Rethinking Your Retail Markup Strategy

Purpose of this article

Many small business owners feel pressured to be the cheapest in the market, believing that low prices are the only way to attract and keep customers. Competing on price is rarely a sustainable strategy for independent retailers. This article explains why, and sets out a practical approach to pricing that reflects the value a local shop actually provides to its community.

Value beyond the price tag

Customers shop with local businesses for reasons that often have nothing to do with the lowest price. Convenience is a significant driver. A shop that offers easy parking, longer trading hours or a central location is providing a service that saves customers time.

The pricing at a cinema or a convenience store illustrates the point. Consumers understand they will pay more in those environments because the items they need are available exactly when and where they want them. This is, in effect, a convenience premium. Independent retailers can confidently apply the same logic to their own markup policies.

A common trap is the opposite behaviour: many local retailers price-compare against big competitors that advertise heavily on being the cheapest, and adjust their own prices down to match. This hands away margin the business has earned through service and convenience.

Challenging the recommended retail price

Suppliers often provide a suggested or recommended retail price (RRP). That figure is based on a general national average and does not account for an individual shop's overheads. A business in a regional area with higher freight costs, or with limited local competition, should set prices that reflect those realities.

Retailers should review their inventory category by category. Where supplier agreements allow pricing flexibility, it should be used. There are usually items where the margin can be lifted by a few percent without affecting sales volume.

Pricing for rising business costs

Fuel surcharges, rents and labour costs all rise year after year, and they quickly erode profit if pricing remains static. Many suppliers are already passing their increased costs on to retailers. Because customers hear about these economic pressures in the news, they are generally more understanding of price adjustments than owners expect.

Adjusting markup as costs rise creates a financial buffer. It keeps the business viable when external costs inevitably increase again.

Avoiding the race to the bottom

Trying to match the prices of national chains is usually a losing battle. Large retailers spend heavily on marketing their low prices while recovering margin elsewhere through tactics such as home brands.

Independent shops in categories such as fashion, gifts, homewares and pet products have more pricing room than those selling high-ticket white goods or basic groceries. Consumers generally expect to pay a little more at an independent store. Meeting that expectation is not opportunistic; it is sound commercial practice.

Small steps for long-term health

Drastic changes are not required. A small increase in gross profit across several categories reduces reliance on sheer sales volume or on finding new customers, and allows steady, incremental financial growth.

• Review POS sales data and current markup settings category by category.
• Identify categories where convenience, service or limited competition supports a higher price point.
• Test modest increases on selected lines and watch unit sales for four to six weeks.
• Do not blindly follow past practice or the RRP; treat pricing as a decision, not a default.

Does it work?

Yes. newsXpress has worked through this process with many member retailers who subsequently increased prices. Unit sales did not fall, and the businesses banked more money as a result. Retailers who take control of their pricing build more resilient and more professional businesses.

Key takeaway: there is no benefit in denying a business additional margin dollars. Price for the value provided, not for the loudest competitor's advertisement.