Retail Pricing Strategy: Unlocking the Science of Pricing!

Strategizing your products’ pricing to generate more sales without losing profit margins would be best. 

It’s not just you can lower the product pricing to increase the sales revenue; it won’t give you profit. And, then, there are other drawbacks of a low-ticket product. 

On the other hand, you cannot have a pricey product to get more profit from your current sales. Also, you will lose budget-conscious customers and a large share of the market as well. 

At the end of the day, pricing your product is a balancing act! 

If you are starting a small business or even running one, you need to strategize or re-strategize your pricing occasionally. 

There is a mathematical aspect of setting up the price for your products considering your product, market, and consumers. 

Pricing also comes from how consumers perceive the value of your product or the brand. 

There are certain aspects of human behavior, market research, and target customers to direct your decision toward the right pricing. 

Best Retail Pricing Strategies to set the right prices:

Manufacturer Suggested Retail Price ( MSRP) 

MSRP or Manufacturer Suggested Retail Price can be quite evident in its name. 

It is the pricing that the manufacturer recommends or suggests retailers consider while selling the product. 

In this case, the manufacturers of the product you are selling help you develop a standard unique pricing set for all of the products. 

The pricing varies depending on the location and retailers. So your manufacturer, with their set of standards, develops a different price range for all products and all locations and retailers. 

Many retailers, mostly seen with those who are selling consumer electronics and house appliances, prefer to go with MSRP as they are highly standardized products in pricing. 

It helps retailers save a lot of time with all complexities creating value pricing for the products and striking the perfect balance for profits. 

On the other hand, retailers also get disadvantaged as they cannot customize their customers’ pricing to compete against their competitors. 

Keystone Pricing

Keystone pricing is the right-of-the-bat, easy rule-of-thumb pricing strategy for many retailers, making the process easy for them.  

This usually works best when retailers double the cost of wholesale that they pay for that product. 

That helps figure out the retail price of that product. However, this strategy doesn’t always work accurately with various products or industries. 

The downside of this pricing methodology is it might give you too low or too high a cost for your product.  

Again, the best about keystone pricing strategy is giving you the best price for your product, which is ideal for gaining sustainable profit margins and practical for consumers as well. 

All you have to do is be flexible with the idea and compare different sets of outcomes around your actual result. 

For Example:  If your business has a slow turnover and a significant amount of money going into shipping, then it might not be a straight enough equation to get the best result with this strategy. 

In those cases, you might want to use a high markup formula to compensate for the high cost you are losing on a particular end.  Then, you increase your retail price accordingly. 

Ensure you also check the other factors, such as scarcity or in-demand aspects of the product. 

Premium Pricing 

This is another end of the pricing strategy where we are not lowering the price to sell more but instead increasing the price to create a benchmark product. 

Here you will be consciously increasing the competition and the upper pricing limit of the product. 

A premium pricing strategy is about pricing your product at a higher limit to increase the value of your product. 

Basically, you are claiming your product to be above all and make it a prestigious, exclusive, and ideal choice amongst the competition. 

For Example, Starbucks sets their pricing at the high-end premium range where customers idealize them to choose rather than their lower price competitors like CCD or Dunkin’ Donuts. 

It is a psychological and social tendency of people who prefer to opt for a higher-end price product rather than a lower-end even if it takes little effort. 

Pros 

Premium pricing creates this “hypnotizing” effect on your consumers or prospective customers. Due to your high price, they perceive your product as better quality, exquisite, and premium than your competitors. 

Cons 

However, the downside is it can be difficult to create this “effect” on people, especially depending on the product you are selling, the location, physical stores, target customers, and other factors. 

So it is suggested you go for extensive market research on whether premium pricing will be a suitable pricing strategy for your business or not. 

Bundle Pricing 

A bundle pricing strategy is also foundationally called multiple pricing strategies for your different sets of products. 

It is as transparent as the name goes “bundle” or “multiple”. You take a single price and put that for more than one product. 

