Selling at the right price is one of the secrets to a flourishing business. If your goods are cheap, you might sell more but find it difficult to make a profit. On the other hand, if your goods are too expensive, customers will shop at competitor retailers, causing you to lose market share.
However, there is no one tried-and-true strategy that works for all retailers when it comes to pricing. You must balance the production costs with customer trends, revenue targets, competitive pricing, and even a little bit of psychology.
If you have ever wondered “What is retail pricing?” you’ve come to the right place. In this post, you’ll learn what retail pricing is, the different types of retail pricing strategies you can use, and how to choose the right one for your products.
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What is Retail Pricing?
The retail price is what consumers pay for the finished product when it is sold. These customers don’t purchase the item to resell it but to use it. The fundamental objective for a retailer when setting a price is to maximize the profit while setting a price that customers will be ready to pay.
Retail price, manufacturer price, and distributor price are all different prices in the retail supply chain. The final retailer will have the choice to set their pricing based on supply and demand. A manufacturer can also propose a retail price to match the cost of the product with its overall production strategy.
How Does Retail Pricing Work?
Retail pricing often includes at least two markups, including the price the manufacturer charges the reseller and the price the reseller charges the customer. Sellers take a variety of factors into account when setting retail prices. A seller will often increase the price after covering all of the costs related to the goods to ensure they can turn a profit. On the other hand, certain well-liked products are often offered at a loss in order to attract shoppers.
The factors that influence your product pricing can be roughly divided into internal and external.
Internal factors are aspects of your business that are typically within your control. Examples include manufacturing prices, value chain processes, labor costs, retail shipping prices, import fees, overhead costs, and the amount of money you spend on advertising and marketing. These factors are crucial because they help you establish your baseline, i.e. the amount of money you need to make in retail sales in order to remain profitable.
On the other hand, external factors are mainly outside your control. These variables may include competitor price range and proximity or your customers’ purchasing power. Macro trends, such as the state of the national, regional, and worldwide economies, should be taken into account when evaluating external factors because they have a significant impact on consumer buying behavior.
How to Calculate the Retail Price
Determining retail prices can be challenging because there are several calculation methods and a number of variables to consider. One way to calculate your retail price is by using the absorption pricing method. This is a straightforward three-step process to arrive at your suggested retail price (RRP):
- Calculate your cost price
- Add together your costs and profit margin to determine your wholesale price
- Determine your RRP by dividing your wholesale price by 2 or 2.5.
This calculation method is really simple and easy to use. It takes into account all expenses related to the selling price of your goods, including the percentage of your fixed costs and your profit margin. It doesn’t require special training or complex calculation formulas.
However, it should be noted that this approach does not account for your competitors and their pricing strategies, which might result in price gaps.
9 Successful Retail Pricing Strategies
Let’s take a close look at a few pricing methods that retailers should employ:
- Manufacturer Suggested Retail Price (MSRP)
The Manufacturer Suggested Retail Price (MSRP) is a useful pricing strategy to apply if you offer mass-produced goods like home appliances and consumer electronics.
A product’s MSRP is a set price that applies to all sellers of the item. While it removes the element of surprise from the price setting, selling your goods at the same price as other retail stores may decrease your competitive advantage.
- Keystone Pricing
With this strategy, you double the wholesale cost of each product to produce a sizable profit margin. You may do your calculations easily with a predetermined percentage but you should be careful not to end up pricing items too low or too high.
If you sell highly unique goods or custom items that take a long time to create, keystone pricing is not the best choice because you won’t make enough money. It’s also not recommended for retailers who sell uniform, widespread products. Depending on the item’s availability and demand, it may not be reasonable for a retail shop to mark up goods at such a high rate.
- Discount Pricing
Discount pricing is when a retailer marks down the cost of their goods in order to boost sales. The high-low pricing strategy is one type of discount pricing. Products are first offered at a high price point and then marked down when demand declines.
Electronic retail stores employ this tactic most often. Items like computers, smartphones, and video game consoles are the most expensive when they are first introduced. However, when newer models are released, the older ones are discounted.
If you want to get rid of unsold inventory and boost sales, discount pricing works well. But if you develop a reputation for often offering discounts on your goods, clients will get used to waiting for the cheaper price or they might think your products are of bad quality.
- Bundle Pricing
Bundle pricing is another discount pricing strategy that is especially useful if you sell related products that can be packaged together. By combining products, you can customize the consumer experience and enhance sales volumes through cross-sells and up-sells.
Deli bundles and Christmas baskets that include hand-picked wines, meats, and cheeses, are typical instances of bundle pricing.
- Penetration Pricing
Penetration pricing is when a company offers a new product or service at a lower price in order to draw in customers. The goal is to entice target customers with a low price so they will be eager to pay full price once the promo period has ended.
This pricing model works especially well for subscription products and it is employed by companies like Spotify and Netflix.
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- Psychological Pricing
Also known as charm pricing, psychological pricing is a value-based pricing strategy when sellers charge a price for a product that ends in an odd number.
For instance, a seller may price a product at $6.99 rather than $7. The brain sees $6 and the consumer is tricked into thinking the price is lower than it really is. This pricing approach is best for non-essentials since it encourages impulse purchases.
- Competitive Pricing
Setting lower prices voluntarily in order to obtain a competitive edge is known as competitive pricing. It works best if you are in a sector where there are a lot of similar products and the only thing that sets you apart from your competition is pricing.
The competitive pricing method works best if you’re a bigger shop and can bargain with suppliers for a reduced wholesale price while still making a respectable profit. However, keep in mind that a price battle can force small retailers out of business.
- Premium Pricing
Premium pricing, which is often referred to as luxury pricing or prestige pricing, is another value-based pricing technique where high-end businesses charge an additional markup percentage on their products to offer their customers a sense of status.
This approach to pricing strategy is most effective when your product quality and customer service can match the high product price tag. Apple, Ferrari, and Cartier are a few businesses that charge premium prices.
- Dynamic Pricing
Dynamic pricing is a pricing strategy in which prices are changed in response to variations in supply and demand. The ability to apply dynamic pricing in real-time makes this strategy ideal for eCommerce companies.
When you sell products online, you can use data and technology to sell the same item at different prices based on the buyer.
The Bottom Line
We hope that this article has provided a comprehensive answer on what retail pricing is. The pricing strategies mentioned above are only a few that you should take into account, but they are certainly not the only options. The most important step is to identify the ones that are effective for you.
Retailers must take into account a number of elements when determining their pricing strategy, including their niche, market behavior, the competition, and most importantly, their financial targets.
No single strategy we’ve discussed will be sufficient on its own. Business owners should experiment and mix different pricing strategies to ensure their company’s profitability and success.