The best practices for product pricing
As rewarding as it is, owning a retail business is an incredibly competitive and often cutthroat arena. Having a well-balanced inventory or standout product is essential if you want to get ahead of the pack in the digital age.
There’s no doubt about it, product pricing matters. We live in a time driven by value, and your pricing strategy and product prices are a reflection of everything you stand for as a business.
Striking the perfect balance between consumer cost, profit margins, and perceived value is somewhat scientific. There are a host of elements to consider when giving a product or service a price tag. However, pricing strategies will help you decide how much to charge for your products based on your unique business circumstances.
These pricing methods, alongside related retail strategies, will ensure you maintain a positive brand image while offering your target customers a solid level of value and maintaining a steady profit margin.
Let’s start with a little something called manufacturer suggested retail pricing.
Manufacturer suggested retail price: MSRP in a nutshell
As you’re probably aware, MSRP is the manufacturer’s recommended retail price. MSRPs were initially used to help standardize the differing costs of products or services across several locations, regions, and retailers.
Using MSRPs is by no means compulsory, but it offers an excellent guide when deciding on pricepoints for particular products. This technique works best for items that are widely available in your niche. By basing a portion of your inventory on MSRPs, you’ll be able to cherrypick these items quickly for deals or discounts – more often than not, your profit margin will be healthy enough for you to mark these products down. Also, you’ll be able to gain a competitive advantage by marking some of your best selling standard products just a touch below the MSRP.
Moreover, while MSRPs won’t suit every item within your inventory, a product’s manufacturer suggested retail price will serve as an excellent benchmark for all of your other pricing strategies, efforts, and activities – strategies including keystone pricing.
Keystone pricing: The art of the markup
This pricing strategy is based on a relatively simple concept: selling a product, item, or service that is exactly double the amount of the wholesale cost.
Not only is this a quick and simple pricing method, but in most cases, keystone pricing will offer a steady profit margin for the vast majority of your inventory.
While this is an effective pricing method, it’s important to note that high-cost items with large handling or shipping fees and lower-cost items that are readily available from your direct competitors may not benefit from this strategy. In these cases, the profit margin may prove too low. For more readily available products, the markup could be considered too high, driving customers away from your business.
That said, keystone pricing is an excellent pricing strategy – it just won’t work for everything you have to offer.
Related retail strategy: In-store and online-based product launches.
Multiple pricing: The benefits of bundling
Bundle pricing, a tactic often see used in stores and supermarkets, is the art of selling a set of related products for a single, competitive price.
Take the Nintendo Game Boy, for instance. A study conducted in the infancy of the Game Boy’s release found that more units were sold when the handheld console was bundled with multiple games compared to selling the device as an individual product.
Bundle pricing is an excellent way of marketing segments of your products online while offering your customers a perceived level of value. This strategy will encourage larger volumes of sales, increasing your profitability.
Beware: When you sell items together at a low cost, it can be difficult to sell them individually at a higher price point – so be selective with your bundling efforts.
Related retail strategy: Product category spotlights or features with focused content such as detailed product information or how-to guides.
Penetration pricing: Using discounts the right way
It’s common knowledge that online shoppers enjoy deals and discounts. Over 67% of consumers wait until an item goes on sale before making a purchase.
Penetration pricing is a tactic focused on offering your customers discounts, deals, or checkout codes to offer a competitive level of value. This pricing strategy is an excellent way of driving traffic to your store or website and increasing sales.
By examining items within your inventory and hand-picking products on which you can afford a dip in profit margin, you’ll be able to offer discounts to your customers, marketing your deals across all of your most engaged online touchpoints, including email and social media.
While penetration pricing is an excellent way of driving revenue to your business, you should refrain from overusing this technique to avoid positioning yourself as a “bargain basement” brand. If you do this, you’ll need to offer deals and discounts on all of your products indefinitely to survive.
Related retail strategy: Email marketing campaigns or exclusive in-store offers and discounts.
Loss-leading pricing: Boosting your transactional value
A savvy tactic that you’ve probably experienced as a consumer at least once in your lifetime, loss-leading pricing is an alteration of bundling.
By offering your visitors a great deal on a featured item and suggesting complementary products to accompany their purchase, you stand a good chance of boosting your average value per customer.
With loss-leading pricing, you might only break even on your primary product, but by enticing your customers to leave the checkout after making multiple purchases, you will make a healthy profit.
Loss-leading pricing is an effective strategy for retailers across sectors. However, akin to penetration pricing, you should avoid leveraging this tactic too frequently.
Related retail strategy: In-store product demonstrations featuring related items or upselling or product recommendation features online.
Psychological pricing: A science of odd numbers
An intriguing retail strategy, psychological pricing – as the name suggests – is centered on selling your items in a way that makes your consumers feel as if they’re being offered added value. It’s a mind trick – but a fair and ethical one.
By rounding off retail prices and throwing odd numbers into the mix, you’ll enjoy a solid profit margin while encouraging more sales.
In William Poundstone’s revered book, Priceless, the author explores eight separate studies based on psychological pricing. He discovered that using odd numbers (for examples $39 rather than $40, or $19.99 rather than $20) boosted sales by 24% on average compared to “rounded” price points.
This approach encourages impulse purchasing, and because these pricing tweaks are so subtle, this method is highly sustainable. However, if you sell luxury items or anything sporting an especially high price point, using psychological pricing tactics can harm your brand’s reputation.
Related retail strategy: Comparison-based marketing. As this is a pricing strategy in its own right, here’s a full explanation for your reference:
Anchor pricing, a branch of psychological pricing, is an approach based on creating a fruitful comparison for your customers’ reference.
A retailer publishes both a product’s discounted price and the original retail price to showcase the savings a consumer will enjoy from committing to the purchase.
If you do this, you will draw your customers’ attention to particular items, allowing them to instantly process the level of value you are offering them.
While this tried-and-tested pricing strategy yields positive results, you must always be honest about your products’ original and discounted prices – unrealistic (or untrue) breakdowns could result in damage to your brand image and drive customers away from your store.
Competitive pricing: Chopping down the competition
Naturally, in such a cutthroat industry, getting ahead of the competition is essential to survival.
As the name of the strategy suggests, comparative pricing is a tactic based on leveraging your competitors’ pricing and using it as a guide for lowering your prices to undercut them while maintaining a respectable profit margin.
By taking the time to establish your direct competitors and analyze their price points for various items, you’ll be able to amend your pricing to offer a more competitive offer without entering a “race to the bottom,” price-slashing battle that will diminish your profits while cheapening your brand’s reputation.
If you can foster tight-knit relationships with your suppliers, you may be able to negotiate a lower wholesale cost for some items, which will allow you to offer competitive retail pricing without giving your items away for next to nothing.
Related retail strategy: Focused in-store or digital marketing campaigns that cover a wide range of platforms and consumer touch points, based on direct competitor research.
“Show value, create an experience and always strive to exceed customer expectations.” – Shep Hyken
Pricing your products for maximum success is a challenge, but by using a balanced mix of these pricing strategies and taking the time to regularly measure the success of your initiatives, you’ll continue to grow your audience – and your profits – year after year.
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