Setting the Right Price – How to Create a Pricing Strategy That Works

But does determining a pricing strategy need to be difficult? After all, it’s basic economics, supply and demand where one simply makes a demand curve and determines the point where price and demand meet that maximizes profit. Ahh, if only it were that simple.

A business’ pricing strategy can influence whom a business will target and therefore, can impact advertising, location, and much more. For a small retail business, everything must be aligned, including the pricing strategy.

So, what pricing strategy should your retail business follow? Here are a few common strategies that businesses utilize:

Premium or Prestige Pricing

In this scenario, a retail business deliberately prices their merchandise/service at about that of the competition, and then “brand themselves as more luxurious, prestigious, or exclusive,” says Lindsey Peacock in an article on Shopify. A well-known practitioner of this strategy is Starbucks.

For this practice to be successful, customers must perceive your brand as being of high quality and/or limited. This perception leads to customers willing to pay higher prices. For this strategy to work, the key is to “be consistent and avoid discounts that hurt the bottom line,” says Tucker Dawson in Price Intelligently. Challenges arise when customers are price sensitive and have other options.

Competitive or Comparative Pricing

As the title implies, this strategy is based on offering lower prices than the competition. “…comparative pricing refers to using competitor pricing data as a benchmark and consciously pricing your products below theirs,” says Peacock.

In this strategy, retail businesses are competing for the bargain hunters. Such shoppers can be finicky and will go wherever the deal is. To offer lower prices, the retail business needs to be able to secure good prices from their suppliers – not easy for a small retailer. It’s also challenging for small retailers to be able to offer lower prices as it can result in reduced margins and reliance on high volume.

Competitor Pricing

In this case, a business considers its competition and prices either a bit below or above their prices. This requires keeping an eye on the competition and leads to Price Intelligently noting, “Competitor based pricing is a lot like a bad case of plagiarism.”

In this strategy, while it’s simple, involves little risk, and is easy to implement, there’s little creativity or independence as your business is simply following what the other guys are doing.

Manufacturer Suggested Retail Price (MSRP)

Manufacturers often offer a suggested price in the hopes of standardizing the prices of their goods. According to Intelligence Node, “One major advantage of setting retail prices in this way is that you’re saved from breaking your head over analyzing consumer data and consumer and competitor behavior while pricing your products. Disadvantage being you’re not able to carve out any advantage over your competitors as you’re forced to sell the product at a pre-set price.”

Keystone Pricing

Very common in retail, this simple pricing strategy is accomplished by a retailer doubling the wholesale cost of an item to determine the retail price. While simple can be good, it’s not always the best path. “Keystone pricing is hard to pull-off when your products are easily available everywhere,” says Intelligence Node. It also doesn’t take into account other factors including inventory turnover, shipping costs, competition, etc.

Multiple Pricing or Bundling

A Shopify article describes the bundling pricing strategy, “Product bundling is when you package complementary products together, often sold at a discounted price or with an added value.”

The bundle leads to customers believing they are getting a good deal. Appropriate packaging of the bundle can show that the items clearly go together and inspire the purchase. Ultimately, bundling can lead to larger volume purchases. As a negative, “When you bundle products up for a low cost, you’ll have trouble trying to sell them individually at a higher cost…,” says Peacock.

Loss Leading Pricing

This pricing strategy involves the retailer offering an item at a discounted price – sometimes lower than cost and lower than the competition – to draw customers into the store in the hopes that they will buy additional items at higher margins.

The drawback to this strategy is that the customer only buys the loss leader item and grows to expect the low price resulting in the customer being reluctant to pay regular price. A positive, according to Peacock, is that this strategy can encourage the buying of multiple items in a single transaction, providing a boost in sales per customer and can cover the loss from the loss leader item.

In a vacuum, no pricing strategy is perfect as they each have pros and cons. The right pricing strategy for your small retail business is the one that works in conjunction with your other business decisions. When this is the case, the right pricing strategy can lead to happy customers and more profit.