Retail Pricing Strategies to Increase Profitability
Many factors influence a retailer's bottom line, including properly priced products that hit the sweet spot of maximizing unit sales without sacrificing on profit per unit. Understanding your business cost structure and choosing the right pricing strategy are crucial steps toward achieving your profit goals. Many pricing strategies exist, and it may be wise to experiment when you price products until you find a strategy that works the most effectively for your business.
Product Cost and Profitability
Before you can determine which retail pricing strategy to use in determining the right price for your products, you must consider the product's direct costs and other related expenses. These two key elements of overall product cost are termed cost of goods and operating expense.
The cost of goods includes the amount paid for the product, plus any shipping or handling expenses. If your company manufactures the product, the cost of goods also includes the cost of any direct labor to produce the item. The expenses related to operating the business, known as operating expenses, include overhead items such as advertising, payroll, marketing, building rent, and office supplies.
Regardless of the pricing strategy used, your product's retail price should more than cover the cost of buying and producing the goods and the expenses related to operating the business. As a retailer, you won't make any profit and your business won't succeed if you sell your products below their cost.
Retail Pricing Strategies
Once you have clarity on what your products actually cost, look at how your competition prices their products to establish a benchmark for your price. As a retailer, you also need to examine your channels of distribution, such as online sales through your own website, via brick and mortar stores, and through other vendors.
Before setting any pricing strategy, it's also useful to research what the market is willing to pay or has paid for your product and similar products.
Many useful pricing strategies exist to tweak and refine your product prices, and each has its own particular set of circumstances. As you develop the best pricing model for your retail business, understand the ideal pricing strategy will depend on more than costs. It also depends on good pricing practices.
The percentage markup on retail is determined by dividing the dollar markup by the retail price. For example, if your markup is $20 and your product retails for $40, your percentage markup is ($20 / $40) = .50 or 50 percent.
You'll want to keep your markup high enough to allow price reductions and discounts, cover shrinkage (theft) and other anticipated expenses, and still achieve a satisfactory profit. If you retain a varied product selection, you can use different markups for each product line if needed.
Manufacturer suggested retail price (MSRP) is a common strategy used by smaller retail shops to avoid price wars and still maintain a decent profit.
For any products you resell, you'll find some suppliers have minimum advertised prices (MAP) and may not let you continue to sell their products if you try to price below their MAP.
The supplier may also suggest using an MSRP for your retail pricing that's higher than MAP. By pricing products with the suggested retail prices supplied by the vendor, it takes the retailer out of the decision-making process. An issue with using preset prices is that it doesn't allow a retailer to have any price advantage over the competition.
Consumers have many choices and are generally willing to shop around to get the best price. Retailers considering a competitive pricing strategy need to provide outstanding customer service to stand above the competition.
Pricing below competition simply means pricing products lower than the competitor's price.
This strategy works well if you as a retailer can negotiate the lowest buying prices from your suppliers, reduce other costs, and develop a marketing strategy to focus on price specials.
Prestige pricing, or pricing above the competition, may be considered when your location, exclusivity, or unique customer service can justify higher prices. Retailers that stock high-quality merchandise that isn't readily available at other locations may be quite successful in pricing products above their competitors.
Psychological pricing is a technique of setting prices at a certain level where the consumer perceives the price to be fair, a bargain, or a sale price. The most common method is odd-pricing, which uses figures that end in 5, 7 or 9, such as $15.97. It is believed that consumers tend to round down a price of $9.95 to $9, rather than $10.
Other Pricing Strategies
Keystone pricing involves doubling the cost paid for merchandise to set the retail price. Although this was once the rule of pricing products, more intense competition and the continually changing retail landscape have driven some retailers to use methods other than Keystone. However, stores selling higher-end goods with less sensitivity to price may still use keystone, and set it to 2.6 times a product's cost, for example.
Multiple pricing is a method that involves selling more than one product for one price, such as three items for $1. Not only is this strategy great for markdowns or sales events, but retailers have noticed consumers tend to purchase in larger amounts when they use multiple pricing strategies.
Merchandise priced below cost is referred to as a loss leader. Although retailers make no profit on these discounted items, they hope the loss leader brings more consumers into the store who will purchase other products at higher margins during their visit.
It is difficult to say if any one component of pricing is more important than another. Ultimately, the right product price is the price the consumer is willing to pay while providing a profit to the retailer.