10 Pricing Strategy Essentials for Retail Success

Our previous chapter explored how to choose and stock the right products for your retail business. Now, let’s dive into another critical aspect for success in retail business: Pricing Strategy.

Pricing is a vital part of your business. You must set prices that attract customers in a competitive market while ensuring your business remains profitable and sustainable. It’s a delicate balance between offering value to your customers and securing your business’s future.

This chapter is all about making pricing strategy more manageable to understand. We know that pricing isn’t just about numbers; it involves how your customers perceive your products and how it impacts your bottom line. Our goal is simple: we want to give you the strategies and techniques you need to succeed in your retail venture.

We’ll break down pricing, explaining how it’s distinct from the retail price. We’ll show you the ropes to determining the best price for your product. Additionally, we’ll dive into ten widely used pricing strategies in retail. For each scheme, we’ll highlight the pros and cons and provide recommendations on which suits different types of businesses. 

Read more: Product Sourcing: 6 Steps to Get Quality Products to Sell

What is pricing?

Pricing is figuring out how much to charge for something you’re selling, whether a product or a service. It’s crucial to running a business because it determines your success and where you stand in the market. 

When you set a price, you consider how much it costs to create the item you’re selling, how much people are ready to pay for it, and how much profit you want to earn. So, it’s about finding the right balance between these factors.

As we explore the pricing concept, you might also stumble upon the term retail pricing, which we’ll clarify to avoid confusion. Both are similar ideas but function differently.

Pricing is like the big picture — it’s how companies figure out how much something should cost. The concept can be for all kinds of businesses, not just retail. They use different pricing strategies, such as profit maximization or competition.

Retail pricing is a specific process that involves setting prices for products sold in stores to the general public. While making a profit is essential, stores must ensure customers are willing to buy their products. It makes retail pricing different from general pricing since it focuses on how stores determine the prices that we, as customers, pay for things.

Key elements that determine price

When pricing products or services in a retail business, several things come into play. Here are the main factors that affect how you set your prices:

1. Cost of Goods Sold (COGS): How much it costs to get or make the products you’re selling. You must ensure your fee covers these costs and leaves room for profit.

2. Operating Expenses: These are all the other costs you have, like rent, bills, employee salaries, advertising, and insurance. You’ve got to include these in your pricing so your business stays in the green.

3. The Elasticity of Demand: The price elasticity of demand measures how sensitive consumer demand is to price changes. If demand is relatively inelastic (insensitive to price changes), you may have more flexibility in setting prices. If demand is elastic, small price changes can significantly impact sales.

4. Customer Perceptions: What your customers think about your products matters. You can often charge more if they see your stuff as a premium or high quality.

5. Target Market: Different groups of customers might have different ideas about a fair price. Think about who your customers are and what they can afford. High-end stores can charge more to fancy customers, while bargain shops aim at folks who want a deal.

6. Distribution Channels: The costs associated with getting products to the customer, such as shipping and handling, can impact pricing, especially in e-commerce.

Read more: Unlocking Growth: 19 Traction Channels for Business Success

The importance of pricing in business

Setting prices for your business is a big deal. It’s not just about making money; it’s about doing much more. Sure, making a profit and getting revenue is crucial. Although, it’s not all about making the most money you can. Here’s what pricing does for your business:

Being competitive in the market

Pricing is a crucial factor in a business’s competitive edge. Companies must look at what their competitors charge to do it well. Some businesses begin by reducing their prices to attract customers away from rivals. 

After consumers prefer your product, you can increase prices again. But remember, if your prices are too high, you could lose customers. Conversely, you might not make sufficient profit if you charge too little. It’s all about finding that perfect balance.

Retaining customers

Retaining loyal customers is crucial for businesses, and pricing strategies can aid in achieving this goal. Companies strive to ensure that their products remain unique and desirable. Companies often face the challenge of balancing the need to increase prices with the risk of alienating their current customers.

As a result, they often maintain the same pricing structure while providing special discounts or offers to loyal customers. This approach helps establish a positive long-term customer relationship and encourages continued patronage.

Customer perception

The price you choose for your product or service says a lot to your customers. It shapes what they think about your business and what you’re offering. Pricing affects your brand and where you stand in the market.

Your pricing also changes how customers see the value of what you’re selling. People might think it’s unique and high-quality if you charge a high price. However, offering products at a lower price can bring in customers who want a good deal. Getting your pricing right can make your brand look better and more respected.

Managing demand

Pricing strategies are pivotal in a business’s ability to effectively manage and shape customer demand. One such strategy is dynamic pricing, a versatile tool businesses can use to their advantage. 

