Pricing: Beyond Cost-Plus

September 27, 2013 at 3:20 PM

More and more shops are using the small/medium/large approach to pricing championed by Tim Huckabee of FloralStrategies. There is lots of information about how versioning this way can improve profits.

There doesn’t seem to be much information on how the price increments should work and whether there should be any impact on margin. Specifically – should the upgraded versions (medium and large) offer the customer better value and the florist lower margins?

Most florists seem to be focussed on consistent margins. Their “medium” and “large” versions are priced according to the same formula as their base “small” version.

Other florists sacrifice some margin to make their “medium” and “large” versions more attractive to the customer. The idea is that the customer is ready to spend some money and, since you really don’t know when they will order again, you should try and get every last penny out of them, even if it means sacrificing some margin.

Other successful vendors take remarkably different approaches with different products:



Category: Suggested Reading

Supermarket Peanut Butter

Price Pattern

There is only the slightest difference in the unit cost between the largest and smallest pack sizes. The difference could reflect savings in packaging and handling, meaning that margin might not be affected at all.

 

What is Going On?

I expected more of a volume discount but maybe, in this case, the retailer has decided they would not benefit. Peanut butter is arguably a non-perishable staple for many families and their consumption may be fixed. If a family is going to consume X pounds of peanut butter in a year any volume discount means only lost margin with no increase in sales to make up for it.

 

Similarities to Retail Floral?

Only the pricing. Like many florists peanut butter doesn’t seem to discount.

 

Differences to Retail Floral

A lot! Peanut butter is non-perishable, and an essential food item for many families.

Supermarket Microwave Popcorn

Price Pattern

Here you start to see some savings when you buy larger packages – the unit price in larger packages saves you 20% to 25%.

 

What is Going On?

Again this is arguably a non-perishable but it’s also more of a discretionary purchase for most people. My guess is that supermarket research (and there is tons of it) shows that when somebody is buying something discretionary like popcorn they should be motivated to buy as much as possible, even if it means sacrificing a little margin.

 

Similarities to Retail Floral?

It is a discretionary purchase.

 

Differences to Retail Floral

Non-perishable.

Movie Theater Snacks

Price Pattern

Here you start to see huge discounts when you buy larger quantities. The unit price for the largest packages is less than half the cost compared to the smallest size. And these don’t even take into account the “free refill on all large size concession items” promotion that is so common. Factor that in and the discount is almost 80%.

 

What is Going On?

Given that:

  • Options for the consumer are very limited – there are no competing concession vendors in the theater to drive prices down leading to the exorbitant prices overall.
  • The high base prices and margins allow for aggressive discounting on larger sizes.
  • The products are essentially perishable. They are only at their peak for about 90 minutes. What is purchased on one visit does not diminish what is purchased on the next – you can’t stockpile these concessions.

The operator seems to be focussed more on maximizing revenue than preserving margin. You are in the theater and ready to spend money – the operator wants to get as much out of you as possible and is prepared to accept smaller margins on the “medium” and “large” versions.

 

Similarities to Retail Floral?

Both involve a perishable product and discretionary purchase.

 

Differences to Retail Floral?

At the moment of purchase the theater operator has an effective monopoly and can charge far more than a florist. Those high margins allow them to discount more aggressively than a florist ever could.

Ice Cream

Price Pattern

Good discounts for larger quantities. The average unit price for the largest packages is about half of the smallest.

 

What Is Going On?

Unlike the movie theater there is more competition – in each case there were multiple ice cream vendors nearby - so the prices and margins aren’t as high. Like the theater the purchase is discretionary and highly perishable. Again the operator seems more focussed on maximizing revenue than preserving margin. You are there at that moment to buy some ice cream. Much better to make a little less on the second scoop (and even less again on the third) than nothing.

 

Similarities to Retail Floral?

Again it is a perishable product and discretionary purchase.

 

Differences to Retail Floral?

Based on the aggressive discounting the margins are probably higher than retail floral, but closer than movie theater snacks.

Where do you think flowers fit in?

To me most flowers seem more like a discretionary perishable purchase like ice cream. It also seems like discretionary perishable purchases get discounted at larger pack sizes.

What do you think? Should margins stay consistent? Or is it better to sacrifice a little margin in favor of maximizing revenue? If you sell one dozen roses for $40, does it make sense to offer two dozen for $60? The margin will certainly be lower but if it means you make an extra $5 you would have missed otherwise is it a good trade?