“ 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.
3. Wholesale
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