How to Determine Your Retail Pricing Strategy

Retailers Pricing Strategy: How to make sure your next new product is priced to sell.

What constitutes an effective pricing strategy?

At first blush, one might assume pricing strategy is all about setting a price that earns your retail business the most revenue possible. The goal being to set the maximum price the market will bear. Certainly, securing a good number is high on the list of goals.

However, the most effective retail pricing happens when retailers find the right middle ground with their customers. In other words, both parties are satisfied with the price set and the value of the transaction. The customer feels the cost for goods is fair. The retailer earns a nice profit on the sale.

Sounds simple enough right? Well, like most things in retail, pricing is rarely as easy as it might seem. In fact, failing to establish a sound pricing strategy is one of the most common mistakes retailers make, and the repercussions can be devastating in terms of sales and profit.

Think about it in terms of the timeless adage, “you never get a second change to make a good first impression.” If you alienate customers from the get-go with pricing that they feel is too high or doesn’t match the value of what you’re offering, you rarely get another opportunity to change that perception.

Conversely, if you price an item too low and suddenly find that it’s flying off shelves and considered a ridiculously great bargain by customers, it’s often too late to realize that you could have increased your profit margin by setting a slightly higher price.

Factors determining pricing strategies and methods.

Not every retail business has the same goals. Some are looking for quick, short-term growth. Many are looking to build long-term, gradual success. Before pricing any product or establishing any strategy, it’s important for a business to examine the factors that will help determine the right pricing strategy. They come in two primary categories – internal considerations and external considerations.

Internal considerations

Generally speaking, these are the business and sales factors that are under your control. At the very least, they are considerations you can impact. For example, the cost of manufacturing a product is an internal consideration. How you distribute products to market (shipping to stores, warehousing, etc.) is an internal consideration, as is the amount you invest in advertising and promotions. It’s important to gauge these costs prior to determining pricing, because you already know that your margins must first meet these costs before turning a profit.

External considerations

These are elements of doing business that, for the most part, remain out of your control. These might include the pricing strategy of your competition or the current state of the economy. Obviously, the COVID-19 pandemic represents today’s most pressing external factor. This crisis has impacted all of us and virtually every business market, with retail being no exception. While COVID-19 is an extreme example, external factors are important to consider and, better yet, anticipate, when building a pricing strategy.

Five common (and very different) pricing strategies

Imagine you’re introducing a new product. You’ve examined your internal and external factors, so you have a pretty solid lay of the land in terms of your cost of doing business. Now, how do you determine the best pricing strategy? One that makes both customers and your bottom line happy? What follows are a few typical methods a business might use to help set a product price.

1. Penetration pricing

This strategy is most often used to launch new products and brands. The idea is to initially keep prices lower to encourage as much consumer engagement as possible and generate interest through word of mouth. This keeps marketing costs down. The risk, however, is that once you establish a discount price it can be difficult to gradually raise the price and not alienate customers.

2. Bundle pricing

Bundle pricing is the strategy of selling a group of products for a single price. Think of a personal grooming kit that might include a razor, comb, fingernail clippers, files, and other items. Retailers often also bundle the same item, such as selling multiple pairs of socks in one package for a single price. Typically bundled products cost less than they would if the customer purchased the items individually.

3. Price skimming

This pricing strategy is the direct opposite of penetration pricing. Products are priced higher in order to gain immediate profit. This tends to work best with established brands with good market penetration already. There’s a reason you see people lining up outside Apple stores to get the latest version of the iPhone. They’re willing to pay the full retail price to be one of the early adopters.

4. Loss-leading pricing

Loss-leading is a strategy that attracts customers by offering a big discount on a highly sought-after product in the hopes that they will then purchase additional products upon visiting the store. It requires a strong customer service team in place that knows how to sell without making customers feel pressured or pushed into those additional purchases.

5. Competitive pricing

A brand or retailer employing a competitive pricing strategy will use prices established by its competition as a benchmark, and then set their own prices slightly lower. This obviously reduces profit margins. The hope is that the lower price point will get enough customers to switch over from the competition and revenue will be realized in sales volume. The downside is that your brand might be viewed as a “discounted version” of other brands. Sell enough volume and that can work. However, if you don’t get those conversions it could spell trouble.

Retail technology and pricing strategies

The best pricing strategies are built on accurate information about your product, stores, competition, customers and markets. Remember those internal and external factors? Well, new breakthroughs in intelligent data capture and analytics are giving brands and retailers more insight into their businesses than ever before.

Eduardo Santaella, Chief Operating Officer and General Manager of Mobile Insight®, a retail management software provider, says, “Our software and digital data solutions give brands and retailers a real-time glimpse into every aspect of their operations, including store conditions, inventory, merchandising, employee performance and pricing. Our customers can clearly see if their retail strategies are working, including determining whether or not pricing adjustments need to be made. With instant and accurate information, it’s easier to make smart decisions regarding pricing or any other area of operations.”

If you’d like to learn more about how retail technology can improve all aspects of operations, including pricing strategies, visit www.mobileinsight.com.

Mobile Insight® is the only retail and merchandise management solution designed to meet the brick and mortar sales challenges of high-value brands and retailers. Unlike hardware and software providers that focus on fast-moving goods, the Mobile Insight® platform delivers assisted sales solutions for more complex, interactive, and customer-centric environments. Combining data from in-store systems, 3PLs, employee and partner activity, Mobile Insight® enables informed, smarter decisions that drive sales and operations excellence. For more information, visit www.mobileinsight.com.