The bundling of products, you have seen a lot with grocery stores or clothing stores as well. Interestingly, it is not just a pricing strategy but also acts as a marketing strategy for increasing sales. 

For Example, One of the most popular and successful bundle pricing is seen with Nintendo’s Gameboy. The product was sold more when it was bundled with some additional games. 

Pros 

The advantage of bundle pricing is very effective, especially seen as quite profitable in certain sets of sectors.

You create this higher perceived value for products at a lower cost believing customers give out the best value along with achieving high volume purchases.

Cons 

The downside with a bundle or multiple pricing is making things a bit difficult when you try to sell the same product individually later. 

Psychological Pricing 

According to studies, merchants experience pain or loss whenever they spend money. So better a retailer can minimize that, it will be easier for them to spend or make a purchase. 

Well, that really is not possible without cutting off your profit, which is again not practical or sensible, for that matter. 

So, what would you do?

The best thing is to do is to make them feel comfortable making the purchase and create this psychological effect that they aren’t spending a lot.

Again, this makes more sense when they consciously or subconsciously compare your prices with your competitors or the market. 

The psychological pricing effect can be achieved by pricing your product ending with odd numbers such as 5, 9, 25, and so on. 

You take it further by pricing your product at $7.99 instead of $8. This is called the charm pricing of the products. 

According to the book ‘Priceless’ penned by William Poundstone, these charm prices increased sales by 24% on average. 

Pros 

The best part about charm pricing is it encourages impulse purchasing among consumers, especially among passionate buyers. 

Cons

The downside with psychological pricing happens with luxury items, where charm pricing can harm your brand’s perception. 

It gives away the idea that your products aren’t really effective and making great sales, so you have to use such strategies in your favor. 

Anchor Pricing 

Since you get the idea of psychological pricing strategy, this is another in the similar zone where you price your product on some similar grounds. 

In the anchor pricing strategy, retailers put both the actual and the discounted prices to the consumers to use a favorable comparison. 

Retailers anchor the current price to its higher-end price supposed to be “original” for customers. 

This gives the consumers the sense of a profit they are making while choosing that product, supposing they are saving on this product by buying it at lower pricing. 

Anchor pricing strategy is also called reference pricing, where customers have a better price in comparison, making the deal desirable. 

The method roots in the psychological trigger called anchoring cognitive bias that people have. The concept goes even further down the lane, further utilized by brands and marketers to make more sales. 

Pros 

The best and simple thing to understand here about the advantage of anchor pricing is that people get influenced when they see the product’s original price higher than the offered discounted price. 

Cons

If your mentioned original price is unrealistic, it can go against you. People lose trust in your brand, or it simply affects your brand’s perception. 

It shouldn’t be something unreasonable as people can always check the competitor’s higher-end price lists. 

Retail Pricing 

Retail Pricing is the simple pricing strategy that is profoundly decided by the retailers themselves, utilizing the best strategy they fit. 

Usually, they go with keystone pricing, which was discussed earlier as to be a straight and simple retail pricing strategy to choose from. 

It is evident why it is preferred or so popular amongst the retailers making their pricing strategy for the products they sell. 

Following is the easy-to-use formula for this in-house retail pricing : 

Retail Price : [(Cost of product)  ÷ ( 100- markup percentage)] x 100

For Example :  

If you are a small business selling your product which costs you $20 to get it ready at a 45% markup, here’s how you will price the product 

Retail Price = [ (20) ÷ ( 100 – 45) ] x 100 ]

        = [ 20 ÷ 55 ] x 100

        =  $36 

Competitive Pricing 

As you can guess, a competitive pricing strategy is about pricing your product based on competition in the market. 

Here you will be pricing your product based on all the data you get from your competitors on their pricing. 

This conscious pricing method against your competitors considers their price as a benchmark where you will price yours below that. 

The strategy simply here is the focus on competing against your successful competitor. Your game here is to outprice their product. 

