Pricing strategy is a big piece of the puzzle for retail businesses. Part marketing, part psychology, and part guesswork, pricing a product can be one of the more difficult aspects of running a retail store.
“Very few merchandising decisions have as sweeping an impact on business performance as how to price items in the product assortment,” said Josh Pollack, associate partner and pricing practice lead at the Parker Avery Group.
“When set thoughtfully, pricing can be a major factor in conveying the brand positioning and value proposition of a retail concept. Pricing approaches differ significantly when considering short-run designer garments (where a higher price might add to the cache) than when planning for everyday pantry items, such as eggs,” said Pollack.
In this article, we’re going to throw the floor open to retail experts like Pollack and others, who will give you their suggestions and tips for getting your product pricing right. We’ll cover:
- Why getting pricing right matters
- Ways to calculate product prices
- Retail product pricing strategies
- How to evaluate pricing strategies
Let’s start with some more thoughts on why pricing matters so much.
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Importance of setting the right price
“The right price is a sweet spot that keeps your product competitive and valuable in the market while safeguarding your profit margin and taking into consideration all your costs,” said Ian Sells, CEO and Founder of Rebate Key.
Calculating your product pricing
Pricing really is a balancing act. “Setting prices too high will prevent customers from buying your product, but setting them too low may mean that you don’t cover enough of your costs and aren’t making an appropriate profit margin,” said Darren Litt, the co-founder of Hiya Health, which sells children’s multivitamins.
So let’s take a quick look at some of the ways retailers can calculate product prices.
- Cost-plus pricing: Here, you subtract the cost of production from the retail price to arrive at an approximate profit margin.
- Value-based pricing: Here, you calculate what customers are willing to pay for your product before adding any costs. With this method you need to know what other companies charge for similar products so you can establish your ideal target market.
- Competitor-based pricing: Research your competitors in the market and look into the similarities in your product ranges. Are you losing margin by discounting too heavily, or are you charging a lot more than businesses that sell similar products?
- Elasticity-based pricing: ‘Elasticity’ is how customers’ respond to price changes. You can measure it by analyzing the prices and sales quantities of past transactions and comparing the changes in price to changes in unit sales.
- Cross-product based: Some items within a range are best priced in relation to others. For example, different flavors of the same size and brand of yogurt or cat food are frequently priced the same.
Other retail pricing tactics to consider include gross margin based pricing, keystone pricing, and bundle pricing.
Brick-and-mortar vs ecommerce pricing
Keep in mind that you’ll need to shift your approach to pricing across brick-and-mortar and ecommerce too.
“We sell both in store and online and have found that our lower price point products sell better online versus our higher price point products, which sell more in person,” said Morgan Futrell of Moonshine and Magnolias, a family-owned boutique in North Carolina.
- Remember shipping. Futrell also suggests similar businesses carefully plan how shipping costs can be included in pricing. “A $5 shipping cost will not cover the amount that it will cost to ship anything in a padded envelope, therefore this cost should be either included in the product price or result in a calculated shipping option,” she suggests.
- Don’t spend profit to ship product. Take the items you will be selling online into UPS and have them price to ship. Then use that information to identify if you should increase prices, shipping rates, or minimum spends for any free shipping.
Yes, customers love free shipping, but offering it across the board may chip away at the effectiveness of pricing strategies.
Different retail product pricing strategies to test
Experts have also come up with some clever ways to market pricing and make it appeal to customers’ emotions and instincts.
Try psychological pricing
Professor Haipeng Chen is the Endowed Chair in Marketing at the University of Kentucky. He said good pricing is as much about hard, cold calculations as it is about how consumers feel. With this in mind, there are several psychological pricing tactics retailers can try, such as:
- Stacked discounts: Offer 20 percent off plus an extra 25 percent off, instead of 40 percent off. Stacked discounts like this look bigger. Therefore, you sell more without incurring any additional costs.
- Bonus packs: For example, offer 30 percent more at the regular price of $8.99/lb). “You win thrice. Consumers buy more. Thirty percent more looks bigger and better than a discount of 25 percent off. And it actually costs you less,” said Professor Chen.
- Price-ending of 99c. “You can sell more and make a bit more profit at $16.99 than at $16. To some consumers $16.99 looks better because 16 is easier on the eyes/mind than 17. To others, they realize the prices are basically $17 and $18 and 18 looks better. So rotate between the two to appeal to different customers,” he adds.
Professor Chen also suggests ‘hiding your treasure’, by showing smaller discounts first to lure consumers into your store, and once they are in, offer them bigger discounts. That increases their total spending, he said.
Encourage charitable donations
Instead of doing a deep discount (30/40/50%), a brand can instead use an incentive like 20 percent off plus 20 percent to give to a charity of your choice, suggests Andrew Forman, CEO of Givz, a platform that gives brands a way to convert discounts into donations.
“We’ve seen this improve conversion more than 55 percent compared to 30 or 40 percent off offers. And consumers feel great about their purchase and the brand they purchased from, leading to higher retention and loyalty in the long-term,” said Forman.
Evaluating the success of the pricing strategy
Evaluating the success of different pricing strategies is difficult. There are many factors in play. Here are just five of the ways to approach measurement.
Monitor sales volume and COGs
“We evaluate the quantity of the item sold along with the money on hand from each item,” said Futrell. “This helps us to evaluate what items are bringing in the most money for us, versus what items are selling the most. For example, we sell hundreds of small bracelets every month which is our top seller, however they are not our biggest money maker because their price point is so low.”
Check conversion rates and retention
Thomas Jepsen, CEO of Passion Plans, a house plans company, suggests retailers look at their retention and conversion rates to gauge your pricing strategy. “Start setting up systems that look at how frequently customers are returning. Look at your product pages on your website and see what the conversion rate is over time as you’re trying out different strategies,” he said.
Compare the selling locations
Doing a controlled test can help you measure your pricing performance too. “One method would entail selecting a subset of selling locations and leaving the prices alone,” said Josh Pollack, of the Parker Avery Group. “If the hold-out stores are similar enough to the remaining stores, the difference between the performance of the price-changed items in the two sets of stores is due to the pricing activity,” he said.
Compare similar products
Measure the performance between items in the range, for an even more sophisticated method for evaluating price strategies. This is especially useful when a location comparison is inappropriate, according to Pollack. This involves using statistical methods to compare the selling patterns of the price-changed items to all of the remaining items in the product range.
Check gross margin and order size
“The key metrics in retail are gross margin, conversion rate, average order size, and customer lifetime value. These metrics will show you if your pricing strategy is working well or not,” said Darren Litt, the co-founder of Hiya Health, which creates multivitamins for children. Tap into your POS data to understand these metrics.
Getting confident with pricing
Pick a pricing strategy that best fits your business from the expert’s suggestions above. And don’t be shy about experimenting with different approaches, as you learn more about what works and what doesn’t for your retail store. To learn more about how Lightspeed can help simplify your approach to pricing, talk to one of our experts.