How to Price a Product for Retail Business Beginners

Posted 4 years ago by Max Komonov

When starting a听new retail business the听first question all business owners come across is: how should I听price a听product for听retail? The truth is, there isn鈥檛 always a听straightforward answer. To听be听successful, you鈥檒l need to听find the听pricing strategy that works best for听your business in听particular.

To听make sure you are pricing your products correctly, there are common strategies retail businesses use and听a听variety of听factors that you should consider before you adopt a听single pricing strategy.

It听is听more than just your desired profit margin. Having an听understanding of听various pricing strategies and听your business鈥檚 overall profit strategy will help you strategically price products that make your customers want to听purchase.

What is听a听Pricing Strategy?

A听pricing strategy is听simply a听formula that helps business owners know how to听price a听certain product. Having one is听necessary for听any听successful business. There are multiple things to听consider when coming up听with your overall pricing strategy:

The type of听products and听the听product costs.
Your brand and听the听perception you want customers to听have about your business.
Overhead costs.
Long-term profit goals.
Marketing and听customer psychology.
How many customers are willing to听pay.

All these things need to听be听considered when creating and听implementing a听working pricing strategy. The types of听products you sell and听the听product costs will be听a听big factor. If听you sell a听variety of听products, then you will need to听do听some research on听what pricing strategy works best for听each type of听product.

For instance, if听you have a听big general store that sells high ticket items like furniture or听electronics and听also some smaller items such as听stickers or听small nik naks, you wouldn鈥檛 have the听same strategy for听each of听these products. You would need to听mark up听the听smaller items much more than you would the听bigger items.

Also, consider your brand鈥檚 image when adopting a听pricing strategy. Some brands will take the听premium approach and听make their packaging and听products have a听more premium look even if听the听products are the听exact same as听a听product you could find at听Walmart. You can price items much higher if听you have a听premium brand strategy.

This isn鈥檛 to听say that everyone should go听the听premium brand route because you can price your products higher. With premium branding you will have higher overhead costs with marketing and听having better customer service and听experience, which in听turn justify the听higher costs per item.

With any听business, you should have long-term goals for听each aspect of听your business, including profit. If听you have a听long-term vision, it听will help you decide what pricing strategy is听right for听you and听your business.

Lastly, a听pricing strategy is听more than just making sure you turn a听profit. There have been countless studies on听consumer psychology and听pricing. You will need to听balance your pricing strategy with consumer psychology. For instance, discount pricing can be听a听great strategy, but if听done too much it听can make a听customer perceive your products as听lesser quality even though it听may be听the听same exact product someone else is听selling at听a听higher price.

Pricing Strategies

There are multiple product pricing strategies and听a听variety of听factors come into each individual business owner鈥檚 goals and听strategy. Deciding on听your final price will depend on听your desired profit margins for听each product, your overall revenue and听how much profit you want your business to听generate, and听your brand鈥檚 image. You will need to听add up听the听material costs it听takes to听run your retail business, such as听wholesale costs, marketing costs, and听shipping costs.

You will need to听price products high enough to听cover these costs while also having enough left over to听keep your business profitable. Once you determine a听fair price that will make you profitable, you can consider some psychological pricing strategies to听help you sell your products at听higher prices.

There are multiple ways to听go听about doing this, here are some product pricing strategies that you can test out and听see what may work best for听your business:

Keystone pricing

When pricing products the听first thing you want to听keep in听mind is听your profit margins. Keystone pricing is听more of听a听rule than a听pricing strategy. Before moving onto the听other product pricing strategies you will want to听figure out your final price first. This requires you to听consider the听material costs associated with bringing the听product to听the听market, getting the听product in听front of听the听customer, and听finally getting the听product in听the听customer鈥檚 hands.

Keystone pricing is听a听simple percentage markup formula. First, You add your costs, this includes, the听cost of听the听wholesale price, marketing costs, shipping costs, etc. Second, add your markup percentage, this is听the听percentage of听the听costs you want to听get back. Using this formula is听a听good starting point, then you can decide to听try out some other strategies to听see if听you can get a听higher conversion rate or听increase your profit margins.

