“ The essence of strategy is choosing what not to do.” Michael Porter.
Pricing is one of the oft forgotten elements of new business, as when you are first getting started there's a focus on shifting any units at all being more important than shifting X number of units at $Y to account for Z, A, B C, which will ultimately allow you to put more staff on, increase output, take regular holidays, and retire to a small but tasteful castle in the South of France.
Your business is unique in some way (and if it isn’t, it should be), but when it comes to pricing there are a number of primary strategies you can look to implement. Whether you’re just starting out or have been in business for years, it doesn’t hurt to look at pricing with fresh eyes. A just because pricing at your place of work has always been done one way is no reason it should continue to be the case.
Outlined below are nine pricing strategies and tools you can use.
1. Keystone Pricing > Retail Pricing
Keystone pricing is the most simplistic retail strategy, as you essentially double the cost of the product - setting a healthy profit margin. Many businesses use this as a starting point then mark up your products higher or lower until you find the level that your customers find palatable and your creditors don’t find tear-inducing.
Adjusting your keystone price in this way allows you to find your retail price.
Here is an easy formula to calculate your retail price:
Retail Price = [(Cost of item) ÷ (100 - markup percentage)] x 100
To illustrate, A product that cost $10 to make would keystone to $20. You then toggle the markup to 45% of the keystone. Here's how you would calculate your retail price:
Retail Price = [(10) ÷ (100 - 55)] x 100
Retail Price = [(10 ÷ 45)] x 100 = $14.50
While this is about as simple as a markup formula can get, this pricing strategy doesn’t work for every product in every retail business due to the unique mix of business challenges and opportunities your business faces.
2. Manufacturer suggested retail price
I may have lied when I said using Keystone pricing was the most simplistic pricing strategy. Please don’t hold it against me. As the name outrightly states, using the Manufacturer Suggested Retail Price as your retail strategy takes all of the calculations out of your hands. This is often used with highly standardised products - think specific electronic branded goods, or items like books - which can even come printed with the MSRP on the back.
The pros of this strategy: don’t waste any time calculating price.
The cons: unable to compete on price if your competitors opt for the same strategy.
When selling business-to-business (B2B), you will need to work out your wholesale pricing. Retailers sell their products at a discounted price to another business to allow for resell to their own customers. This can increase a brand’s reach and introduce its products to new audiences, while also reducing the “hassle” of selling to business-to-consumer (B2C).
Start by calculating the Cost Of Goods Manufactured (COGM)
Total Material Cost + Total Labor Cost + Additional Costs and Overhead = Cost of Goods Manufactured
From here, you add a margin built around an assumption of higher quantity order sizes.
Pros: when selling wholesale, it will be at a lower price but a higher quantity, and you can take advantage of economies of scale (ie, freight prices, reduced packaging, less individual handling
Cons: Not appropriate to all goods. If your reseller's sell at a very low price, it can impact your retail offerings.
4. Multiple pricing/Bundle Pricing
While this strategy has been implemented successfully in grocery and clothing stores and many other sectors, one of the most famous examples of multiple or bundle pricing has been with the Nintendo’s 64 and Gameboy devices, and associated games. For those too young to remember or unfamiliar with gaming, retailers bundled the devices with games, additional handsets, and merchandise to shift more units.
It was a hugely successful strategy, selling more units in bundles than alone.
Pros: Consumers feel they are taking advantage of the greater value on offer, which can drive larger sales figures.
Cons: If a product is known to be bundled at a lower cost, it can be difficult to unbundle it, or sell it individually at a comparable lower price.
5. Penetration pricing and discount pricing
“Penetration pricing” is a fantastically aggressive name for a strategy that involves stabbing your way into a market with low prices. Once in, you try to sell more units than your competitors and get a foothold. This is a particularly effective strategy for new businesses. Once established, you can choose to raise prices.
Discount pricing is a similar strategy, cashing in on the fact that shoppers of nearly every ilk love sales, rebates, coupons, seasonal pricing, and any other possible excuse for a markdown.
Pros: Great way to attract a large amount of foot traffic, enter a new market, and offload out-of-season or aging stock.
