March 28, 2020  
 
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Pricing in a Retail Environment

Written by James Garvin for Gaebler Ventures

If one industry has been hit the hardest by the advent of the internet, the retail industry has been it. The internet has enabled consumers to price compare with a click of a button and some technologies even allow consumers with smart phones to scan a bar-code of a product at one store and see what the prices are at other stores online and offline.

Everyone knows that unless your business strategy is to provide the lowest cost within an industry such as Wal-Mart or Southwest Airlines, competing on price is a losing strategy that over the long-run will drive a firm out of business.

This is exactly what we're seeing in the retail industry today with brands such as Circuit City, Blockbuster, and other major retailers closing up shop.

If most retailers cannot compete on price with e-tailers and firms like Costco and Wal-Mart, how can retailers price effectively where they can increase profits?

It is important to remember that the name of the game isn't attracting the most customers; it's about driving the greatest profits by selecting and retaining the right customers. If you're attracting price conscious customers and trying to attract more of them by slashing your prices, you're digging yourself a deep hole that many are unable to climb out of.

Rather than slash prices to drive greater demand at the cost of your profit margins, try raising your prices and retain the customers who value your retail store based on the additional value that you provide them. Businesses have wised up to firing unprofitable customers and raising prices is one way to eliminate your most price sensitive customers who do not add to your bottom line. If low price is what they want, let them get it elsewhere.

The key to retaining customers while raising prices is ensuring that you are offering sufficient differentiation and value to your customers. Retailers have gotten lazy with regards to customer interaction and customer service. The primary driver of greater profit losses in the retail environment is caused by a retailer's inability to adapt to change and inability to find new ways to create outstanding service and value for consumers.

Retailers have the advantage over internet firms in facing their customers and interacting with them one on one, yet they do not do enough to capitalize on this immense advantage. Retailers also have the ability to deliver goods faster than the internet, yet no retailer that I am aware of offers same day delivery. How great would it be able to call up my local book shop and ask them if they can deliver a book that I've been looking at buying if I'm tight on time or leaving town tomorrow?

There are numerous value-added services that retailers could implement to increase share of wallet. What makes Amazon thrive over traditional book retailers isn't just their pricing and recommendation engine, but the fact that I can also sell my book when I'm done with it on the same platform. Rather than wait for someone to buy it online, why not run to the local book store and sell my book back to them on consignment? The book store can then sell my book for me and give me store credit, which increases their short-term cash flow as well as incentivizes the consumer to revisit the bookstore for additional purchases.

The key to any business, but particularly in retail, is to differentiate and continuously create value for your customers. Those who dare to be different are often richly rewarded.

James Garvin began his education studying biotechnology. In recent years he has turned his interest in technology to helping two internet startup companies. The first business was an online personal financial network and the second was an e-marketing platform created to help entrepreneurs demo their web sites. Currently a student at University of California Davis, James is spending his summer incubating two new online businesses and writing about his entrepreneur experiences.

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