During peak demand periods, you can increase your prices to capitalize on your customer’s willingness to pay more for products or services. Conversely, you can set discounts and price reductions during slower seasons or to stimulate sales. This approach ensures sales remain consistent throughout the year, optimizing revenue and profit margins.

Sustainability and ethical considerations

In today’s world, where people care more about doing the right thing and protecting our planet, businesses also consider ethics and sustainability when deciding prices. Ethical pricing means setting prices fairly to everyone involved, especially regarding commodities (raw materials or products bought and sold).

For example, some companies follow a practice called fair trade pricing. Companies pay a fair and reasonable price to those producing commodities like coffee beans or cotton. It’s not about getting the cheapest deal possible; it’s about ensuring everyone in the supply chain gets a fair share of the money. This approach matches a company’s values and makes customers feel good about buying their products.

5 steps for setting prices in your retail business

Now that we’ve outlined the importance of pricing a retail product, let’s implement them with a practical example. We’ll take a pair of sneakers as our product and walk through the process.

1. Understand market and customer demands

To set the right price, you need to gather important information about what your customers want and your competitors are doing. Here are a few things to consider:

• Customer Demand: Start by finding out what people are looking for. If you’re selling sneakers, ask yourself what kind of sneakers people want. 

• Check Competitor Prices: Look at what other businesses charge for similar products. In this case, you find out that other brands are selling sneakers for prices between $30 and $50.

• Know What Customers Will Pay: Determine how much customers are comfortable paying for your product. Your research tells you that customers are okay with spending about $40 on a pair of high-quality sneakers.

Read more: Market Research for Retail: 5 Reasons Why It’s Important

2. Cost analysis

Next. calculate all expenses linked to your product to determine the correct retail price. All the fees include the costs of making it, like materials, labor, and machinery, plus shipping expenses to get it where it needs to go. Don’t forget those everyday costs like rent, utilities, and employee salaries, which make up your overhead expenses.

Imagine you’re selling sneakers. After crunching the numbers, you find that producing one pair costs you $20. This price covers everything from making the sneakers to getting them to the stores. Knowing this cost is crucial as it forms the basis for setting your retail price

3. Detemine your desired profit margin

When pricing your product for retail, deciding how much profit you want to make is crucial. This profit margin is like the reward you get for selling something. 

For instance, if you want a 50% profit margin on those sneakers, you aim to earn $10 from each pair you sell. To figure this out, first, you look at how much it costs you to make one pair, which is calculated to be $20.

With a 50% profit margin goal, you’re saying you want to earn half of what you charge for the sneakers. So, if you sell a pair for $40, half of that ($20) covers your costs, and the other half ($20) is your profit.

By setting a clear profit margin goal, you ensure you earn enough money to cover your expenses and make a profit. It helps you stay on track with your financial goals and provides your pricing makes sense for your business. Remember to review and adjust your profit margin goals as your business changes and the market evolves to stay competitive and profitable.

4. Choose a pricing strategy

After researching and setting your profit goal, it’s time to pick how you’ll price your product. We will detail further other commonly used pricing strategies in the next section. For this example, we will use a competitive pricing strategy.

This strategy allows you to price your product similarly to your competitors. However, based on your market research,  you can set your price to be a little lower, the same, or a bit higher than what your competitors are charging. It depends on where you want to position your product in the market.

5. Setting the retail price

This step is where all your planning comes together. After carefully considering how much profit you want and checking out what’s happening in the market, you’ve charged $40 for each pair of sneakers. This decision is a smart move to make sure you make money and stay ahead in the market.

Here’s why this $40 price is a good choice:

• Hitting Your Profit Goal: By selling each pair for $40, you’re ensuring you reach a 50% profit margin goal. For every pair you sell at this price, you’ll earn $20 in profit ($40 x 50%). That’s enough to cover the $20 it costs to make the sneakers and to have $20 left as profit for each pair.

• Staying Competitive: You’ve checked what others are doing in the market. Similar sneakers are being sold for prices between $30 and $50. Picking $40 puts you in that range, making your sneakers attractive to shoppers and keeping you competitive.

• Meeting Customer Expectations: You’ve done your homework on what customers are willing to spend. Your research showed that people are okay with paying $40 for good sneakers. By setting your price at that level, you’re likely to get the attention and trust of potential buyers.

10 commonly used pricing strategies in retail business

Now that we’ve looked at the simple steps of setting up prices in retail let’s look closely into retail pricing strategies. Here, we’ll explore ten commonly used pricing strategies businesses employ to meet various goals and adapt to diverse market conditions. These strategies offer valuable insights into how retailers can maximize profits, attract customers, and maintain a competitive edge.

1. MSRP

MSRP (Manufacturer’s Suggested Retail Price) is the price the product maker suggests for retail stores to sell their products. It’s usually higher than the price the retailer paid for the product, as it includes their profit. Retailers can decide to sell at or below this price.

