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Retail and pricing puzzles solved by our small business expert

Retail and pricing puzzles solved by our small business expert

What Franchise’s resident business agony aunt Angie Coates, founder and CEO of Monkey Music, answers your business and entrepreneurial conundrums

I can’t decide whether to open a retail business online only or combine it with a bricks and mortar store. What would you advise?

This is a huge question. And even more challenging without knowing your product/service or target market. Irrespective, my instinct is ‘stick to what you know’, minimising new learning while you get up and running.

While online-only may appear attractive because of the potentially lower cost base, it’s a competitive, fast moving and increasingly sophisticated space. As such, if your background is in bricks and mortar it may be better to launch in a familiar environment and while learning about online.

Although the additional running costs of a physical store can be significant (rent, rates, additional staff, etc) these do bring advantages. For example, your storefront provides powerful advertising opportunities, you may benefit from the current ‘shop local’ movement and returns are likely to be lower and customer loyalty higher.

If your background is digital, you’ll already know the challenges of creating an engaging online customer experience and how to drive and convert traffic through social marketing and organic/paid search.

Time invested learning the ropes of bricks and mortar is time not spent competing online as, although there may be overlap in operations between the two parts of the business, each has separate elements that offer no economies of effort. For example, the in-store and online customer experiences need to be developed independently.

The question is: does the benefits of bricks and mortar outweigh the costs and extra work? Building a good face-to-face customer service and creating a stand-out shopping experience are harder than many imagine. Of course, there are exceptions and if you’re buying a franchise the franchisor may offer templates, guides, training and other support that reduce or eliminate many of the unknowns and risks.

Whichever route you choose, be realistic about how much time everything takes, what your costs are going to be and what revenues you can achieve.

Is there a formula for setting competitive price levels for my products and services?

Sorry, no, there is no magic formula. A product or service is worth whatever people will pay for it and determining that is a combination of art and science.

However, it’s worth getting it right, as many businesses fail due to poor pricing strategy.

Here’s how I’d approach it:

  • Do your market research. What are your competitors charging? What do they offer for that?
  • Calculate annual sales. Be realistic. Break annual sales down into units per month or week.
  • Work out your costs. Include all direct costs (development, etc) and the variable costs of production (materials, packaging and labour). Work out what percentage of your fixed costs (overheads such as rent, rates, etc) the product needs to cover. Add these together and divide by the volume to produce an initial unit break-even figure.
  • Add on a margin. Put a margin onto the cost per unit and you have a sales price.
  • Benchmark your sales price. Use your market research and, if appropriate, revisit your costs and/or margin.
  • Watch the market. Regularly review your pricing strategy, as your costs, customers and competitors will change.

At some point you simply have to commit. If you’re really unsure, consider a ‘product launch offer £x, normal price £y’ strategy to test the water without devaluing the product. But remember, price is only one factor that affects sales.

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