Bundle pricing

Bundle Pricing is听often used by听retailers to听sell multiple items. With bundle pricing you get two main benefits, selling more products and听the听ability to听list single products for听more. This is听often used in听grocery stores to听try and听get customers to听purchase multiple of听the听same item. Bundle pricing is听set up听where the听item is听cheaper when purchased in听connection with multiple of听the听same item or听when purchased with another item.

For example, say you are selling a听pack of听pens and听highlighters together for听$12.00听and听then selling each separately for听$7.00. Your customer is听more likely to听purchase these as听a听pack because they would be听getting each for听$6.00. By听bundling these two products together, it听then justifies raising the听price for听the听individual item by听$1.00. This strategy will get your customers to听purchase more products and听let you increase your profit margin on听the听individual items when sold separately.

Premium pricing

This product pricing strategy can be听risky but worth it. If听you can sell your brand as听a听high-end premium brand you can ask for听whatever price you want for听your products. This may not be听the听best route if听you are starting your first business. It听takes a听lot of听smart marketing and听sales tactics to听pull this off correctly.

You will need to听watch the听market trends for听the听particular product. If听everyone else in听the听market is听using a听discount pricing strategy, this would be听a听great opportunity to听come in听with a听premium brand. It听would give you a听competitive advantage because the听perceived quality of听your products would be听much higher.

Anchor pricing

is听a听great pricing strategy that sets up听price expectations for听your products and听makes the听middle-of-the-row item a听great option by听utilizing customer psychology. Anchor pricing works best when you have various price points for听certain products. You will want to听lay these options out on听your sales page in听a听way that a听customer will see a听higher-priced item and听a听lower-priced item. The product you are anchoring will be听priced in听the听middle of听these two products.

Most customers will choose the听middle option, in听their minds it听is听the听optimal price. They will not want to听pay top dollar for听the听product, and听they may believe that there is听a听quality problem with the听cheapest option. This common consumer analysis makes your middle option the听most attractive option.

You can do听this either with products or听services on听your own store, but you can also do听this by听listing competitor鈥檚 prices on听your page. You will need to听be听careful with listing your competitor鈥檚 on听your own page, make sure your product stands out enough that customers will believe that your product is听clearly the听best option for听their money.

Charm pricing

Another product pricing strategy that focuses on听customer psychology is听charm pricing. There have been studies done that would list products at听various prices to听see which numbers attracted more sales. Odd numbers were found to听perform the听best, and听the听number 9听was the听best performer.

This is听why many products are priced using .99, the听reasoning is听that customers will normally focus on听the听first number rather than the听last. So听if听something is听priced at听$5.99听it听would sell better than if听you rounded it听to听$6.00. This sales strategy is听subtle but has been proven to听be听effective.

Penetration pricing

Penetration pricing might be听one of听the听best product pricing strategies for听new products. The strategy requires you to听reduce the听product price when it听is听introduced to听the听market. This discount pricing allows you to听gain market share with the听new product. The idea is听that you are trying to听penetrate the听market and听get your product and听brand on听customers鈥� radars. You will have reduced profit margins in听the听short term, but once you gain traction you can raise the听product price.

Manufacturer suggested retail price (MSRP)

In听some cases, retailers will list products at听MSRP, or听retail price. The MSRP is听the听price that the听manufacturer suggests the听price should be听for听the听products they make. This strategy is听used in听certain instances, sometimes bigger retailers have agreements with the听manufacturer that require them to听use a听specific retail price and听have some situations where they can offer discounts.

Another instance is听when you have a听good amount of听traffic and听you just want to听stay at听a听competitive price point. There may not be听an听agreement between you and听the听manufacturer as听to听price, but you go听ahead and听list it听at听the听retail price because it鈥檚 industry practice or听you may want to听test the听product before deciding on听another pricing strategy.

No听matter what strategy you go听with, at听the听end of听the听day, it鈥檚 always good to听understand the听landscape and听start with a听plan. The plan might change as听your business scales and听grows and听that鈥檚 okay! The important thing is听to听keep getting out there, seeing what works and听what doesn鈥檛, and听working from there!

听

About The Author

Max has been working in the ecommerce industry for the last six years helping brands to establish and level-up content marketing and SEO. Despite that, he has experience with entrepreneurship. He is a fiction writer in his free time.

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