This pricing strategy is where most retailers begin when setting prices. They look at the cost of making the product, the profit they want, and what other stores are charging.

Pros: 

• Easier to calculate.
• Ensures price consistency.
• Provides a reference point for consumers.

Cons:

• Limits your flexibility.
• Competitors may set a lower price.

Recommended for:

Brands that want to keep the same prices in all their stores, especially in industries where the brand is well-known.

2. Competitive-based pricing

Competitive-based pricing is when businesses decide how much to charge for their products or services by looking at what their competitors are charging. They do this to stay in the game and be competitive. They might have the same price as their rivals, charge less, or go a bit higher.

Pros: 

• Helps win market share from competitors.
• Attracts customers looking to find better deals.

Cons:

• It may lead to price wars in the market. 
• It can lead to profit erosion if not appropriately managed.

Recommended for:

Businesses in very competitive markets where customers often pick products based on price.

3. Cost-plus pricing

Retailers use cost-plus pricing, where they increase an item’s cost to set the selling price. This extra money, known as the markup, is often a percentage of the item’s worth, but it can also be a fixed amount. While this method is easy to calculate, it doesn’t consider what competitors charge for similar products or what customers are willing to pay.

Pros: 

• It’s a straightforward calculation.
• Ensures a consistent profit margin.

Cons: 

• Prices may be too high or too low for customers.
• It may not maximize profits.
• Does not take into account the demands of the market.

Recommended for:

Businesses with stable production costs and predictable pricing environments.

4. Keystone pricing

Keystone pricing means selling a product for double what it costs to make. For example, if something costs $10 to produce, it’s sold for $20. It’s a simple and easy way to set prices.

Pros:

• It’s simple and easy to implement.
• Helps maintain a healthy profit margin.

Cons:

• Doesn’t consider market conditions or customer willingness to pay.

Recommended for:

Small retailers or convenience stores with limited pricing resources.

5. Bundle pricing

Bundle Pricing is a retail strategy where companies group several products and sell them at one price instead of giving separate costs for each item. This strategy means the bundle is considered a single product. Businesses use this strategy to boost sales, clear out inventory, or attract customers with a good deal.

Pros: 

• Encourages larger purchases. 
• Helps introduce a new product.
• Increases customer spending.
• Helps clear excess stock.

Cons:

• Lowers the profit of a particular product. 
• Some customers may not need the bundled items.
• Bundled products may be seen as lower in value.

Recommended for:

Businesses with complementary products, such as fast-food chains.

6. Premium pricing

Premium pricing means a business sells a product or service at a high price. In this strategy, a company concentrates on specific brands, products, or services consumers perceive as adding value in the upper mid- to high price range. The idea behind this is that people often believe expensive items are of exceptional quality and prestige. So, some things can be sold at a higher price while others can’t. 

Pros:

• It can lead to higher profit margins.
• Helps position your product as superior.

Cons:

• The price can result in lower sales.
• May limit the customer base.
• The strategy might not work in price-sensitive markets.

Recommended for:

High-end or luxury brands in industries like fashion, cosmetics, and technology.

7. Value-based pricing

Value-based pricing means setting prices based on what customers think a product is worth. In this strategy, businesses charge fees based on how much customers value the product or service. This approach differs from cost-plus pricing, where prices are determined by adding up the production costs.

Pros:

• Reflects customer preferences and willingness to pay.
• Can make the product or service stand out from competitors.

Cons:

• It’s difficult to calculate.
• Requires a deep understanding of customer preferences and market dynamics.

Recommended for:

Companies with unique or innovative products, where value is subjective.

8. Price skimming

Price skimming means starting with a high price for a product and slowly making it cheaper as time passes. It’s a strategy often used by businesses when entering a market. The idea is to get the most profit early on and then drop the price later to get more customers looking for a good deal.

Pros:

• Captures early adopters and maximizes initial revenue.
• Can help recoup development costs.
• Builds a competitive barrier and discourages others from entering the market.

Cons:

• High prices may discourage customers from making a purchase.
• You may have lower sales.
• Less effective in a saturated market.
• There are legal and ethical concerns when setting a high initial price.

Recommended for:

Companies that are introducing new, cutting-edge products that are in high demand but have limited supply.

9. Psychological pricing

Psychological pricing is a sales strategy that taps into how customers think. Businesses use tricks to make prices seem lower or better value. This marketing strategy takes various forms, such as pricing products just below round numbers (e.g., $9.99) to create the illusion of a lower price. Other tricks include setting artificial deadlines and giving a reference price (anchoring) to make the actual price seem like a deal.

