14 product pricing strategies for retailers

When starting their own company, most entrepreneurs focus their creative energy on developing an idea and turning it into a sellable product. But before you can start selling any product or service, you need to decide how much it costs. This is where pricing strategy comes into play.

In this article, you'll learn about the importance of competitive pricing and how to choose the pricing model that works best for your business.

What is pricing?

Pricing is the process of determining the monetary value of a product, service, or offering. It involves considering factors such as production costs, market demand, competition, perceived value, and profit margins. Effective pricing strategies aim to achieve a balance between attracting customers, maximizing revenue, and ensuring business profitability.

Ultimately, each small business owner must find and develop the right pricing strategy for their specific goals. Retailers must consider factors such as production costs, consumer trends, their business's profitability goals, financing options, and competitors' prices. Even so, setting a price for a new product or even an existing product line is not just pure math.

Numbers behave logically. But people can be much more complex. Yes, your pricing method should start with some key math. But you also need to take a second step that goes beyond hard data and number crunching.

What is pricing strategy?

Pricing strategy is a method for determining the price of a product. An effective pricing strategy takes into account revenue, profit, consumer behavior, and business goals.

To do this, you need to study various examples of pricing strategies, their psychological impact on your customers, and how to set the price of your product .

How to Choose a Pricing Strategy

Whether you're implementing your first pricing strategy or your fifth, you'll benefit from reading about how to create a working pricing strategy for your business.

Cost accounting

To determine your product pricing strategy, you will need to add up the costs associated with bringing your product to market. If you are ordering products from someone else, you already have a direct answer to how much each unit costs, i.e. the cost of goods sold.

If you create your own products, you need to determine the total cost of that work. How much does it cost to package the raw materials? How many products can you make from them? You also need to consider the time it takes to make them.

Here are the costs you may incur:

• Cost of Goods Sold (COGS)
• Manufacturing times
• Package
• Promotional materials
• Transportation
• Other expenses such as loan repayments

Your product pricing must take these costs into account to ensure your business is profitable.

Define your business goal

Align your business goal with your pricing to help you move in the right direction. Ask yourself: What is my end goal for this product? Do I want to be a luxury retailer like Snowpeak or Gucci ? Or do I want to create a chic fashion brand like Anthropologie ? Identify this goal and keep it in mind when pricing your products.

Identify your customers

This step is similar to the previous one. Your goal should be to not only determine the appropriate profit margin, but also what your target market is willing to pay for the product. After all, your hard work will go to waste if you don’t have any potential customers.

Consider your customers' disposable income. For example, some customers may be more price sensitive, while others are willing to pay a higher price.

Find your value proposition

What makes your business different from others? To stand out from the competition, you need to find the best pricing strategy that reflects the unique value you bring to the market.

For example, direct-to-consumer mattress brand Tuft & Needle offers exceptional quality mattresses at an affordable price. Its pricing strategy has helped it become a well-known brand because it has filled a gap in the mattress market.

6 Common Pricing Strategies for Small Businesses

Once you have the above points sorted out, you will need to choose a pricing strategy. Here are a few common strategies to get you started.

Cost Plus Pricing: Simple Markup

Cost-plus pricing, also known as markup pricing, is the simplest way to price a product. You produce the product, add a fixed percentage to the cost price, and sell it for the total amount.

Let's say you just started an online t-shirt business and want to calculate the selling price of a shirt. Then the cost of making a t-shirt might include:

• Material costs: $5
• Labor costs: $25
• Shipping cost: $5
• Marketing and overhead: $10

You can add a 35% markup to the total cost of $45. Here's what the formula looks like:

Cost ($45) x markup ($1.35) = selling price ($60.75)

• Pros: The beauty of cost-plus pricing is that it doesn’t take much time to understand. You already factor in production costs and labor costs. All you have to do is add an extra percentage to get the selling price. It can provide a steady profit if all your costs remain the same.
• Cons: Cost-plus pricing does not take into account market conditions such as competitors' prices or perceived value to customers.

Competitive Pricing: Beating the Competition

As the name of this pricing strategy suggests, competitive pricing means using competitors' pricing data as a guide and deliberately setting your prices below theirs.

