One of the most exciting and nerve-wracking aspects of retail is determining what price to sell your products at. Pricing is both an art and a science that requires an experimental attitude coupled with an intuitive feel for how you want your brand and by extension your products to be perceived.
Price your products too low and you might get a ton of sales but you might find yourself going under when you tally up your expenses at the end of the month.
When you price your products too high, you might give off an aura of luxury, prestige, and exclusivity thereby attracting a more well-off clientele which is smaller in number but makes up for volume by purchasing your products at the higher price. However, what if you're in an area where the demographic is especially price-sensitive, then what will you do?
Ultimately, you'll have to decide whether you want higher prices for your products and a lower volume sold or lower priced products and higher volumes sold, and which direction will enable you to achieve profitability.
Keep in mind though that when you have a range of products, you can sometimes risk lowering prices for one as long as you also sell products that are marked up higher.
A Simple Formula
Most retailers benchmark their pricing decisions using keystone pricing (explained below), which is essentially doubling the cost of the product to arrive at a 50% markup. However, in many instances you'll want to mark-up your products lower or higher depending on your specific situation.
Here is an easy formula to help you calculate your retail selling price:
So for example, say you wanted to price a product that costs you $15 at a 45% markup instead of the usual 50%, here's how you would calculate your retail price.
Retail Price = [(15.00) ÷ (100 - 45)] x 100
Retail Price = [(15.00 ÷ 55)] x 100 = $27.00
Now that we've covered how to successfully markup your products, below you'll find nine pricing strategies that are traditionally deployed by retailers to stay afloat and one step ahead of their competitors.
Manufacturer Suggested Retail Price (MSRP)
As the name suggests (no pun intended), this is the price the manufacturer recommends that you as a retailer use to sell their products to the general consumer. The reason manufacturers first started doing this was to help standardize prices of products across multiple locations and retailers.
However, a lot of factors go into the end retailer going along with the MSRP, such as the bargaining power of the manufacturer and exclusivity of the product, but for the most part, you’ll find the more mainstream or conventional the product, the more you can expect the prices to be standardized.
- Pros: As a retailer, you can save yourself some serious headache by taking yourself out of the decision-making process and going with the flow.
- Cons: You’re unable to carve out or sustain an advantage over any of your competitors by being able to compete on price or availability.
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This is a pricing philosophy that retailers use as an easy rule of thumb. Essentially, it’s when a retailer would simply double the wholesale cost they paid for the product to determine the price. Now, there are a number of scenarios in which keystone pricing may be too low, too high, or just right for your business.
If you have products that have a slow inventory turnover, have substantial shipping and handling costs, and are unique and scarce in some sense then you might be selling yourself short with keystone pricing and could possibly get away with an even higher markup. But, if your products are highly commoditized and easily available elsewhere, using keystone pricing can be harder to pull off.
- Pros: Works as a quick-and-easy rule of thumb that ensures an ample profitability margin
- Cons: Chances are that depending on the availability and how competitive a product is, it’s usually unreasonable for a retailer to mark up a product that high
We’ve all seen this one in groceries stores but it’s pretty common for apparel as well, especially socks, underwear, and t-shirts. Not to mention its usage in the software and electronics industries. This tactic is where a merchants sells more than one product for a single price, a tactic alternatively known as product bundling pricing.
For example, a study looking at the effect of bundling products found in the early days of Nintendo's Game Boy hand-held console, it sold the most products when the devices were bundled with a game rather than individual products alone.
- Pros: Traditionally, retailers using this strategy to create a higher perceived value for a lower cost which can ultimately lead to driving larger volume purchases.
- Cons: When you bundle products up for a low-cost, you'll have trouble trying to sell them individually at a higher cost creating cognitive dissonance for consumers.
It’s no secret that consumers love sales, coupons, rebates, seasonal pricing among other promotion related markdowns, and that’s exactly what this refers to. There are several scenarios in you might consider going down this road. The more obvious ones being to increase foot traffic to your store, offloading unsold inventory, and attracting a more price-sensitive group of consumers.
- Pros: Great for attracting a larger amount of foot traffic to your store and getting rid of out-of-season or old inventory.
- Cons: If used too often, it could give you a reputation of being a bargain retailer and could hinder consumers from purchasing your products for regular prices.
