Setting the perfect price for goods is often an elusive goal for retailers. However, companies need to focus on making improvements in this area, because research suggests that merchants are leaving a significant amount of potential profit on the table as a result of failing to achieve an optimal pricing structure.
Two analysts recently published the results of a relevant study in McKinsey Quarterly. They found that a 1 percent increase in the price of a company’s products typically leads to an increase in operating profits of almost 9 percent, assuming sales of affected items remain consistent after the change. This caveat is important to note, because raising prices too much can quickly backfire by driving customers out of the store and tarnishing the brand’s reputation.
The McKinsey team estimates that about 30 percent of all retail pricing decisions do not produce the most profitable price, leading to a substantial amount of lost revenue. For many large consumer products companies, the annual losses are believed to be in the millions.
In an article for Entrepreneur magazine, contributor Neil Lustig emphasized the importance of avoiding “gut-based pricing” decisions, such as extreme discounting aimed at meeting transaction quotas at the end of a quarter or fiscal year. Instead, Lustig wrote that companies should use the wealth of data that is available today to set an ideal price that will maximize profits without turning away potential customers.
Of course, before retailers can achieve this goal, they need to capture pertinent data within their point of sale system, and ensure that it is stored in an accessible format.