Setting prices and profits is always a challenge. Do it the right way and it's a challenge that pays handsomely.

1. Business Analysis & Improvement Systems
SETTING RETAIL PRICES
Setting Retail Prices
Paper 151-012

2. Business Analysis & Improvement Systems
1. Price Setting Is A Difficult Step
• Do not undersell
• Complex
Paper 151-012 2

3. Business Analysis & Improvement Systems
2. Pricing Can Determine
Profit Or Loss
• Market awareness
• Product development
• Advertising
Paper 151-012 3

4. Business Analysis & Improvement Systems
3. Pricing Fallacies
• Only thing about which customers
worry
• Low priced products are successful
• Same level as competitors
• Price low to gain market entry
• Ask your customers
• Lowest prices
• Price is not the only thing
Paper 151-012 4

5. Business Analysis & Improvement Systems
3. Pricing Fallacies cont'd....
Other factors:
• Quality
• Technical & backup
services
• Reputation
• Brand associations
• Location
• Guarantees
• Refund policy
Paper 151-012 5

6. Business Analysis & Improvement Systems
4. What Is Your Customer’s Cost?
• Risk of interrupted supply
• Poor quality
• Ineffective service
• No back up
• Hassles when placing
orders
• Location
• Inconvenience
Paper 151-012 6

7. Business Analysis & Improvement Systems
5. Why Do Your Customers
Buy?
• Competitors?
• Previous suppliers?
Paper 151-012 7

8. Business Analysis & Improvement Systems
6. Competitors Intelligence File
• Record
– Selling prices
– Back up service
– Reputation
– Reliability
– Location
– Technical knowledge
Paper 151-012 8

9. Business Analysis & Improvement Systems
6. Competitors Intelligence File cont'd....
• “Buy decision perspectives”
• Charge higher than competitors
• Higher prices by the most successful business
• Other items which affect the buying decision
– Reliability
– Back up service
– Technical knowledge
– Location
– Understanding the customer
Paper 151-012 9

10. Business Analysis & Improvement Systems
7. Customer Decision Process
• Take into account
– Features
– Product quality
– Service
– Warranty
• Know customers
Paper 151-012 10

11. Business Analysis & Improvement Systems
8. Understand Customer Perception On Pricing
• Some people advocate price low to
gain market entry
• Potential risks
• Low price/value relationship
• Difficult to remove
• To change can be very expensive
• Understanding a customer’s
perception of your pricing is one of
the key elements in developing
pricing strategies for business people
Paper 151-012 11

12. Business Analysis & Improvement Systems
9. What Are The Business’ Overheads
• Costs to operate?
• Prepare:
– Annual Budgets
– Stock and Debtors Budgets
– Cashflow Forecasts
– Periodic Accounting Reports
– Revised Business Overhead Cost
Lists
– Weekly Performance Estimates
Paper 151-012 12

13. Business Analysis & Improvement Systems
10. Customer’s Perception On
Prices
• Premium goods
• A superb value
• Over charging
• Good value
• Cheap price
• A rip off
Paper 151-012 13

14. Business Analysis & Improvement Systems
11. Mark Up/Gross Profit
• Gross Profit Percentage?
• Compare with competitors?
• Sales mix?
• Individual Gross Profit Percentages?
• Customer’s perception?
Paper 151-012 14

15. Business Analysis & Improvement Systems
12. Sales Statistics
• Sales mix
• Customer’s
perceptions
• Sales per product
• Sales per hour
• Sales per employee
• Gross profit earned by
individual employees
Paper 151-012 15

16. Business Analysis & Improvement Systems
13. Equivalent Of Mark Up Percentage To
Gross Profit Percentage Chart
Mark-up % on Purchases Equivalent Gross
Profit % on Sales
5% 4.8%
10% 9.1%
15% 13.0%
20% 16.7%
25% 20.0%
30% 23.1%
35% 25.9%
40% 28.6%
45% 31.0%
Paper 151-012 16

17. Business Analysis & Improvement Systems
13. Equivalent Of Mark Up Percentage To
Gross Profit Percentage Chart cont'd...
Mark-up % on Purchases Equivalent Gross
Profit % on Sales
50% 33.3%
75% 42.9%
100% 50.0%
120% 54.5%
130% 56.5%
140% 58.3%
150% 60.0%
175% 63.6%
200% 66.7%
Paper 151-012 17

18. Business Analysis & Improvement Systems
14. Targeted Net Profit
• Pricing strategies
• Reasonable salary for the owner
• Reward for the investment of capital
Paper 151-012 18

19. Business Analysis & Improvement Systems
14. Targeted Net Profit cont'd....
• Many other problems:
– Staff
– Debtors
– Suppliers
– Law
– Tax
– Potential bad debts
– Potential deteriorating
stock
– Labour problems
Paper 151-012 19

20. Business Analysis & Improvement Systems
15. Determining Gross Profit
Required
• Gross profit required is the labour and
overhead expenses, plus the targeted
profit
• Most important figure in determining
the performance of a business is its
gross profit & whether its adequate to
generate the net profit target
Paper 151-012 20