It will influence your price-conscious consumer market to choose your product over theirs. 

The competitive pricing strategy is quite the opposite of the premium pricing strategy in many ways. 

Pros  

This is really an effective pricing strategy where your suppliers, distributors, franchise, or retailers can actively promote your product due to the high margin they receive on it. 

On top of that, it helps you negotiate better over cost per item. 

Cons 

Not very unlikely to understand why this pricing strategy could go wrong. It becomes difficult to sustain amongst your competitors as you have to survive with a low-profit margin here. 

Not to forget, the strategy can also be used against you in this by your competitors. 

Also, customers might not prefer the lower-end cost of a product you sell or won’t go beyond a point. 

Loss-Leading Pricing 

You’ve already been to the other side of this spectrum.

As a consumer, everyone has that experience where you visit a store with a promised heavily discounted primary product and come out buying others with it. 

Now, even with the discount on your primary product you went to buy in the first place, you bought more than you have saved by buying another two-three product along with it. 

Well, right there, that’s loss-leading pricing. 

Keep aside your feelings; this isn’t just a powerful pricing and effective marketing strategy. 

Here you will attract your customers by providing heavy discounts on a popular or high-selling product and then encourage customers to buy along with it. 

This often relates to the bundle pricing you get to introduce earlier, where customers are encouraged to buy more products under a single price. 

Pros 

This is among retailers’ most effective pricing and marketing strategies, especially in grocery and other markets. 

Encouraging your customers to buy multiple products in a single transaction increases your overall sales per customer. 

Also, it will cover any loss you will bear from the price cutting on the original product as well. 

Cons 

When over-using the loss-leading prices, customers expect higher bargaining and become reluctant to pay the total retail price. 

Penetration Pricing 

Discounts and offers are amongst the best pricing strategies for all retailers across different markets. 

Coupons, sales, seasonal pricing, and such offers heavily attract shoppers. 

Discount pricing strategy is when you price your products with various discounts and offers to attract more customers. 

Such pricing strategy is also called penetration strategy, which helps stores to offload their unsold inventory.  

It primarily targets more price-conscious customers and increases foot traffic to your retail store as well. 

Pros 

The discount pricing or penetration pricing strategy is highly effective in driving massive foot traffic to the retail store, especially in removing all the old inventory. 

Cons

Too much utilization of this penetration pricing will make it look like a bargain retailer. It also makes customers reluctant to purchase the product at their original costs. 

How To Price Your Products For Your Retail Small Business? 

Indeed, you have seen various retail pricing strategies to price your products in the best way possible. 

These different pricing methodologies or strategies are unique; their application works differently depending on your product, market, or brand. 

But you also need to understand that no single pricing strategy can work for all kinds of products. 

You have to use various permutations and combinations to find out what works best for your product. 

Intelligent Pricing Strategy

To take your pricing strategy to an advanced level, you must adopt an intelligent pricing strategy for your business. 

Intelligent pricing strategies study the market, leverage market research, market data, and analysis to optimize the prices to remain the leading brand amongst competitors. 

It focuses on the market price of all the products that are competing against you. It primarily ensures you don’t lose your potential profit to stand in the competition.

A balance is required in pricing strategy in the market against your competitors.  You cannot lose your profit in the quest for higher sales. 

POS System

The Point-of-sale system you choose is highly significant in the pricing strategy of your product.  

You get all the data from the POS system to track and analyze the best-selling products, number of sales, returns, and other essential data. 

All these reports help you effectively develop strategies to price your product in the best way possible.  

Have a look at the Best POS Systems To Buy.

Factors Affecting Markup 

In the traditional sense, retail products even have been marked up with 100%; you have seen this with the keystone pricing strategy in default used by retailers. 

But it would be best if you determined whether keystone pricing fits your product or market. You must check that before you lock the markup.  

You must be able to adjust your markup to achieve better profit margins. The demand for the product also affects the markup you will set. 

