I would rather sell 100 things at a 30% margin than 30 of the same thing at 70%. That, in one sentence, is the tension at the heart of retail pricing: percentage margin against cash margin. Cash wins, because we pay the bank in pounds.
Percentage margin can mislead
A high percentage margin looks good on a report. But if the price suppresses volume, the stock sits there, takes up space and ties up cash. A lower price that sells far more units can put more money in the till.
Volume brings other benefits too. Customers who come in for a good deal usually buy other things, so the basket margin blends up. Suppliers invest more when you take more units. And customers who had a good experience come back.
Not every product is equally price-sensitive
Applying one standard margin across the range leaves money on the table. Some products are far more elastic than others.
When I worked on pricing for a convenience retailer, we found we had to be sharp on bread and milk. But toiletries and wine were much less sensitive, because they were often distress purchases. The detail was fascinating: plain digestives were very price-sensitive, chocolate digestives were not.
Know your key value items
A handful of frequently bought products shape how customers judge your prices overall. At an electrical retailer, a market-leading price on ink cartridges more than paid back, because it acted as a barometer of value for the whole store. In convenience, it was milk, bread and eggs.
Decide category by category where you want to win, where you want to compete, and where you're prepared to give up some volume for margin.
Why most promotions don't pay
Years of analysis point the same way: most promotions don't grow cash margin. Customers happily switch from one brand to another depending on what's on offer, and the basket value stays about the same.
When you evaluate a promotion, check three things:
- Did customers buy more, or just buy something different?
- Did cash margin go up after the discount? Model the real take-up. Assuming every customer redeems will always make a multibuy look bad, and assuming none will always make it look good.
- What would have happened anyway? A control store or region is the only reliable way to know.
Make events count
Blanket discounts such as "25% off everything" lack excitement and give margin away across the whole range. A deep, genuine saving on a carefully chosen set of lines does more, and costs less.
- Use special buys bought for the event.
- Keep to a limited number of lines with broad appeal.
- Make the saving genuine against a real previous price.
- Stick to the start and end dates. "Offer extended" damages credibility.
- Run the same offers online and in store.
Technology is making this easier
Pricing tools that learn from demand, competitor prices, stock levels and even the weather used to be the preserve of the largest retailers. They're now within reach of mid-sized ones, and electronic shelf-edge labels mean prices can change quickly.
Marketing and buying on the same side
Marketers can be seen as obsessed with footfall, and buyers as obsessed with margin. You need both. The best results come when pricing, promotions and marketing are planned together, with one shared measure of success: cash margin.