Some businessmen still confuse the concept of margin with the concept of trade margins and set prices for their goods, guided solely by the example of competitors. No wonder they go broke! Analyst at the Academy of Retail Technologies Maxim Gorshkov gives several tips and formulas with which you can set not only ruinous, but also profitable prices.
Margin and margin - “two big differences”
In a business environment, you can sometimes hear a phrase like “This company works with margin in 200%,” which is actually incorrect, since in this case we are not talking about margin, but about a margin. Unfortunately, these two concepts are often confused. Let's dot the “and” and see what margin, margin and margin ratio are.
When purchasing goods from a supplier, we pay a certain amount of money for it. For example, 1000 rubles per pair. it purchase price. When the goods arrive at the store, we impose on it value addedso that the buyer pays for a couple already 3000 rubles, which is retail price goods. There is such a thing as actual price - the price at which the product was actually sold as a result of promotional actions or discounts on a loyalty card. Having decided on the types of prices, we can understand what margin is. Margin - this is the share of value added in the retail price of the goods, that is, the difference between the retail and purchase prices. It shows how much profit the company will receive if we sell the product at this retail price. In our example, the margin, that is, the share of value added, is 2000 rubles, or 66,6%. But no matter what examples we give, the margin will always be below the retail price. So if you hear someone talking about margin in excess of 100%, be aware that this person confuses margin with trade margin. Trade margin - This is a kind of allowance for the purchase price of the goods, that is, how much percent the retail price exceeds the purchase price. In our example, the trade margin is 200%. More recently, the indicator margin coefficient. It, like the trade margin, demonstrates the ratio of the retail price to the purchase price, but is expressed not in relative (percent), but in absolute terms, and is used only for simple calculations. The margin coefficient in our example is 3: it is exactly the number of times the retail price is greater than the purchase price.
The question arises: which indicator should be used in the work? From the point of view of financial accounting and budgeting, the most important indicator of margin, since many other calculations are associated with it. But for simple operations, you can use all the other indicators.
How to set prices that will bring profit
It is possible to cover all costs and provide profit for the sake of which any normal business functions using well-calculated trading margins. Our goal is to establish with its help a retail price that will cover all fixed and variable costs, and will be as large as possible with the solvency of your customers. Do not be shy to sell expensive: if you buy a product even at a very high price, then it's worth it. You also do not need to rush to the other extreme, selling goods at cost or even lower than that - and it happens! Remember that low prices not only do not provide you with customer loyalty, but also slowly, but surely ruin you, especially if you really cannot afford these price games. To set the right prices for your store, first answer yourself a few questions.
What is the cost of goods? Calculate what costs you incur when receiving goods in your store. They always include the purchase price, and in stores that do not work on franchising, most often the cost of delivery. For companies that themselves produce and then sell the assortment, the cost of goods includes costs for raw materials, labor, designer labor and other costs.
What is the threshold price level? The threshold price is the minimum price of the goods, which ensures the breakeven of the company. It includes all costs that must be paid off even if you are making a discount on the product. Some sellers, inspired by the example of competitors, networkers, lower prices in an effort to please the buyer. But often they do not take into account the fact that networkers can really afford such games with a price, because sometimes they get goods many times cheaper than a private entrepreneur. As a result, the store owner, without calculating his threshold price, enters into the price race with a large retailer and works at a loss. He can do this until he finally goes bankrupt, or out of the race. Raising the price back, the seller is likely to lose customers - because they went to him only because of the low price - and again he will be on the brink of ruin.
What is the pricing situation in the industry? Of course, you must understand what prices your competitors work with and at what prices consumers are willing to buy your products.
Is the demand for your products flexible? Demand is considered elastic if it changes with a decrease or increase in price. Only in this case it makes sense to make a discount on the product, otherwise it will not work. If demand is inelastic, that is, sales do not increase when the price decreases or increase slightly, there will be no profit on the sale of such goods. Since there are categories of goods with different elasticities of demand in a shoe store, you must measure and calculate the elasticity of each of them according to the formula E = K / C, where K is the change in demand in percentage terms and C is the change in price in percentage terms.
