Business Analysis & Improvement Systems
SETTING RETAIL PRICES
Setting Retail PricesPaper 151-012
Business Analysis & Improvement Systems
1. Price Setting Is A Difficult Step
• Do not undersell
• Complex
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Business Analysis & Improvement Systems
2. Pricing Can Determine Profit Or Loss
• Market awareness
• Product development
• Advertising
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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
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Business Analysis & Improvement Systems
3. Pricing Fallacies cont'd....
Other factors:• Quality• Technical & backup
services• Reputation• Brand associations• Location• Guarantees• Refund policy
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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
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Business Analysis & Improvement Systems
5. Why Do Your Customers Buy?
• Competitors?
• Previous suppliers?
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Business Analysis & Improvement Systems
6. Competitors Intelligence File
• Record– Selling prices– Back up service– Reputation– Reliability– Location– Technical knowledge
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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
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Business Analysis & Improvement Systems
7. Customer Decision Process
• Take into account– Features– Product quality– Service– Warranty
• Know customers
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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
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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
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Business Analysis & Improvement Systems
10. Customer’s Perception On Prices
• Premium goods• A superb value• Over charging• Good value• Cheap price• A rip off
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Business Analysis & Improvement Systems
11. Mark Up/Gross Profit
• Gross Profit Percentage?• Compare with competitors?• Sales mix?• Individual Gross Profit Percentages?• Customer’s perception?
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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 employeesPaper 151-012 15
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%
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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%
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Business Analysis & Improvement Systems
14. Targeted Net Profit
• Pricing strategies
• Reasonable salary for the owner
• Reward for the investment of capital
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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
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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
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Business Analysis & Improvement Systems
16. Labour Budget
• Labour for a retail shop would normally be classified:– Managers– Assistant managers– Salespersons– Cashier– Administration
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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
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Business Analysis & Improvement Systems
18. Overhead Expenses
• An accurate schedule of expected overhead expenses, which correlates to the expected turnover, should be prepared
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Business Analysis & Improvement Systems
19. Labour Budget (Detail)
• Permanent Staff:– General Manager– Managers– Salespersons– Cashiers
• Casual Staff:– Salespersons
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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%)
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Business Analysis & Improvement Systems
21. Targeted Gross Profit
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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
Business Analysis & Improvement Systems
22. Affect Of Gross Profit Percentage In Determining Sales Figure
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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
Business Analysis & Improvement Systems
23. Proof Of Gross Profit1 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
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Business Analysis & Improvement Systems
24. Mix On Purchases & Mark Up% & Therefore Sales – What Effect On Profitability?
Product Purchase Price $
Mark Up %
Mark Up $
Sales$
GrossProfit %
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 - $54,736Paper 151-012 29
Business Analysis & Improvement Systems
24. Mix On Purchases & Mark Up% & Therefore Sales – What Effect On Profitability? cont'd....
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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%
Business Analysis & Improvement Systems
24. Mix On Purchases & Mark Up% & Therefore Sales – What Effect On Profitability? cont'd....
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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
Business Analysis & Improvement Systems
25. Professional Assistance
• Your professional PHIRE POWER advisor can assist
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