Did you ever walk into a store knowing they were having a sale on a hot-ticket item only to buy not just that one item but several others while you were at it?
If so, you’ve gotten a taste of what loss-leading pricing is, luring in customers with a product they want at a lower price than competitors and benefiting from the additional products they’ll purchase while in your store.
- Pros: This tactic can work wonders, especially, when you consider complementary or additional purchases a consumer will make when their in your store, resulting in a boost in overall sales per customer.
- Cons: Similar to the effect of using discount pricing too often, when you overdo loss-leading prices, people will become trained to expect bargains from you.
Retail is a numbers game and surprising things happen when merchants take advantage of the different ways customers perceive their pricing, giving way to the term psychological pricing.
Studies have shown that when merchants spend money, they're experiencing a pain or loss, but if you help minimize the pain experienced it's possible to increase the likelihood of customers making the purchase. Traditionally, merchants will do this with ending the price with an odd number like 5, 7, or 9. For example, using $8.99 instead of $9.00.
However, when it comes to deciding which odd number to go to at the end of the day, the number 9 reigns supreme. How do we know? Well researchers at MIT and the University of Chicago ran an experiment on a standard women's clothing item with the following prices $34, $39, and $44. Guess which one sold the most?
That's right, pricing the item at $39 even outsold its cheaper counterpart price of $34.
- Pros: You tap into the irrational part of a consumer’s brain and trigger impulse purchasing through perception of a bargain deal or steal.
- Cons: When you're selling luxury goods, stepping down your price from a whole number like $1,000 to $999.99 will actually hurt the brand perception of what it is you're selling
As the name of this pricing strategy suggests, it refers to using competitor pricing data as a benchmark and consciously pricing products below them to lure consumers into your store over theirs.
- Pros: This strategy can be killer if you can manage to negotiate with your suppliers to obtain a lower cost per unit while at the same time focusing on cutting costs and actively promoting your special pricing.
- Cons: This can be difficult to sustain when you’re a smaller retailer given the lower margins you’ll be making.
Carrying on from the strategy above, this is where you benchmark your competition but consciously price your products above theirs and brand yourself as being more luxurious, prestigious, or exclusive. This works for Starbucks when people pick them over Dunkin' Donuts and it's a scientifically proven fact as well.
Economist Richard Thaler's study looked at people hanging out on a beach looking for a beer to cool off with the option of purchasing it at either at a run-down grocery store or a nearby resort hotel, and found that people were far more willing to pay higher prices at the hotel for the same beer. Sounds crazy right? Well, that's the power of context.
- Pros: This pricing strategy can work its “halo effect” on your business and products by giving consumers the perception that your products are of better quality and more premium due to the amount they’ll be paying for them.
- Cons: It may be difficult to pull off if the location and surrounding demographic are too price-sensitive and have several other options to purchase similar products.
This is another psychological tactic where you list both a sale price and the original price to establish the amount of savings a consumer perceives to gain from making the purchase by taking advantage of the cognitive bias of anchoring.
A study by Dan Ariely found that when students were first asked to write the last two digits of their social security number and then asked to consider whether they would pay this number of dollars for items that they didn't know the value of like wine, chocolate, and computer equipment. Next, they were then asked to bid for those items, and Dr. Ariely found that students with a higher two-digit number submitted bids that were 60-120% higher than those with lower security numbers.
The original price establishes it self as a reference point in the minds of consumers which they then anchor onto and then form their opinion of the listed marked down price. The other way you can take advantage of this principle is to intentionally place a higher priced item next to a cheaper one to draw customer's attention to it.
- Pros: If you happen to list your original price as being much “higher” than the sale price, it’ll automatically trigger a response in the consumer of having found a great deal, pushing them to act on their impulsive buying habits.
- Cons: If you’re anchor price is perceivably unrealistic it can lead to distrust and customer outrage given the age of information, where consumers can readily research pricing anywhere they happen to be thanks to their mobile devices.
There’s never a black and white approach to pricing, it’s a moving target, and these are just a few options to consider when deciding on what will work for your business. If you’ve actively used one of these strategies, let us know how it went for you, and if there are others you would recommend, by commenting below.