Pricing is one of the most important activities for retailers.
But it can often feel like guesswork.
That’s because pricing is tied up in much more than a number, for your customers. It can touch on ideas like value, status, gratification—and don’t laugh, even joy.
Everybody loves a bargain. And people can have some very emotional reasons and reactions to what they buy. It’s why there is an entire culture around unboxing products and the satisfaction that can bring.
As a retailer, your prices may give people a whole range of emotions about your store, your product range and your company’s brand.
In this article, we’re going to dive a little deeper into retail pricing, with the help of several experts. You’ll learn:
Let’s get going.
The psychology of price
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3 ways to price a product for retail
“Pricing is one of the main levers that can be pulled to control profit margins, but on the other hand price levels that are too high will alienate customers and drive them to the competition,” says Josh Pollack, a pricing expert at Parker Avery Group, a retail and consumer goods consultancy.
One way to start thinking about pricing is to think about whether a given product is something that is a repeat purchase or a one-time purchase, explains CPA and ecommerce consultant Abir Syed of UpCounting.
“If something might only be purchased once like a pool table, you’ll need to make back your money after taking into consideration the customer acquisition cost. But if something is a repeat purchase—like a protein bar—then you can price lower knowing that you’ll make back your money off the customer’s lifetime value,” says Abir.
On top of this, different products need different pricing strategies based on your customers’ attitudes and their price sensitivity to that type of product.
Pricing traffic drivers and margin enhancers
Here’s where it becomes more strategic.
“Some items can be classified as ‘traffic drivers’,” says Josh, of Parker Avery Group. “Prices and promotions on these items can be deployed to increase unit sales and customer traffic. Other items are ‘margin enhancers’. Customers are much less aware of the relative prices of these items, so those prices can be [moved] to improve profitability. Retailers can establish a range of pricing strategies to apply to different product categories.”
There are a few main approaches to pricing. You can:
- Price based on your costs. This means having an accurate understanding of the cost of your product, and marking it up to profitable (we’ll talk more about markups later). To do that well you have to have a good understanding of your sales and marketing costs, overhead, and the volume of stock you can realistically sell.
- Price based on your competition. Research your competitors in the market and look into the similarities in your product ranges. Are you much more expensive than others who sell similar products, or are you losing margin by discounting too heavily?
- Price a product range. This is where common practices like loss leaders come in. This is when you sell a given product at a lower price, to attract customers to purchase higher-priced products elsewhere in the range.
A quick word about wholesale vs retail pricing
But hey, not every retail business is selling directly to consumers — some are selling to other retailers. With wholesale pricing you mostly need to factor in a different set of overheads, suggests Abir Syed of UpCounting. Your sales and marketing cost structure will be very different from selling retail, and each customer will buy much larger volumes, notes Abir.
“Another significant difference would be to your warehousing and distribution set up when doing fewer large shipments, as opposed to many small ones direct to consumers. If you have brick and mortar locations, then that can bring in a whole other overhead consideration,” he said.
9 retail pricing tactics
Let’s run through some of the different pricing structures for retail products.
1. Manufacturer suggested retail price (MRSP)
“Manufacturer suggested resale price (MRSP) is the price a product maker suggests vendors sell the product for,” according to Meaghan Brophy, a retail and ecommerce analyst at FitSmallBusiness. “Though according to antitrust law, manufacturers cannot dictate the prices at every stage of the resell process, they can choose what vendors they distribute products too. It is a common practice, particularly for manufactures that sell to companies that sell on Amazon, to only work with retailers that agree to abide by the MSRP.”
2. Keystone pricing
This usually applies to prices set at double the wholesale price. This used to be the convention for pricing clothing, but is less common nowadays.
3. Multiple pricing and discount pricing
Multiple pricing and discount pricing occurs when items are priced at a discount if multiples are purchased at one time. Think of buying one pair of socks for $5, two pairs for $8 and so on. Straightforward discount pricing doesn’t need too much explaining. Customers love good old-fashioned discounts and they can be a great way to shift stubborn inventory or late-season items.
