4 Pricing Strategies for Improving Inventory Management
Implementing a pricing strategy as part of your inventory management is not a matter of one-size-fits-all. Retailers can form a more responsive pricing strategy, consequently maximizing profits and improving inventory management, through four key techniques.
- Discounts don’t always drive sales: Retailers should not always resort to discounting their products as a way to increase sales. For example, if a certain item at your business is flying off the shelves even at retail prices, you don’t need a discount pricing strategy; perhaps you need to start increasing prices.
Gain by losing: The loss leader strategy is when a store sells a product below market price — essentially giving the item away — just to get customers into the store to buy a different product with a higher profit margin. The clothing industry uses this strategy as part of inventory management. For example, a lot of clothing retailers order shorts to sell during the summer, but as the fall weather draws near, the retailer will have more promotions to get the shorts off the shelves to make room for long pants and sweaters. Loss leaders serve as a means to increase inventory turnover or move clothing that will not be part of next season’s inventory.
Keep in mind that you should still balance your pricing and demand. If you are on track or ahead of your sales forecast, then you don’t want to decrease your prices as much. But on the other hand, discounting an extremely popular item could get more people into the store, and those customers might buy other higher margin products.
Determining the best pricing strategy takes having the right data: The most effective pricing strategy for your inventory management depends on your operations. The more you know about your customers and what they buy, the more effective you can be at selecting the right pricing strategy to drive demand.
With data from a retail ERP solution, you can see which items will attract the most people to your store. Also, if you tie store sales data in with your customer loyalty program, give those customers personalized discounts as a way drive up sales. It’s a more targeted approach than sending a mass email blast. Even if you don’t have a loyalty program, you should still gather customer demographics data and know your customers’ buying history. That way, you would at least know which products are seasonal and which products sell more at the beginning or end of the month.
Calculate your inventory profit margin: Knowing the profit margins of your inventory can help determine your pricing tactics. You should know how much you can discount a product before running into negative territory.
In some cases, losing money will be a necessity. Let’s say a retailer stocked up on neon purple men’s shorts for the summer season, but as the season continued on, sales fell. With the fall season approaching, the retailer must make room for new inventory. So, if the retailer was trying to sell the shorts for $10, it now must sell the shorts at $2 — a price below the retailer’s $3 cost — because the cost of shelf space for carrying the shorts would cost the retailer more than selling the inventory at a loss.
Carrying costs is a legitimate loss to consider because it includes the expense to store inventory, move it to a warehouse or place it back on the shelves. But this scenario may not be a complete financial failure for the retailer; data could reveal the pants that replaced the neon shorts have a higher profit margin, consequently making up for a loss in profit.
Deciding when to drive up product demand by changing pricing strategies takes insight from several data factors. Whichever strategy you feel is right for you and decide to deploy, make sure your systems can measure the effectiveness of it and compare the results to other strategies you have tried.
Source: Shop.org, July 2013