This strategy is usually driven by the product's characteristics. For example, it is suitable for industries with very similar products, where price is the only differentiator and you rely on price to attract customers.

• Pros: This strategy can be effective if you can negotiate a lower unit price with your suppliers while cutting costs and actively advertising your low prices.
• Cons: This strategy can be difficult to maintain if you are a small retailer. Lower prices mean lower profits, so you will have to sell more volume than your competitors.

For some product groups, the need to engage in price wars is not advisable. The alternative is to rely on the attractiveness of your brand and focus on your target customer segment to eliminate the need to rely on competitors' pricing.

Pricing based on perceived value

Value-based pricing means setting prices based on what the customer believes a product or service is worth. It is an approach that takes into account the wants and needs of your target market. This strategy differs from cost-plus pricing, which includes the cost of the product in its pricing calculation. Companies that sell unique or highly valuable products are better positioned to benefit from value-based pricing than those that sell standardized products.

Consumers care more about the perceived value of products and are willing to pay more for them.

Some general requirements for using value-based pricing include:

• A solid brand
• High-quality products in demand
• Creative Marketing Strategies
• Good customer relations
• Excellent reputation

Value-based pricing is common in markets where the product enhances the customer’s self-esteem or offers a unique life experience. For example, people tend to value luxury brands such as Gucci or Rolls-Royce highly. This gives them the opportunity to apply value-based pricing to their products. Such companies must have a product or service that is different from their competitors.

• Pros: Value-based pricing allows you to set higher prices for your products. Art, fashion, collectibles, and other luxury items often work well with this pricing scheme. It also encourages you to create innovative products that resonate with your target market and enhance your brand value.

• Cons: It is difficult to justify the added value of common products. To use value-based pricing, you need a special product. Perceived value is subjective and depends on many cultural, social, and economic factors that are beyond your control. There are no exact scientific methods for determining value-based pricing.

Skimming the price: short-term high profits

A price-skimming strategy means that a company charges the highest price that customers are willing to pay and then lowers it over time. As customer demand is met and more competitors enter the market, the company can lower its prices to attract a new, price-conscious customer base.

The goal is to increase revenue when demand is high and competition is low. Apple uses this pricing model to cover the costs of developing a new product, such as the iPhone.

The skimming strategy is useful under the following conditions:

1. There are enough potential buyers who will buy the new product at a high price.
2. High price does not attract competitors to the market.
3. The price reduction has only a minor impact on profitability.
4. A high price is perceived as exclusivity and high quality.

Skimming also works when there is a shortage of a product. For example, products with high demand and low supply may cost more, and as supply increases, prices fall.

• Pros: Skimming can result in high short-term profits when launching a new, innovative product. If you have a prestigious brand image, this strategy can also help maintain it and attract loyal customers who want first access/exclusive experiences.
• Cons: Skimming isn't a good strategy in crowded markets unless you have truly incredible features that no other brand can imitate. It attracts competition and can hurt the perception of customers who have already bought from you if you lower your price too early or too much after launch.

Discount prices: squeezing competitors out of the market

It’s no secret that shoppers love sales, coupons, discounts, seasonal prices and other related discounts. That’s why discounts are the main pricing method for retailers across all sectors. This method is used by 97% of respondents, according to a study by Software Advice.

There are several benefits to using discount prices. The most obvious ones are increasing traffic to your store, clearing out unsold inventory, and attracting a group of customers who would not buy your product at a higher price.

• Pros: Discount pricing strategies are effective in attracting more traffic to your store and getting rid of out-of-season or old inventory.
• Cons: If used too often, discount pricing can give you a reputation as a discount retailer and discourage consumers from buying your products at regular price. It also has a negative psychological effect on the consumer's perception of product quality. For example, The Dollar Store and Walmart have low prices, but their products are perceived as low quality, regardless of whether this is justified.

Discount pricing strategy is also useful for new brands. Essentially, discount pricing involves temporarily selling at a lower price to introduce a new product and gain market share. The trade-off of losing profits to reach a wider range of customers is something many new brands are willing to make to enter the market.

