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How to Price a Product for Retail Business Beginners

13 min read

When starting a new retail business the first question all business owners come across is: how should I price a product for retail? The truth is, there isn’t always a straightforward answer. To be successful, you’ll need to find the pricing strategy that works best for your business in particular.

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

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

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What is a Pricing Strategy?

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

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

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

For instance, if you have a big general store that sells high ticket items like furniture or electronics and also some smaller items such as stickers or small nik naks, you wouldn’t have the same strategy for each of these products. You would need to mark up the smaller items much more than you would the bigger items.

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

This isn’t to say that everyone should go the premium brand route because you can price your products higher. With premium branding you will have higher overhead costs with marketing and having better customer service and experience, which in turn justify the higher costs per item.

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

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

Pricing Strategies

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

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

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

Keystone pricing

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

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

Bundle pricing

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

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

Premium pricing

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

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

Anchor pricing

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

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

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

Charm pricing

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

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

Penetration pricing

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

Manufacturer suggested retail price (MSRP)

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

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

No matter what strategy you go with, at the end of the day, it’s always good to understand the landscape and start with a plan. The plan might change as your business scales and grows and that’s okay! The important thing is to keep getting out there, seeing what works and what doesn’t, and working from there!

Do you want to learn more about launching a retail business?

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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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