21. Business Analysis & Improvement Systems
16. Labour Budget
• Labour for a retail shop
would normally be
classified:
– Managers
– Assistant managers
– Salespersons
– Cashier
– Administration
Paper 151-012 21

22. Business Analysis & Improvement Systems
17. Labour Oncosts
• Every business employing on a full time
basis has the following oncosts:
– Annual leave
– Holiday pay loading
– Statutory holidays
– Personal, Carers & Compassionate Leave
– Superannuation
– Payroll Tax
– WorkCare
– Training
– Long Service Leave
Paper 151-012 22

23. Business Analysis & Improvement Systems
18. Overhead Expenses
• An accurate schedule of expected
overhead expenses, which correlates
to the expected turnover, should be
prepared
Paper 151-012 23

24. Business Analysis & Improvement Systems
19. Labour Budget (Detail)
• Permanent Staff:
– General Manager
– Managers
– Salespersons
– Cashiers
• Casual Staff:
– Salespersons
Paper 151-012 24

25. Business Analysis & Improvement Systems
20. Targeted Profit
• Determine net value of the investment in
the business
• Targeted rate of return should be
determined to calculate a targeted profit
• Example:
– Net Investment estimated at $900,000
– Targeted rate of return used is 25%
– Targeted profit is $225,000 ($900,000 x 25%)
Paper 151-012 25

26. Business Analysis & Improvement Systems
21. Targeted Gross Profit
Paper 151-012 26
Targeted Gross Profit is calculated by adding the
following (example):
Budgeted Overhead Expenses $ 454,400
Total Employment Costs $ 743,742
Targeted Profit $ 225,000
Targeted Gross Profit $1,423,142

27. Business Analysis & Improvement Systems
22. Affect Of Gross Profit Percentage In
Determining Sales Figure
Paper 151-012 27
If average gross
profit is:
Sales will have to
be:
25% $5,692,568
30% $4,743,806
40% $3,557,850
50% $2,846,284
60% $2,371,900

28. Business Analysis & Improvement Systems
23. Proof Of Gross Profit
1 2 3 4 5
SALES $5,692,568 $4,743,806 $3,557,850 $2,846,284 $2,371,900
Average gross profit
percentage achieved in this
business 25% 30% 40% 50% 60%
This gross profit percentage is
equivalent mark-up
percentage of 33.3% 42.8% 66.6% 100% 150%
Less Product purchases $4,269,426 $3,320,664 $2,134,708 $1,423,142 $ 948,758
Gross Profit $1,423,142 $1,423,142 $1,423,142 $1,423,142 $1,423,142
Less:
Employment Costs $ 743,742 $ 743,742 $ 743,742 $ 743,742 $ 743,742
Budgeted Overhead
Expenses $ 454,400 $ 454,400 $ 454,400 $ 454,400 $ 454,400
Total Expenses $1,198,142 $1,198,142 $1,198,142 $1,198,142 $1,198,142
Forecast Net Profit $ 225,000 $ 225,000 $ 225,000 $ 225,000 $ 225,000
Paper 151-012 28

29. Business Analysis & Improvement Systems
24. Mix On Purchases & Mark Up% & Therefore
Sales – What Effect On Profitability?
Product Purchase
Price $
Mark Up
%
Mark Up
$
Sales
$
Gross
Profit %
1 500,000 110.00% 550,000 1,050,000 52.30%
2 200,000 20.00% 40,000 240,000 16.66%
3 250,000 180.00% 450,000 700,000 64.20%
4 150,000 89.00% 133,776 283,776 47.10%
5 50,000 33.30% 16,666 66,666 25.00%
6 25,000 60.00% 15,000 40,000 37.50%
7 40,000 70.00% 28,000 68,000 41.20%
8 55,000 150.00% 82,500 137,500 60.00%
9 153,142 70.00% 107,200 260,342 41.20%
1,423,142 1,423,142 2,846,284 50.00%
Weekly Sales Target - $54,736
Paper 151-012 29

30. Business Analysis & Improvement Systems
24. Mix On Purchases & Mark Up% & Therefore
Sales – What Effect On Profitability? cont'd....
Paper 151-012 30
KPIs to monitor are:
Weekly Sales Target $54,736
Product Sales Share:
• Product 1 36.8%
• Product 2 8.4%
• Product 3 24.6%
• Product 4 9.9%
• Product 5 2.4%
• Product 6 1.4%
• Product 7 2.4%
• Product 8 4.9%
• Product 9 9.2%

31. Business Analysis & Improvement Systems
24. Mix On Purchases & Mark Up% & Therefore
Sales – What Effect On Profitability? cont'd....
Paper 151-012 31
Based on this performance, the result would be:
Sales $2,846,284
Less Purchases $1,423,142
Gross Profit $1,423,142
Gross Profit % - 50% $454,400
Less Budgeted Overhead Expenses $743,742
Employment Costs $1,198,142
Forecast Net Profit $ 225,000

32. Business Analysis & Improvement Systems
25. Professional Assistance
• Your professional PHIRE POWER
advisor can assist
Paper 151-012 32