The Top 8 Ways To Price Your Products
There are so many different strategies retailers can use to price their products. Some precisely calculated and others purely psychological. There is no single proven tactic, as every business is different, but we’ve come up with eight of the most effective pricing strategies below.
Price products at double the wholesale cost.
This is the most common pricing strategy among retailers. It’s a quick and easy rule of thumb that ensures an ample profitability margin. However, it’s important to keep in mind that there are some cases in which this strategy would be a bad idea.
If you have unique or scarce products with slow inventory turnover and high shipping/handling costs, then you may require a higher markup strategy.
If your products are highly commoditized and easy to find, you may need a lower markup.
Mark up your products using a specific percentage.
If you want to price your product at a different markup than the typical 50% (Keystone), you can use a simple formula to calculate the retail price:
Retail Price = [(cost of item) ÷ (100-markup percentage)] x 100
For example: A bottle of wine costs you $15, but you want to sell it at a 40%markup. Here’s how you would calculate the retail price:
Retail Price = [(15) ÷ (100–40)] x 100
Retail Price = (15 ÷ 60) x 100 = $25
Use the price that the manufacturer recommends.
Manufacturers decided to implement suggested pricing to help standardize product pricing across multiple locations and retailers. The more mainstream the product, the more you can expect this standardized pricing.
MSRP pricing can save you a headache and make the pricing process much easier. However, retailers using this strategy are unable to compete on terms of price and availability.
Sell more than one product for a single price.
Customers appreciate bundles when they can purchase multiple items together for cheaper than the products would cost if purchased individually. When effective, bundling benefits both your business and your customers.
Retailers often sell more when items are bundled appropriately, rather than priced as individual products. An example of a common bundle would be a video game console bundled with a game.
Tracking bundling performance and customer satisfaction helps ensure long-term benefits. With the right bundle, you and the customer can both win.
Get rid of old inventory and attract more foot traffic.
There are many different reasons a retailer would want to offer discounts. Discounting products can help you get rid of excess inventory and you can attract a new crowd of price-sensitive customers.
Examples of the most effective discounts include sales, coupons, rebates, and seasonal pricing.
Be careful with discounting too often. It could give your store a “bargain” reputation and discourage customers from purchasing your products at regular prices.
Price products based on consumers’ perceptions.
You may be surprised how much of a difference a couple cents or dollars can make. When retailers price their products using favorable numbers and pricing psychology, they can sell like never before.
When someone spends money, they’re experiencing a pain or loss. As a retailer, you can minimize this pain. Ending a price with an odd number is a common way of doing this. For example, using $6.99 instead of $7.00.
Studies have shown that 9 is the most effective psychological pricing number. In fact, researchers ran an experiment on a standard women’s clothing item priced at $34, $39, and $44. They found that the $39 price point sold the most, even outselling the price of $34.
Using the number 9 in this way triggers the perception of a bargain or cheaper price in the customer’s mind, encouraging impulse purchases.
If you are selling a high-end or luxury item, it will actually hurt the perception to take down the price to an odd number. In this case, pricing an item at $1,000 would be more effective than $999.99.
Benchmark your prices below the competition.
You can consciously price your products below the competition to lure customers into your store over their’s.
If you’re a smaller retailer, this can be difficult to sustain with your lower margins. However, if you can manage to negotiate with your suppliers to lower your costs, you can take advantage of this strategy and start actively promoting your special pricing.
Benchmark your prices above the competition.
Pricing your products consciously above the competition is effective in branding yourself as high-end, luxurious or exclusive.
It may be difficult to pull off if your customers are price-sensitive, or if there are several other options to purchase similar products.
List both the sale price and original price to show savings.
Anchor pricing is another psychological strategy. By listing both the old and new (sale) price, customers can see the value in what they’re paying.
The original price offers consumers a reference point which they can use to compare with the sale price and realize the value and savings. Consumers will be more likely to consider the item a great deal, encouraging an impulse purchase.
Another example of anchor pricing is to intentionally place a higher priced item next to a cheaper one. Consumers will be more drawn to the cheaper priced item than otherwise, considering it another great deal.
Have you ever used any of these pricing strategies? What worked best for you? If you know of any other strategies that work well, share them in the comments below.