For more information on how to build a discount pricing strategy, you can read the following articles:

• How to Offer Retail Discounts Without Cutting into Profits
• The Science of Sales: How to Sell More Products with Discounts

Dual Pricing: A Simple Markup Formula

Dual pricing is a product pricing strategy that retailers use as a simple rule of thumb. Essentially, it is when a retailer charges a retail price by simply doubling the wholesale price they paid for an item in order to make a healthy profit margin. There are a number of scenarios where using dual pricing can result in a product being priced too low, too high, or just right for your business.

Here's a simple formula to help you calculate the retail price:

Retail price = [item cost ÷ (100 – markup percentage)] x 100

If you want to price a $15 item at a 45% markup instead of the usual 50%, here's how you can calculate its retail price:

Retail price = [15 ÷ (100 – 45)] x 100 = $27

If your business has a long turnover of items, they require significant shipping and handling costs, or they are unique or rare in some way, you may be undervaluing them by using a double price. In these cases, the seller could likely use a higher markup formula to increase the retail price of the in-demand items.

On the other hand, if your products are widely distributed among competitors and are easy to find elsewhere, it may be more difficult to use a dual pricing strategy.

• Pros: Dual pricing works as a quick and easy rule of thumb to ensure you make enough profit.
• Cons: Depending on the demand for a particular product, it may not be wise for a retailer to mark up the product so highly.

Other Types of Product Pricing Strategies

Manufacturer's suggested retail price

As the name suggests, the manufacturer's suggested retail price (MSRP) is the price that a manufacturer recommends retailers use when selling a product (pardon the pun). Manufacturers first began using MSRP as a pricing strategy to help standardize prices for the same product across different locations and retailers.

Retailers often use suggested retail prices for highly standardized products (such as consumer electronics and appliances).

• Pros: As a retailer, you can save time by simply using the suggested retail price when pricing your products.
• Cons: Retailers using MSRP cannot compete on price. With this pricing strategy, you must consider the difference in profit and cost. For example, your business may have additional costs that the manufacturer does not account for, such as international shipping.

Keep in mind that MSRP is a fairly niche pricing strategy. While you can set any price you want, deviating too much from MSRP may cause manufacturers to end their relationship with you, depending on your supply agreements and the goals the manufacturer has for MSRP.

Dynamic Pricing: Adjusting Price Based on Variables

Have you ever tried to hail an Uber on a Friday night and noticed that the price is higher than usual? That’s dynamic pricing in action. Dynamic pricing is when a company continually adjusts its prices based on various factors, such as competitors’ prices, supply, and consumer demand. The goal is to increase the business’s profits.

For brands like Uber , the cost of a ride depends on variables including the time and distance of your route, traffic, and current demand from riders. Prices are determined by rules or self-improving algorithms that take these variables into account when making pricing decisions.

• Pros: Dynamic pricing strategy allows retailers and brands to automatically set prices for products and services using AI learning. They can change prices according to current market conditions, save time through automation, and maximize profits.

• Cons: This strategy can be difficult for small businesses to manage, and it is an expensive process. Dynamic pricing makes more sense for larger retailers with thousands of SKUs across online and brick-and-mortar stores. When dynamic pricing results in frequent price changes, consumers may react negatively, which can lead to lower revenue.

Bundled Pricing: Pros and Cons

We've all seen this pricing strategy in grocery stores, but it's also common in clothing, especially socks, underwear, and T-shirts. With a bundle pricing strategy, retailers sell more than one item in a single package at a reduced price. This tactic is also known as bundle pricing.

For example, a study looking at the effect of product bundling in the early days of Nintendo's Game Boy handheld console found that more units were sold when the devices were bundled with a game rather than sold separately.

• Pros: Retailers use this strategy to create higher perceived value for less, which can ultimately lead to higher purchase volumes. Another benefit is that you can sell items separately for a higher profit. For example, if you sell shampoo and conditioner together for $10, you can sell them separately for $7 to $8 each, which is a win for your business.
• Cons: Bundling reduces profits. If bundling does not increase sales, you may lose profits.

Loss Pricing: Increasing Average Transaction Cost

We've all walked into a store lured by the promise of a discount on a popular item, but instead of leaving with just that one item in hand, we end up buying several others.

If this has happened to you, you've had a taste of the loss pricing strategy. With this strategy, retailers attract shoppers with a desired product at a discount, then encourage them to buy additional items.