4. Penetration pricing
Penetration pricing is another form of discounting—with a twist.
One way to explain it is through the competitive world of video-on-demand streaming services. Think Netflix, Amazon Prime, Hulu and any other streaming services you use at home on a regular basis. Because this market is so competitive, many new entrants will use penetration pricing to attract and hopefully retain new customers.
This involves offering a lower price for an initial period, to hopefully get the customer ‘hooked’ on the service so that they will be willing to pay full price moving forward. As more products move towards subscription pricing, it’s a pricing approach worth considering.
5. Value pricing
Value-based pricing is truly customer-focused pricing, as Investopedia explains. That’s because it is based on how much your customer believes a product is worth. This pricing strategy basically attempts to strike a balance between a product’s cost and its quality. The reason value pricing can be so effective is because it’s based on something that’s hugely valuable to all businesses: a great understanding of the customer. But it’s not easy to achieve. Value-based pricing isn’t based on guesswork, it’s based on slow and detailed investigation to understand your customers, the products they truly want and what is valuable to them below a surface level.
6. Psychological pricing
As we explained earlier, much of pricing is based on what people think, want and feel. This is why pricing is often hard to untangle from psychology. In many senses, pricing is a form of marketing—and the best marketing draws on psychology in a positive way. There have been hundreds of studies over the years about why consumers buy more goods that are priced at odd numbers, instead of even or round ones. It’s part of our brains’ wiring.
A popular example of psychological pricing is charm pricing. Have you ever wondered why most products are priced as $5.99 instead of $6.00? This is because just the simple difference of lowering it one cent to a price that ends with the number 9 or 99, causes customers to interpret it as having a completely different value and being more attractive.
7. Luxury and premium pricing
Some brands and businesses–think Cartier, or Gucci–price their products to make customers perceive value. Again, psychology is at play. High-end retailers know that customers who buy their products are purchasing a feeling of status, as much as they are purchasing, say, a handbag or a bracelet. Pricing your goods in the highest tiers is effective, only if every aspect of your product, customer experience and loyalty services can match the price tag.
8. Bundle pricing
Bundle pricing can be useful for retailers, if you want to package and market your products into an experience for customers. For example, a deli could bundle crackers, meats, cheeses and wine to suggest customers have a picnic experience. Or a butcher could bundle certain products to suggest a barbecue. With bundle pricing, you offer a range of products that are normally priced individually at one single price. With some creativity, bundle pricing can help retailers shift inventory that would not be appealing alone.
9. Markup pricing
Let’s not forget markup. “The predominant pricing strategy for retailers is to do a 100% markup,” says Meaghan, at FitSmallBusiness. “That means if they purchase a good from the supplier or manufacturer for $20 they sell it to shoppers for $40.”
“Amazon and its sellers are notorious for driving down prices and retail margins. In order to stay competitive, retailers sometimes price a product with margins smaller than 100%. It can make sense for retailers to compete in this way if they are selling a high-volume of products or trying to clear through seasonal or perishable items.”
“However, there are also scenarios where a retailer can price a product above a 100% markup. This is common with private labels and custom products, cosmetics, jewelry, electronics and alcohol, for example,” explains Meaghan.
Which retail pricing strategy is right for you?
“In today’s retail environment, retailers have to consider multiple factors in their pricing approach,” says Josh, at Parker Avery Group. “Competitive price positioning, customer response and financial targets all come into play. Also, differences in customer behavior in different geographic markets, as well as price sensitivity by channel (brick and mortar versus an online store) are complicating factors.”
Ultimately, no one pricing tactic will be enough. You’ll likely need to combine the tactics above, and if your retail business is young, you’ll need to experiment. Much will depend on the category of product you sell, too. With a cloud-based point of sale you’ll be able to make pricing adjustments in real-time to different products and test out the best strategy for you.
One thing’s for sure, getting pricing right at the right time can be a gamechanger for retailers.
If you’re interested in learning how Lightspeed Retail POS can help you make real-time price adjustments, let’s talk.