For every price tag in your range, there’s perception, demand, customer journey, and business goals to consider. Here, we cover 4 expert-led strategies across margin and markup, data-based decisions, price point investments, and markdowns to help you get the science of your pricing model down to an art.
Strategy 1: Price for profitability
Keeping your margins intact is essential to your bottom line, but shaking off the urge to markup prices for every headwind is the true test of brand integrity. So, why should you focus on protecting your product margins instead of making fast cash?
Gross margin is the percentage of revenue remaining after accounting for the cost of goods sold. It reflects overall business profitability and operational efficiency.
Gross Margin = sales - COGS
The markup, is the percentage added to the cost of a product to determine its selling price and represents the pricing strategy.
Markup = ((Selling price – Cost price) / Cost price) x 100
However, relying only on the markup percentage can result in underpricing and missed profit opportunities because it overlooks factors beyond production costs. Using Gross Margin to set prices ensures better profitability by factoring in overall costs and target profit margins.
The following tips will start you off on the right track for profit-focussed price setting:
- Determine what your entry and exit price points are, and don’t have too many price points; your customer needs to be able to see the value in each.
- Aim to find a price that optimizes profit while maintaining a competitive advantage within the market.
- Consider the volume required when pricing products at the lower end of the scale.
- Calculate the volume required to hit company profit targets and ensure you have the capabilities to deliver consistent velocity.
- Use pricing tools to check margins and avoid costly mistakes. Check you’re on the right track by inputting last year's sales and pricing data into your assortment plan and confirming your new plan will achieve the budget you set.
Strategy 2: Use data to inform pricing
Use data to inform profit growth strategies. Setting up your product range for success means taking calculated risks based on data to grow sales and increase profitability at the same time.
- Create a range plan pyramid:
Be strategic with your product once you have a framework in place. Identify the portion of your range you're targeting to make up your volume product and set benchmarks on profitability. That enables you to take risks with new products you can test with your customers.
- Understand market value:
When you’re retail pricing, don't just go off a markup, gauge the market value based on your product data points. When you're quantifying your buys, consider the historical performance of styles, and then overlay that with your expectations on grading, taking into account the marketing investment.
- Know your margin projections:
When margin is lower than expected it's either about unbalanced product mixes or certain data points not being captured. If your short-margin pinnacle products overperform and you back into them to continue that performance, that will hit your bottom line. You’ve got to plan out those mixes and then buy accordingly.
- Track sell-through in season:
Once the product lands, tracking and adjusting your pricing strategies based on demand will help inform your decision of whether you wait for a sale period, or whether you take decisive action outside of the sale period.
Strategy 3: Experiment with price point investments
Changing investments at a price point level can play a pivotal role in your customer acquisition and gross margin results.
- Consider how your products are acquiring customers now—are you acquiring more new customers from higher-priced items or lower-priced items? Changing your investment in that space is going to affect acquisition.
- By having higher price point items in the customer’s basket, you can gain a better dollar-per-order gross margin value than lower-priced items. Considering the unit-for-unit, basket-for-basket value to determine if you’re in a better position margin-wise to invest in higher price-pointed items.
Strategy 4: Plan for markdowns
Inventory ages quickly so it’s important that retailers monitor their inventory closely, and plan upfront for clearance and markdown at the beginning of the season. Taking a structured approach to clearing inventory and having an indication of where your closing stock investment will land will enable you to protect your profit margin.
The impact of closing the season overstocked will follow you into the next season, tying up your OTB funds and limiting your available investment to buy new stock. If you have a lot of product failure leading to overstocks you will need to spend more than originally planned to clear inventory. It’s not just the cost of the stock, it’s the warehousing storage, onsite real estate and the hit on profit.
Clear As You Go (CAYG) is a markdown strategy used by retailers to identify slow-moving product and discount them early to increase sales velocity and sell-through outside of scheduled sale periods.
- Plan your CAYG markdown spend at the beginning of the season to track your spending, and understand how much money you have set aside to spend on markdowns each week during the season.
- Look at the styles that are slowing up the whole categories every 2 weeks, and apply a 20-30% discount to get them moving.
- Monitor these SKUs and increase this discount by 10-20% each week until the products sell out.
Marking down in season will release cash flow and save you profit loss on your true worst sellers, rather than waiting until End of Season (EOS) sale where you may have to take a deeper discount.
Want more profit-building tips you can use throughout the season? Download the Profit Playbook with must-see insights from retail experts across inventory management, brand narratives, performance marketing, freight management, and more.