A prime example of a loss-making pricing strategy is a grocer that lowers the price of peanut butter and promotes additional products such as loaves of bread, jelly and jam, or honey. The grocer might offer a special bundle price to encourage customers to buy these additional products together rather than just selling a single jar of peanut butter.

Although the original product may be sold at a loss, the retailer can benefit from having an upselling/cross-selling strategy that will help drive sales growth. Loss pricing is typically applied to products that customers are already looking for, where demand for the product is high, which attracts more customers.

• Pros: This strategy can work wonders. Encouraging customers to buy multiple items in a single transaction not only increases overall sales per customer, but can also offset any loss of profit from lowering the price of the original item.
• Cons: Similar to the effect of over-selling, when you overuse loss pricing, shoppers start expecting deals and are hesitant to pay full retail for the same item in the future. You can also lose revenue if you discount something that doesn't increase your basket size or average order size.

Learn more: Find out how bundling your products can help you increase retail sales.

Psychological Pricing: Use Odd Numbers to Sell More

Research has shown that when shoppers spend money, they experience pain or loss. Retailers should help minimize these feelings to increase the likelihood that shoppers will make a purchase.

Traditionally, retailers have used psychological pricing to alleviate the feeling of loss by offering prices that end in an odd number, such as 5, 7, or 9. For example, a retailer would rather price an item at $8.99 than $9 . It looks like the retailer has shaved a penny off the price, but the shopper's brain reads $8.99 and sees $8 instead of $9 , and perceives the item as cheaper.

In his book Priceless, William Poundstone reviews eight studies on the use of "charm prices" (i.e. those ending in an odd number) and finds that they increased sales by an average of 24% compared to adjacent "rounded" prices.

But how do you choose which odd number to use in your pricing strategy? The number 9 prevails in most cases. Researchers from MIT and the University of Chicago conducted an experiment with a standard item of women's clothing priced at $34, $39, and $44. Guess which one sold the most? That's right: the $39 item sold even better than its cheaper $34 counterpart.

• Pros: Charm prices allow retailers to encourage impulse purchases. Ending prices with an odd number gives shoppers the feeling that they are getting a good deal, which can be hard to resist.
• Cons: Sometimes charming prices can seem useless to buyers and reduce their trust in you, while a simple price rounded to the nearest dollar seems fair and is perceived as transparent.

Learn more: Psychological Pricing: What Your Prices Really Tell Your Customers

Premium prices: prices higher than competitors

Brands price their competitors but deliberately set prices higher to appear more luxurious, prestigious, or exclusive. For example, a higher price works to Starbucks' advantage when people choose it over a cheaper competitor like Dunkin' .

A study on pricing strategy by economist Richard Thaler looked at people walking on the beach and wanting a cold beer. They were given two options: buy a beer at either a run-down grocery store or a nearby resort hotel. The results showed that people were much more willing to pay the higher price at the hotel for the same beer. Sounds crazy, right? Well, that’s the power of context and marketing your brand as high-end.

Be confident and focus on the differentiated value you provide to customers and make sure you continue to deliver value. For example, great customer service, great branding, etc. will show customers the value they need to justify higher prices.

• Pros: A premium pricing strategy can have a halo effect on your business and products: consumers perceive your products as higher quality and more premium than your competitors due to the higher price.
• Cons: A premium pricing strategy can be difficult to implement, depending on the physical location of your stores and target customers. If customers are price sensitive and have few other options for purchasing similar products, this strategy will not be effective. This is why it is important to understand your target customers and conduct market research.

Learn more: Learn how to conduct market research to better understand how to price your products, identify target customers, and find the specifics of your chosen niche.

Anchor Pricing: Creating a Benchmark for Buyers

Anchor pricing is another product pricing strategy that retailers use to create a favorable comparison . Essentially, the retailer lists both the sale price and the original price to show the savings the consumer can get from making a purchase.

Creating this kind of reference price (placing the sale price next to the original price) causes what's called an anchoring bias. In a study by economics professor Dan Ariely, students were asked to write down the last two digits of their Social Security number and then consider whether they would pay that amount for items they didn't know the value of, such as wine, chocolate, computer equipment, and so on.

