Before you can start selling your products, you need to decide what they’re worth.
There’s a lot that goes into this calculation and an effective pricing strategy is needed to ensure business success.
This guide will explain the importance of competitive pricing in the retail industry.
Pricing is the process of determining the amount that a customer will be charged for a product or service. Setting the appropriate prices for your goods requires striking a balance. A cheaper price isn't always the best option because the product could sell well yet not make any money.
Similarly to this, a retailer may experience less sales and "price out" more frugal shoppers when a product is priced too high, therefore losing market positioning.
Every small business owner must ultimately evaluate the best pricing plan for their specific objectives. Retailers must consider various elements, including manufacturing costs, consumer trends, revenue targets, funding possibilities, and the prices of competing products on the market.
Even then, it’s not all about numbers. Human psychology also has a role to play in the decision-making process. A study has found that when it comes to simple purchase decisions (where there are few factors to consider) consumers are likely to come to a rational fact-based decision. In contrast, when the purchase decision is more complex (a lot of factors to consider), the decision-making can be driven more by emotions.
This brings an added psychological element to a pricing strategy. An example of this could be when a person buys an expensive watch because it's a limited edition.The high price can later be justified logically by looking at the quality of workmanship and materials used.
Let’s run through the six most common pricing strategies that small and medium retailers adopt.
Cost-plus pricing refers to simple marking up pricing. In this scenario, you make the product and add a fixed percentage on top of the costs. The price is then the cost it took to make the product plus the percentage.
Competitive pricing is more market-driven. In this strategy, you take a look at direct competitors as a benchmark price then deliberately undercut their price for your products. This strategy is useful if your retail products are quite similar to everybody else's, meaning price may be the only differentiating factor.
Value-based pricing focuses on what the customer perceives the value of the product to be. This relies on market research to understand the target audience’s expectations for product price. This can be a beneficial tactic for specialised products that customers deem to be of high-value, but that don’t actually cost that much to make.
Value-based pricing is common in markets where a product enhances a customer’s self-image or offers a unique life experience. For instance, Gucci t-shirts probably cost around the same to make as any other department store, but they can charge a lot more due to Gucci’s perceived value with the customer.
A price skimming approach is when you set your starting price as high as your target market can bear before gradually lowering it. You meet the demands of the first, eager customers while there isn’t much competition for your product. As you cut prices, you entice a new, more price-conscious consumer base.
The goal is to drive more revenue while demand is high and competition is low. The strategy only works if you have an in-demand product that people are willing to pay high prices for.
This strategy involves offering products in a sale at discounted prices.
While a sale may impact your profit margins, it can be a great way for retailers to attract new customers, get traffic to your site or store, and offload unwanted inventory. It can be a great way to attract attention for new brands entering a market.
In order to establish a reasonable profit margin, retailers who use keystone pricing simply double the costs they paid for a product. This creates a simple marking up formula similar to cost-plus pricing
Using keystone pricing tactics can work out for your business, though sometimes it results in prices that are too low or too high.
Each pricing strategy listed above has a list of potential pros and cons. There are other pricing strategies beyond this list, including psychological pricing, anchor pricing, and economy pricing. Ultimately, the best pricing strategy will depend on your business context.
Your financial data is the primary source of information driving your pricing strategy. You must first and foremost be aware of the costs associated with producing your goods as a retailer.
You’ll need to analyse these costs continuously to sustain long-term profitability and be able to respond rapidly to changes.
External factors are also integral to understand. Know your clients, your market, and your competitors. New trends, supply chain issues, and even altered perceptions of your brand can all force you to make a quick adjustment to your pricing strategy.
Finally, the pricing strategy you choose will depend on your short and long term goals. Pricing strategies should not always be about maximising profits.
Penetration pricing may serve its purpose, but how long could you last without making as much profit? Value-based pricing may be something to aim for in the future once you have built a solid reputation.
No matter what strategy you opt for, keeping track of your finances is imperative to business success.
You’ll want to make sure you’re using reliable accounting software to keep track of relevant data and watch those profit margins.
You can manage your cash flow and track sales data in one location with the help of QuickBooks.
Armed with this information and a quick holistic picture of your business finances, you can make better-informed decisions about your all-important pricing strategy.
Sign up for our quarterly newsletter and receive educational and interesting content straight to your inbox.
Want more? Visit our tools and templates!