So there are many moving parts you need to work with, so be careful not to lock anything under a specific pricing strategy, especially with traditional keystone pricing. 

Setting Up The Right Price 

Setting up the right price for many small businesses becomes significant to survive in the market. It can actually determine your growth as a business. 

So you can start by studying and analyzing all the pricing strategies and how you can benefit from them. 

Make sure you adapt state-of-the-art POS systems for your business to make the right choice when it comes to pricing.

Experimenting With Your Pricing To Capture More Market Share 

The most common misconception about pricing your product amongst most small business owners is – lower pricing products lead people to buy it more, increasing sales. 

Well, that’s the trap to start with! 

According to Seth Godin, you can certainly race to the bottom to win, and you might as well, which will be the worst part of it. 

Lowering the price of your product strategically has a fair share of advantages and surely increases your sales. 

Pricing Product & Consumer Surplus 

It helps reduce the consumer surplus, i.e. money left on the table for consumers willing to buy products at different price points. 

Consumer surplus is the difference between what consumers pay and those willing to pay. So reducing cost means reducing consumer surplus. 

Maximizing Profits Even With Capturing More Market Share

Capturing more market share for your product and maximizing the profits simultaneously brings you to price elasticity. 

Price elasticity measures the correlation between the number of items in demand and the difference in their price. 

The Problem Comes  With Price Elasticity 

The “elasticity” of the price refers to significant change requirements in response to the demanded quantity of the product. 

For Example 

Suppose you have 1000 customers purchasing your product. Now, when you test different prices for the product, you see different conversion results. 

Interestingly, the sale volume for all price points also fluctuates. 

So, with this particular number of consumers, you can calculate how much sales revenue your business generates at different price points. 

At a significant level, this is a great way to decide your product’s “base” price. 

Now, the only problem with this price elasticity is the large number of consumers who bought the product at a certain price point. 

You cannot ignore that significant amount of total revenue. 

That’s why you need to figure out on the basis of how much you can gain or lose and stick to the price point accordingly. 

Long-Term Product Pricing Strategies For Sustainable Profit 

You now have different pricing strategies to price your retail products to achieve larger profit margins and higher sales revenue. 

It cannot be certainly considered a long-term solution for sustainable profit from your business. 

The pricing strategies or anything working for you right now can be challenged or depleted over time. 

So to ensure long-term sustainable profit for your business, you must pursue product pricing accordingly. 

The best way to do that is to start experimenting with your pricing and see what dynamic strategies can work in the long term. 

Leveraging Seasonal Promotions & Discounts 

The three primary advantages of seasonal promotions & discounts are : 

1. The large influx of sales revenue in a short time 
2. Giving you brand awareness and attracting new potential customers for future
3. Compensating for any shortcoming in your total yearly sales revenue 

Nothing better attracts customers than seasonal discounts and promotions. You can even attract customers by offering free shipping for your products. 

Analyzing Your Current Pricing 

The worst possible thing that can go with the pricing strategy you are currently following is not able to cover your overhead expenses, far from getting any profit. 

Well, you need to look hard at your current overhead expenses, enlist them and calculate how much you are giving in on a monthly basis. 

Overhead expenses can include rent, packaging cost, marketing cost, manufacturing cost, shipping cost, staff salaries, utilities, website maintenance costs, etc. 

You have to actively make decisions with your pricing strategy to cover all these to make it to the level of profitability. 

Adapt From Your Competitors

The first rule of adapting from your competitors is to model it, adapt it, not copy it. Many small business owners make that mistake with their pricing strategy. 

Looking back to the market and picking up the pricing trends is essential, but you need to see how it serves your product or business. 

You need to be aware of employment rates, stock market changes, and other factors that affect the market. 

It also affects how much your customers are willing to pay for your product; having a competitive advantage in the marketplace becomes necessary.  

You must adapt to the market and customer demands; otherwise, people will choose others over you. 

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