For Fuel Retailers - Edition nr 32 - AUGUST 2015
When 5 cents combine ...
There is a trend nowadays for prices to be set based on the availability of certain coins. When 1 cents were discontinued some Dealers stopped pricing an item that would result in change less than 5 cents. For example prices moved from R3.99 to R3.95.
Now that it is becoming more difficult to find 5 cent coins the same is happening. That same item is now being priced as R3.90 or R4.00. This makes logical sense, but not profit sense. There is another way. Keep in mind there are a few principles that are still valid:
- There is a psychological advantage in pricing an item as R3.99 or R3.95 or even R3.90 as opposed to pricing it as R4.00. Even if the difference is only a few cents, research shows that customers still feel that R3.99 is notably "cheaper" than R4.00
- Pricing items as full Rand amounts e.g. R4.00 or R5.00, takes the obligation off the cashier to complete an actual transaction and makes it easier for cashiers to skim money from the till. Also, it is more likely that a customer will pay the full amount and not expect any change.
Let's explore the pricing issue. What if you price at R3.95 instead of R3.90. The implication is that on all products you get an extra 5 cents profit. Here are two scenarios:
- You sell one product for R3.95 and the customer gives you R4. Because you don’t have 5 cents you give the customer 10 cents in change and she is happy. You "lose" 5 cents, but if you had priced at R3.90 you would have lost it anyway.
- You sell two products for R3.95 and the total is R7.90, the customer gies you R8 and you give 10 cents change. The customer is happy. But, you are 5 cents more profitable on each product.
This may look like a small amount, but let's calculate a typical example. Service Station ABC processes 22'000 transactions per month in the c-store. Let's assume that 10'000 of those transactions are for two products or more. That means on 10'000 transactions the Dealer makes an extra 5 cents per product, that equals 2 products x 5 cents x 10'000 transactions = R1'000. That’s the profit from 1'000 litres a month, or 12'000 litres a year. That’s on an average, because on some of those 10000 transactions a customer may buy more than 2 products.
That also means, every time a customer buys 2 products instead of just 1 you make 10 cents more profit. And if you had priced for 10 cents, you would have lost 10 cents each time. Would you rather make an extra R1'000 or lose R1'000?
And on the rest of the transactions, where a customer buys only one product, you may "lose" 5 cents per transaction, but if you had priced for 10 cents you would have lost it anyway, so you are not worse off. And if you happen to get 5 cent coins in, every time you give 5 cents in change instead of 10 cents you make another 5 cents.
Remember, this only applies to cash customers. Any customer paying by card won't get change and you will make an extra 5 cents on every item they have purchased.
According to the same logic, why not price at R3.99? You'll get the benefit.