Pros:

• Encourages impulse buying and the perception of a good deal.
• The strategy grabs the customer’s attention.
• It can increase the overall sales.

Cons: 

• This strategy does not necessarily work in all markets.
• It’s not sustainable in the long run.
• There is a risk of losing your customer’s trust.
• Relies heavily on demand.

Recommended for:

Retailers that are targeting cost-conscious or impulse buyers.

10. Penetration pricing

Penetration pricing is a strategy where you start by offering your product or service at a lower price. The idea is to attract customers quickly because your price is lower than your competitors. 

It’s like giving a discount to get more people interested in what you’re selling. Businesses often use this strategy when they’re new in a market or have a new product. The goal is to get more customers and make your business bigger. It’s all about growing and becoming more efficient.

Pros:

• Attracts price-sensitive customers
• Deters the competition due to the low price.
• Helps gain market share.

Cons:

• May not be profitable in the initial implementation.
• It will be challenging to raise the product price.

Recommended for:

When companies launch new products in highly competitive markets, it can be a challenging task. An excellent example of this is the launch of Netflix.

Common mistakes to avoid when setting your price

Setting the right price for your products or services is crucial for the success of your business. To ensure you make informed pricing decisions, here are five mistakes to avoid.

1. Undercutting your competitors

Setting your prices much lower than your competitors is a great idea. Being affordable is good, but setting meager prices can have downsides. Don’t make your product all about being cheaper than your rivals. Remember that your pricing strategy affects how people see the value of your product and your company’s reputation.

Selling your product for much less might mean you don’t make enough money to cover your costs and earn a profit. Undercutting can trigger a price war in the market. If your competitors lower their prices in response, it can lead to a chain of price reductions. This cycle can hurt all businesses and make it hard to stay profitable. 

Additionally, setting prices too low might not work in the long term. Maintaining product quality, investing in new ideas, or offering good customer service can make it challenging.

2. Neglecting value perception

When you decide on a price for your product or service, it’s not only about how much it costs to make or provide. It’s also about what your customers think it’s worth. Don’t set a low price; it can make people think your product or service isn’t valuable. Instead, consider what makes your product unique and what good things it can do for your customers.

For example, if you’re selling handmade, unique jewelry, don’t price it the same as mass-produced items. People are willing to pay more for something special and one-of-a-kind, so price it accordingly to show its real value.

3. Failing to segment your customers

Customers are all unique. They don’t want to purchase the same items and won’t pay the same amount. If you don’t pay attention to these differences, you’ll miss chances to sell more and make customers happy.

One common mistake is when companies don’t create detailed buyer personas. Ignoring this can lead to random and not-so-great pricing plans. To avoid this, you should segment your customers based on what they like and how much they can spend. We call this customer segmentation. Once you know these groups, you can set your prices to fit each group’s wants.

This method helps you fine-tune your pricing plan to please different types of customers. So, you won’t miss out on potential sales, and you can make the most of your selling efforts.

Read more: Creating a Solid Business Plan in 9 Simple Steps

4. Overcomplicating your pricing presentation

Don’t make your prices a puzzle. If your pricing structure is too complicated, it can drive customers away. Instead, keep things straightforward and easy to understand. When you present your prices, make sure your customers know what they’re getting and what they’ll gain from it.

Take a smartphone plan, for instance. A phone company with various plan tiers and hidden fees can confuse and frustrate customers. They might end up switching to a competitor with a straightforward, all-inclusive plan. However, customers will likely pick their plan if the company offers a simple pricing structure. 

5. Not adapting to changing prices

Market conditions change, and you must change with them. You might lose money if you don’t adapt your prices to match how the market is moving or what customers want. Keep an eye on what’s happening, ensure your prices stay competitive, and help you make a profit. Don’t set your prices and forget about them – review and adjust them regularly.

For example, think about a small ice cream shop. In the summer, they might charge more for their ice cream because it’s hot, and people are willing to pay more. But in the winter, they might have to lower their prices to attract customers. They might lose business if they keep selling ice cream at the same high price all year. So, they adjust their prices based on the season and what people are willing to pay. 

Summary

Pricing strategy is essential for your retail business to do well. It’s not just about numbers; it’s about how your customers see your products and how it affects your business in the long run.

In this chapter, we have discussed the nuances of pricing, its distinction from retail price, and how to select the best pricing plan for your products. We have thoroughly analyzed ten popular pricing strategies used in retail and have provided you with the advantages and disadvantages of each. Armed with this information, you can make informed decisions that align with your business objectives and cater to your customers’ needs.

In the upcoming chapter, we will delve into a topic that is often overlooked but crucial for the success of your retail business: customer experience. Creating a positive and memorable customer experience can make your business stand out and encourage them to return.