Suggested Retail Price: A How-To Guide
As a wholesale company, many of our customers are retail vendors, customization artists, and other people who are in the business of selling hats. One question we are frequently asked is how much these customers should sell their hats for in their marketplace. Others ask us for our MSRP, or Manufacturer Suggested Retail Price. As BuckWholesale.com is not the product manufacturer, we do not provide MSRP, nor do the manufacturers we do business with. Still, folks ask us for our advice, and we are here to provide it.
Step 1: Establishing a Base Line
It stands to reason that, if you are a vendor selling a product, you can put whatever price tag you want on your products. You can give your hats away for free, or you can charge $1,000 apiece. But it doesn't take long to realize that neither of these models are very sustainable, as free hats don't net much profit, and thousand-dollar hats aren't exactly going to fly off the shelves (unless you are somehow operating in a market that can sustain that, in which case, way to go!). So to help narrow in on an appropriate price range, it helps to establish a baseline price. There are two variables that are crucial in establishing a baseline price: initial cost of product, and desired mark-up.
Initial cost is the easiest place to start. How much did it cost you to get this far? How much did you pay for the product? How much did it cost to customize it? Was there shipping or tax on the item? These are all hard numbers that you should already have to hand, and will allow you to figure out how much the product has cost you thus far.
EXAMPLE: You buy three dozen hats for $72. The hats themselves are $2 apiece, but you pay an additional $12 in shipping, and you spend another $15 in paints to airbrush designs on the front. All told, your three dozen hats have cost you $99+x, where X is the value you place on the time you spent airbrushing the hats. Since this is a variable of personal decision, we will ignore it for now. $99 for 36 hats comes to $2.75 per hat.
Mark-up is the first key decision a retailer needs to make, and the variable you are most likely to change as time goes on. Your mark-up is how much more than the cost of the product you charge for it. Mark-up is calculated as a percentage of the original cost. Profit margin is a closely related concept, and is also written as a percentage. Profit margin is how much of the total sale is profit. For major retailers like Wal-Mart, MSRP is usually twice the initial cost of the product, which is noted as a 100% mark-up, resulting in a 50% profit margin. This method of pricing is commonly referred to as "keystone" pricing. For the purposes of establishing a baseline price, this is the ideal starting point.
EXAMPLE 1: After establishing an initial cost of $2.75/hat, you decide to use the 100% standard mark-up, doubling the cost of your hat $5.50. This means that for every hat you sell, you spend $2.75 in costs and make $2.75 in profit, which is 50% of the cost, and thus a 50% profit margin.
EXAMPLE 2: After establishing an initial cost of $2.75/hat, you decide that your product is the best thing on the market, and you decide that you want to try for a 200% markup. Your mark-up value is now $5.50, bringing the total retail price of the hat to $8.25, and your profit margin to 66%.
Confused yet? Hopefully not. But If you aren't in the mood to do all that math, you can use this link to calculator.
Step 2: Reading Your Marketplace
So, you have your baseline price figured out. So you're ready to take on the market, right? Well, maybe. When selling any product, you don't have to worry about just YOUR business. Your competition is always an element worth considering when structuring many elements of your business, especially price. Even if you find yourself in the enviable position of cornering a market, or finding yourself a competition-free niche, competitors will catch wind and bring the competition to you. And when they do, no profit margin will save you if you can't make the sales. This section will help you analyze your options. Fortunately, you only have three: raise prices, lower prices, or leave them alone.
- When to Raise Prices
1.) Because You Want To: Sometimes, everything goes your way. Business is strong, competition is weak, demand is high, and you are confident that an increase in price will not impact your sales figures. In cases like these, why not raise your price? After all, you're in business to make money, so making more money is common sense.
2.) Because You Need To: Other times, things don't work out like you would prefer. Sales are slow, or unexpected costs and expenses make your original baseline price unprofitable. In cases like these, you'll need to raise your prices just to stay in business. But be careful; higher prices can make sales even slower, or give your competition more room to under-sell you.
3.) The Premium Allure: One high-risk, high-reward pricing model is to raise your mark-up extremely high, and market your product as high-quality, "cool", or elite enough to warrant the high price. This method requires a strong market presence and good marketing to ensure your mark-up isn't considered a rip-off, so consider your market before attempting this approach. This method won't make you the most popular table at the flea market, but if you want proof of concept on a large scale, remember one word: Apple.
4.) To Help Lower Prices: A more common practice than you might think, many companies will raise the price of their products to later create the illusion of lowering them. If a $3 item is put on sale for $2.50, then the perceived savings is rather small. However, if the company raises the cost of the product to $5, THEN puts it on sale for $2.50, they create the perception of a 50% savings with the same change in cost. This method also allows you to raise the base price of a product "after" the sale, or convince unsuspecting/less observant customers to buy at full price if combined with a coupon or loyalty program.
- When To Lower Prices
1.) Sales Are Slow: A high profit margin is great, provided you're making the sales. But there is no profit on a sale not made, so if you're prices are so high that no one is buying, you'll need to lower them to encourage those sales.
2.) Sales Aren't Fast Enough: Even if sales are fine, and your profits are comfortable enough to keep the lights on and then some, lowering your prices can encourage growth. From bringing in new customers to larger order sizes, lowered prices can help your company in ways other than just profits. In fact, some companies find themselves at the right confluence of sales velocity, initial cost and profit margin, that a lower profit margin will increase sales to the point of a GREATER net profit.
3.) To Beat The Competition: Unless you are truly on the cutting edge of whatever market you're in (and, assuming you're reading this article to help sell hats, you aren't), you're going to have competition. And when two companies offer identical products and services, the lower price wins out every time. So, if you can't beat them, under-sell them instead.
4.) To Sell More Expensive Items: While some businesses can succeed by providing only one service or product, most do not. Diversity is a great way to expand your market presence and appeal to customers who wouldn't normally be interested in you. And, when selling a diverse line of items, many companies will drastically under-sell an item (usually the cheaper of the two) to encourage customers to come in and shop, then sell them the more expensive item as well.
Step 3: Tips and Tricks
- By The 9s
One of the most effective, practical pricing tricks on the books is "nineing" your prices. Don't sell a $5 hat, sell a $4.99 hat. Why? Because the human brain is easily fooled by numbers. Any rational person will, when taking the time to consider a price, realize that the difference between $4.99 and $5 is only a penny. But that assumes your customer is a rational person taking the time to consider the price, which is an expectation you'll find easily thwarted. Instead, shoppers in a hurry, or those mentally rounding prices to calculate a budget, will routinely read the first digit of a price, and round accordingly. So even though an item is $4.99, your customer rounds the price to $4, increasing their likelihood of buying a product, while reducing your profit margin by only a penny. This method is especially effective for $10 or $100 items, as the minute change can remove an entire digit from the price.
- Buy By the Bundle
Raising mark-up can be sustaining even if sales slow as a result. Lowering mark-up can really only improve your profits if it increases sales. One way to help improve those sales is through bulk sales or bundle deals. By selling the products in groups, you multiply the number of sold products per sale. With an appropriately low price or clever marketing, customers will be willing to buy more than they might have normally. You can see the bulk-sale methodology at work in warehouse stores like CostCo, or with wholesale companies (like us!).
- The Cult of the Coupon
Never underestimate the psychological influence of a sale. You can sell some people three different colors of the same thing they didn't even need one of if they believe the savings are strong enough. By advertising both the original price and a lowered sales price, you can create a short-term surge in demand, and therefore sales. The even more effective cousin of the sale is the coupon, which allows you to take advantage of the bargain-hunting reflex of the human brain while only sacrificing your initial profit margin if the customer comes prepared.