Paul Erickson, a sales director at Management One, says that the first 10 seconds of a customer’s experience in your store will determine whether they feel it is the right shopping place for them. That’s why retail giant Walmart offers 50-cent soda machines right by the storefront: to set the tone of what customers can expect as they enter and explore more everyday low prices.
In his Jan. 17 Atlanta Market seminar The Psychology of Price: The Markup and Markdown Game, Erickson shared his secrets to effectively pricing product in a way that make customers happy and retailers profitable. Here were his top tricks of the trade:
Initial Markup
Paul Erickson shares nuggets of wisdom with market attendees.
Any markup has three key elements they need to cover: markdowns, overhead expenses and desired net profit. Rather than go by the standard keystone pricing, in which the wholesale cost is merely doubled for MRSP, Erickson offered up the following initial markup formula:
Initial markup = markdown % + operating expense % + net profit goal %
100% + markdown%
Erickson also advised retailers to think about cents, since “cents can add up to big dollars.” A customer who’s willing to pay $4 for a product will easily pay $4.50, and every added dollar can greatly impact your store’s bottom line. To illustrate, Erickson shared how Delta made more than $30 million dollar in revenue last year, just by tacking on an extra 20 cents to every flight ticket sold.
Research Says…
When it comes to displaying prices, research has shown that red fonts work better for men, Erickson reported. “When men see the color red (in a price), they think they’re getting a good deal,” he said.
Additional research has shown that removing the comma from a price tag can make the product seem cheaper — especially handy when merchandising high-end goods.
Finally, Erickson shared results from a survey in which consumers reported believing most products were marked up to 80 percent. “Every now and then,” he added, “you can prove them right!”
Setting Markdowns
Good markdowns can help keep your inventory fresh and assure good cash flow. It’s also often the cost of doing business.
When setting your markdowns, Erickson discourages the use of percent off advertisements. “They’re irritating to the customer,” he said. Instead, Erickson suggests using dollar savings amount, since studies have shown this to be more effective. People are naturally ingrained to view money as good, and giving it up as bad, so framing sales around how much money is being saved helps customers feel god about what they are spending.
Another pointer to keep in mind when setting markdowns is explaining the reason for the markdown, such as “weekend special,” or “discontinued item.” This keeps from training the customer to always anticipate a sale.
Coupons and Complimentary Gifts
Besides markdowns, coupons and complimentary gifts can also be great tools in the retailer’s arsenal.
Citing research that showed how coupon recipients experienced a 38 percent rise in oxytocin in the brain and a slightly decreased heart rate, Erickson declared, “Coupons create happiness and health!”
Even more effective than coupons, however, is “the power of free.”
According to Erickson, “A retailer’s perceived generosity makes it more likable and leads to positive brand associations. Shoppers prefer getting something extra free to getting something cheaper. Researchers sold 73 percent more hand lotion when it was offered in a bonus pack than when it carried an equivalent discount.”