They were then asked to name the price they would pay for the items. Ariely found that students with higher double-digit numbers named prices that were 60 to 120 percent higher than those with lower numbers. This is due to the higher “anchor” price, which is the social security number. Consumers are like that — they set an initial price as a benchmark in their minds, then “anchor” to it and form an opinion about the discounted price listed.

Another way to take advantage of this principle is to deliberately place a more expensive product next to a cheaper one to attract the buyer's attention.

Many brands across a variety of industries use anchor prices to entice customers to buy mid-tier products.

• Pros: If you list the initial price as much higher than the sale price, it may encourage the customer to make a purchase based on the perceived benefit of the deal.
• Cons: If your anchor price is unrealistic, it can damage your brand's credibility. Customers can easily compare prices of your competitors' products online using a price comparison engine, so make sure the prices you list are reasonable.

Economy price: with low production costs and high sales volumes

The economy pricing strategy is where you set low prices for products and earn revenue based on sales volume. This strategy is typically used for products like food or medicine where the company does not have a large brand to support its marketing. The business model is based on selling large quantities of products to new customers on a consistent basis.

Economical pricing formula:

Cost of Production x Profit Margin = Price

• Pros: Cost-effective pricing is easy to implement, reduces customer acquisition costs , and is suitable for price-sensitive customers.
• Cons: Margins are usually lower, you need a constant flow of new customers, and consumers may not perceive the products as quality.

Pricing Strategy Examples

Premium Price: Gucci

Gucci, one of the world's leading luxury brands, charges premium prices for its products due to their superior quality. The Italian fashion house is a successful manufacturer of high-quality leather goods, clothing, and other fashion items.

Key brand attributes include:

• Quality product
• Revolutionary creativity and innovation
• Customization

Its products are unique in style and design and are aimed at wealthy consumers. The brand name associated with this prestigious image allows Gucci to charge high prices. You will also notice that Gucci products are not usually sold through official stores, which maintains the brand's image as distinguished and respectable.

Value Based Pricing Strategy: Fashion Nova

Global fashion brand Fashion Nova has made a name for itself through influencer marketing. The brand works with different women from all over the world to showcase their clothes online in luxurious locations and styles.

By displaying the clothes on women in high-end establishments, Fashion Nova becomes a status symbol for customers. Women who shop with the brand feel that it adds value to their lives, which allows Fashion Nova to price its products the way it wants.

Discount Pricing Strategy: Netflix

Netflix is ​​a prime example of a brand using discount pricing to eliminate competitors. In the late 1990s, DVD rentals were becoming popular, and Blockbuster controlled the market. You probably remember the unforgettable smell of popcorn, plastic, and carpet cleaner from the movie Blockbuster.

But Blockbuster had two major flaws: late fees and limited selection. Netflix offered a solution. Customers could order DVDs online under a standard pay-as-you-rent model, with a better selection of movies and no late fees. In 2000, you could rent four movies with no due date for less than $16 a month. The average moviegoer could pay less than a dollar per DVD, compared to Blockbuster 's $4.99 for a three-day rental.

After Netflix destroyed Blockbuster (and other competitors like Hollywood Video ), it eventually raised its prices to maximize its profits. The low price allowed people to try the service and get to know the brand, which helped Netflix launch its online streaming service in 2007.

Competitive Pricing Strategy: Costco

If there's one thing you know about Costco, it's the deals you get on all sorts of items: bread, vegetables, giant lobster claws, seven-pound tubs of Nutella, expensive bottles of whiskey, and even a four-person steam sauna.

The brand uses a competitive pricing strategy based on market conditions to set prices. The company's goal is to offer the lowest prices on bulk purchases compared to other grocers and retailers in the market. Customers receive discounts through their Costco membership, which has a renewal rate of about 90%.

Find the best pricing strategy for you

There is never a black and white approach to developing an effective pricing strategy. Not every pricing strategy will work for every type of retail business: each retailer will have to do their homework and decide what works best for their products, marketing strategy, and target customers.

Now that you have a deeper understanding of the different pricing strategies available to your retail business, you can make more informed choices and create a more personalized shopping experience for your customers by offering them the best prices.