Will additional services affect the increase in sales? One of the most attractive services for the buyer now is a consumer loan for shoes. So far, only a few companies sell shoes in this way, and this is strange, because the seller does not bear any costs, but only enjoys an increase in sales.
What price is the buyer willing to pay for the product? This indicator depends on many factors, for example, on the location of the store and the income of the target audience. When we know the exact portrait of the buyer, we well understand what exactly he needs and how much money he is willing to spend per month on shoes. For example, after all expenses, the customer of our store has about 6 thousand rubles per month, which means that we can set approximately the same price for most models in the store. But this is the average price, so we have to add two more steps to it: 25% down and 25% up from the price. It’s not reasonable to make a price step more than 25% in one store, since such a price range will dilute your target audience and make you compete with more expensive or cheaper stores, which is absolutely not interesting for you or your customers.
What is the nature of competition? Competition is like radiation: it is always and everywhere, but it is not visible. But you should still keep your finger on the pulse of competitors and work better than them. The one who monitors his rivals opens 200-300 stores a year, and the one who sells goods at cost and does not learn anything from others, and works all his life with one store.
How to calculate prices
Once you understand your pricing options and desires, use one of several pricing methods.
The first method: average costs + profit. This is a fairly simple and effective pricing method, which is repelled by costs - and this is very important - although it does not take into account changes in the market and does not show to what extent it is possible to reduce prices during sales. The essence of the method is to get the price of a product from the sum of all costs for the reporting period and the desired share of profit. For example, we bought goods in a season for 5 million rubles, and found out that the total costs for the same period will be approximately 8 million rubles. If we make an extra charge on the goods in the amount of 100%, then our profit will be only (5х2) -8 = 2 million rubles, and if we make an extra charge in the amount of 150%, the inventory in cash will be equal to 12,5 million rubles, which will bring in the ideal case, we already have 4,5 million rubles. It is clear that there are no “ideal” cases: the season always ends with the remainder, and the market dictates its conditions to us. Some of the assortment will be sold at a discount, so in this situation, an extra charge of 150% will allow us to at least stay afloat.
Method Two: Pricing Based on Break-Even Analysis. In business, there is such a thing as a breakeven point. The essence of the breakeven principle is to establish the sales volume at which there will be no loss. The break-even point is always calculated for new businesses, since with its help it becomes clear how long the store will operate without profit, only to cover the initial investment. Some elements of the break-even analysis can also be used for pricing, and this method will help us figure out what should be the minimum profit necessary for the survival of a business (something that the “average cost + profit” method is not capable of giving). To determine the minimum profit margin, it is necessary to subtract the variable costs from the volume of the planned gross revenue, and divide the resulting number by the volume of the planned gross revenue. For example, (15 million - 5 million) / 15 million = 0,5. This coefficient suggests that the difference between the purchase and sale price should be 50%, otherwise we will work at a loss. Using this method, you can calculate the trade margin. To do this, use the formula “1- (planned gross revenue / variable costs) * 100%”. In our example, the following calculation can be obtained: 1- (15 mln / 5 mln) * 100% = 200%. This is exactly what the trade margin should be, so that we at least cover all costs without earning anything. The limit of the upper price dictates only common sense: we must sell as expensively as possible, without listening to those who advise you to sell goods cheaper. As a rule, such advisers are people of low social status, who have little understanding in making money.
In principle, these methods are enough to set prices that are adequate for your business. But in some cases, prices are set in other ways. In particular, "Current price method"when competitors' prices are taken as a guideline: this method has not yet taken root in the fashion segment, but it is already being used by electronics retailers. Its advantage is that it vetoes price wars, but not all stores can afford to maintain the same prices with large chain retailers. "The method of dumping prices" used to attract buyers. Its essence is to establish low prices for best sellers, that is, for particularly attractive products, although prices for all other products can even be overstated. This method can provoke price wars and create the image of a cheap establishment in the store, so use it with caution. "Method for measuring the elasticity of demand" good in that it can be used to track the dependence of sales growth and profit on price changes, and the method "Analysis of consumer behavior" used at the stage of launching a new product on the market.
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