12 Retail Pricing Strategies Explained
As a retailer, you may often find yourself deciding between different retail pricing strategies.
Is it the right time to discount some prices? Or, should you perhaps bundle multiple products together? Maybe even stick to the good old doubling of the purchase price?
If you’re dealing with these questions you’re in luck. In this article, we’re going to cover 12 major retail pricing strategies so you can know when to apply a certain strategy in order to maximize your profits and reach your business goals.
What are the Benefits of Applying Appropriate Retail Pricing Strategies?
Many potential benefits are waiting for your business if you make the right decision regarding your pricing strategy.
For example, a successfully applied bundle pricing strategy may lead you to see your least sold products suddenly bringing in a significant increase in your revenue.
Another example would be if you want to enter a new market and attract new customers. Penetration pricing strategy will help you do just that.
Also, you should have in mind certain dangers which inappropriately applied retail pricing strategies carry.
One of the biggest risks lies in leaving your profit on the table. This can happen in a scenario where you are unaware of your stock advantages (ie. you are stocking higher amounts of a highly coveted item than your competitors). In these situations, you may often be able to apply a premium pricing strategy and pick up additional profit.
Internal and External Pricing Factors
In business, as is in life, there are things you have control over and things you don’t. When it comes to business, the factors you have control over are called internal factors. They refer to aspects of your business such as production costs, purchasing price, organizational structure, marketing mix, goals and objectives, etc.
Alongside those factors, there are some aspects of running a business that you can’t directly control. Things like demand, your competition, macroeconomic conditions (inflation, interest rates, etc.), regulations, suppliers, etc. These factors are known as external pricing factors.
When determining your retail pricing strategy you need to consider both of these groups of factors.
Arguably, however, the most important of these factors are your goals and objectives.
You need to know what you want to accomplish in order to select a proper strategy. In other words, you need to know where you want to go before choosing a road.
In the rest of the article, we explain the 12 most important retail pricing strategies used by some of the most successful businesses around the world.
12 Retail Pricing Strategies
Dynamic pricing is an advanced retail pricing strategy that means adjusting your prices as the market conditions change. Those can be fluctuations in demand, changing number of competitors, product scarcity, etc.
Also, these changes can occur monthly, weekly, daily, or even on an hourly basis. It all depends on the industry you’re in.
It’s important to be careful when applying this pricing strategy, however. Customers are capable of noticing frequent changes and if you overdo it you may alienate them.
To properly use this powerful strategy, you should consider using an already tested tool that gives results, such as Price2Spy.
Probably the simplest retail pricing strategy, keystone pricing simply means doubling the price at which you bought the product.
The main concern retailers have when applying this strategy is whether their prices will remain competitive.
Of course, choosing a strategy doesn’t mean sticking blindly to it. You should make adjustments whenever and wherever necessary.
That means raising your price if you’re far below your competition or if you can’t cover your overhead or selling costs.
MSRP stands for Manufacturer Suggested Retail Price. It means pricing the product at the price which the manufacturer or brand from whom you’ve bought the product suggested to you.
In most countries, except for the US, brands have no means of enforcing this rule. However, if you constantly go below MSRP, a certain brand may stop doing business with you.
You need to understand the point of MSRP (also known as MAP – minimum advertised price) is to preserve the brand value and market position of the product. This retail pricing strategy is a time-saver.
Essentially, competitive pricing means first and foremost taking into account your competitors’ prices when setting your own.
From there on you have three options. Go under their prices, follow their steps or go higher.
Have in mind that the more data you have, the likelier it is that you will make the right decision regarding your prices.
As the name suggests, premium pricing means charging a premium on top of your regular price for a certain product.
This may seem counterintuitive because it’s widely accepted that customers are generally more attracted to lower prices.
While this may be true for most of the product types, some products have a different logic of selling. Find out which ones and more about premium pricing.
Channel-based pricing refers to setting different prices for the same product depending on the distribution channel through which it is sold.
For example, if you have a brick-and-mortar store and an online eCommerce channel, you may decide to price the same product higher at the brick-and-mortar store, to cover the overhead costs.
The risky part of this strategy is that in the eyes of the consumer it may seem like something suspicious is going on. It’s not instinctively clear why someone would set 2 or more different prices for the same product.
To avoid this, many retailers use coupons or special discounts which are applicable when purchasing through a specific channel.
Bundling is a retail pricing strategy that essentially means selling multiple products for a single price. It’s a very popular strategy among retailers and there’s a good reason for that.
What bundle pricing does is that it allows leader products to carry the sales of non-leader products.
You can also make a decision whether you want bundled products to be purchasable separately or not. If you decide to allow such cases then you risk seeing people not wanting to buy that product unless it’s bundled. If you decide against this then you risk missing out on potential profit from customers who do want to purchase a certain product separately.
Penetration pricing gets its name from the main purpose it serves — penetrating new markets. When you want to enter an already highly competitive market you may need to lower your prices drastically to win over new customers.
Also, you may apply this retail pricing strategy if you can utilize economies of scale to create a significant demand or drive your competitors out of the market. Whatever the case may be, you need to know the potential risks and benefits this strategy carries.
The main point of anchoring is to give customers a frame of reference to convince them they’ve found the best value for their money.
It can work in two ways. Firstly, you can set your most-feature rich product as the most expensive one and the one with much fewer features just slightly cheaper. In that case, your customers will converge toward the most expensive product because they think that the price difference is more than justified and they’ll be happy to make the purchase.
On the other hand, you can make a product drastically cheaper than its slightly more advanced counterpart and drive the sales of that product. Also, when offering a discount, the initial price should be as prominent as possible, so customers have something to compare the current price to.
Simply put, discounts mean reducing the prices at which you sell your products. More often than not, this pricing strategy should be used short-term or seasonally, when trying to increase the volume of sales. Also, you may use it when trying to quickly remove a certain product from your assortment.
In the long term, discounting carries several risks. The most significant ones are that your customers may start valuing your product less and less, or they may get used to discounted prices that they become unwilling to purchase your products at full prices.
The point is, discounts should be used in specific scenarios where you are confident they’ll serve their purpose.
Have you noticed how most of the prices tend to end in .99 or .95? Or that many restaurants don’t have a currency indicator next to their prices? These are all part of a psychological retail pricing strategy.
This strategy can have a noticeable positive impact on your business while carrying relatively low amounts of risk. Make sure to read more about the strategy and its techniques in order to apply it yourself.
One of the riskier strategies, loss-leading involves selling a certain product at a price drastically lower than even the production costs in order to attract customers.
In theory, this should lead to customers buying other products which have a higher profit margin and cover the loss from the discounted product.
There is, however, a significant risk of not covering your losses because people tend to cherry-pick the best deals and ignore other products.
Make your life easier with Price2Spy
If you feel like you can’t manage to track your competitors’ prices by yourself you should check out Price2Spy’s free trial version.
Price2Spy is a powerful price monitoring software that can minimize the time you spend researching your competitors.
With over 20 different types of reports at your disposal, you’ll be able to keep track of your competitors without them ever knowing.
The best part is that the free trial comes without any strings attached — meaning you won’t have to provide any billing details unless you’re satisfied with the service.
Hopefully, our article has cleared up some things for you in terms of retail pricing strategies. Whether you’re a small, medium, or large retailer, finding the most optimal way to price your products is essential for keeping your business going. After all, it is the price, most often, which either attracts or deflects customers from your products.