know what your competition is charging for a limited number of price sensitive items. If you sell the same items, you must be competitive which means priced no more than 10-15% higher than they are or you shouldn’t carry the item at all. You don’t have to charge the same price.

Price the rest of your merchandise at your normal margins.

Repeat the process often to make sure you remain competitive.

Remember that even the big guys have to make a profit. You may actually beat their price on less price sensitive merchandise.

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