“How you establish prices for your merchandise will be one of the most important decisions you will make,” says Entrepreneur. “Since it directly affects that all-important variable, profit. You must strike a delicate balance, setting a price that is high enough to allow you to achieve a reasonable profit margin and yet low enough to keep your merchandise affordable and competitive.”
Pricing your products too low might help you rake in a ton of sales, but you could still end up short when you calculate expenses at the end of the month. On the other hand, pricing your products too high could help you attract a more high-end clientele while alienating a price-sensitive demographic.
So the question is: Which pricing method will help you achieve profitability?
Let’s take a look at some common pricing methods used by retailers:
Keystone Pricing is essentially doubling your cost to establish the retail price. Markup is calculated as a percentage of the sales price, so doubling the cost means a 50% markup. If your cost on an item is $2, for example, your selling price will be $4. Fifty percent of $4 is $2. That’s your markup.
Keep in mind that there are several situations in which keystone pricing may or may not be right for your business. Products that have a slow turnover, have considerable shipping/handling costs, or are unique/scarce might require a higher markup than keystone pricing. If your products are widely available, however, keystone pricing might be harder to pull off.
While Keystone Pricing is a simple rule of thumb that delivers generous profitability margins, depending on the availability and competitiveness of the products, it might be unreasonable to mark up your goods by 50%
MSRP (Manufacturer’s Suggested Retail Price)
This is literally the price the manufacturer recommends you use to sell their products. Manufacturers first started doing this as a means of standardizing product prices across multiple locations and retailers.
While a lot of factors (i.e. bargaining power of the manufacturer and exclusivity of the product) determine whether the retailer goes along with the MSRP, you can pretty much expect the prices to be standardized the more mainstream or conventional the product.
MSRP can save you the headache of pricing decisions, but you won’t enjoy the advantage of competing on price or availability with this option.
This strategy involves selling more than one product for a single price, such as a pack of socks or a hand-held console bundled with a game.
Offering your products in a bundle lets you include high-margin items while still delivering overall value. You can also gain a competitive advantage by creating a bundle that is unique to your company, using products only you can provide. Because competitors can’t offer the same bundle, they also won’t be able to compete on price so you can achieve higher margins.
On the downside, bundling products up for a low-cost might result in difficulties trying to sell those products individually at a higher cost.
This is a common but effective strategy for increasing customer traffic in your retail store. Essentially, it’s the practice of luring customers by offering a frequently purchased or hot-ticket item at a discount, assuming that they’ll make additional purchases once they’re in your store.
Yes, you might lose money on the discounted item, but there’s a good chance you’ll make up for it—and then some—with the additional products they’ll most likely purchase. Keep in mind, though, that when you offer loss-leading prices too frequently, people will come to expect bargains from you.
There are many ways to offer discount pricing including sales, coupons, rebates, loyalty rewards, and seasonal pricing—all designed to increase foot traffic to your store, get rid of unsold inventory, and attract more price-sensitive consumers.
While Discount Pricing is a great way to attract shoppers and offload old inventory, if you use it too often, it could cement your reputation as a bargain retailer and keep consumers from purchasing your products at regular prices.
This pricing method is based on the theory that particular prices have a psychological impact. Retail prices, for example, often appear as “odd prices”, or, slightly less than a round number ($19.99).
Interestingly, evidence suggests that consumers tend to perceive “odd prices” as being lower than they actually are, causing them to round to the next lowest monetary unit (prices such as $1.99 are associated with spending $1 rather than $2).
Psychological Pricing allows you to reach the irrational part of the consumer’s brain, triggering impulse buying through the perception of a better deal. This strategy can help you increase sales without significantly reducing your prices.
So, what’s the best pricing strategy for your business? The truth is, there’s no absolute approach to pricing. In many cases, your pricing methods will depend on how much you paid for the merchandise, what your competitors are charging, what your overhead expenses are, what your sales volume is, and a bunch of other variables, suggests Entrepreneur.
That being said, pricing is the most crucial component in maximizing your revenue. According to Harvard studies, a 1% improvement in your pricing can add up to 11% to your profits.
“The moment you make a mistake in pricing, you’re eating into your reputation or your profits.” ~ Katharine Paine
“With bad pricing, you’re missing out on profits in every transaction that you make, not to mention the deals that you completely miss out on,” says Price Intelligently.
Use the pricing strategies above to help you price your products in a way that will give your customers value, while sustaining your business and contributing to your growth.
Also published on Medium.