Cons: To be used sparingly, or this strategy could give you a reputation of being a bargain retailer and could hinder consumers from purchasing your products for regular prices (this is obviously fine if you are a bargain retailer, but if so, one would hope you have a market advantage to benefit from the lower price/higher levels of stock approach).
6. Loss-leading pricing:
Unless you have an iron will and laser focus, there’s a good chance you have walked into a shop, enticed by the reduced price of a single item you want. While you’re in there (most often whilst you are in the queue waiting to pay) you grab other items. You pay and walk out, satisfied that you’ve made a killing with your nose for a deal.
There’s a good chance you’ve just been bamboozled by a loss-leading price strategy.
The goal here is to increase the average transaction size, and make up the “lost” revenue through the shifting of these peripheral items.
Pros: A great tool for retailers. Generates greater foot traffic and sales.
Cons: Much the same as discounting strategies; if overused customers come to expect bargains and will hesitate before paying full retail price.
7. Psychological pricing: Anchoring and Charm Numbers
A strategy relying on old notions in psychology. Anchoring refers to a tendency for people to use the first piece of information they learn about a subject. It is difficult for many to shift this original notion, and they tend to cherry pick further information on the subject in a way that solidifies their original opinion.
From the point of pricing strategy, a retailer lists both the discounted price and the original price to establish side by side. The perceived savings the customer is making, compared to the original price, pushes the customer to purchase, irrespective of the accuracy of the “original” price. A customer may even have no intention of buying an item, seeing it as a needless purchase, but when they are making a bargain compared to what it “usually” sells for, this suddenly makes sense.
Anchoring can also be achieved by placing an item besides a higher priced item.
Cons: if the anchor price is too high, the customer will distrust your brand. Modern customers can easily price check against your competitors, so if your product is available everywhere, this may not be the best strategy for you.
This is a deceptively simple strategy, backed up with academic research. Essentially, humans feel like they are securing a deal if they buy a product that ends in a “charmed number”. There’s no need to list these numbers now, because the most important (and powerful) number is 9. You know that items in all sales categories are listed as $14.99, $999.99, $2999.99 and so on. One study showed that when consumers were offered jeans at $34, $39, or $44, they overwhelmingly chose the one ending with, you guessed it, 9.
Do you think it’s by chance there are 9 items on this list of strategies? (It is, we aren't that clever)
Pros: Tends to trigger impulse purchasing. People instinctively feel they’re getting a bargain and this can be tough to resist.
Cons: Depending on your sector, it can work against you. In luxury goods, an item listed as $999.99 might be perceived to be on sale and perhaps damaged or out of vogue.
8. Competitive pricing
Use your competitors price as the benchmark and undercut it. Many businesses make this the core of their marketing ethos and become famous with slogans such as “If you find a cheaper price, we’ll beat it by 10%!”
This strategy captures price conscious consumers, but can have the obvious negative impact of generating a “a race to the bottom” as competitors try to outdo each other.
Pros: Can become a point of differentiation if you can sustain it. Can also be used to negotiate a lower cost with your suppliers whilst cutting costs and actively promoting your special pricing.
Cons: Lower prices=lower margins, which puts the onus on you to make this up by shifitng more stock. This is not a great option for smaller players, and as such is often not a viable strategy for them. Also, depending on the product, customers may not reach for the cheapest product on the shelf.
9. Premium pricing
Instead of racing to the bottom and differentiating on price, premium pricing pushes the other end of the spectrum. Due to an actual or perceived higher quality, speciality, or strength of brand, you charge a higher price. Depending on your sector, this can be a highly profitable play, catching both people within a target demographic, and also aspirational purchasers who wish to highlight the fact they can afford the best.
Pros: Pricing strategy strengthens brand and can have a “halo” effect on your other products
Cons: Not appropriate for all products and goods. Will miss the price sensitive elements of the market. Can be difficult to implement, depending on your stores’ location and target customers. As with all strategy, your research will be vital for success.
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Remi AI is an Artificial Intelligence Research Firm with offices in Sydney and San Francisco. We have delivered inventory and supply chain projects across FMCG, automotive, industrial and corporate supply and more.
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