You may have noticed a business opportunity and decided to open a brick-and-mortar store, an eCommerce platform, or both.
Now, you are probably concerned with how to set up your prices, but you don’t have enough resources (whether it be time, money, or something else) as of now to go in-depth regarding this matter.
A simple way to deal with this problem is to use the Keystone Pricing Strategy. In the rest of the post, we’ll cover what the Keystone Pricing Strategy is, give you a couple of examples, list out the pros and cons and try to see if it’s suitable for your business or not.
Keystone Pricing Strategy essentially means doubling the wholesale price at which you bought the products from a Brand or Manufacturer.
From one point of view, it means a 100% markup and from another a 50% profit margin.
You should have in mind that before doubling the amount, you should include in it the delivery and any additional costs you had when buying the products.
The formula for Keystone pricing is simple and it looks like this:
Wholesale price * 2 = Keystone price
Let’s say you bought an item at a price of $25 per unit. If you apply the Keystone Pricing Strategy you should be selling those products at $50 per unit.
As you already might have guessed this pricing strategy originated in times when there were no advanced computing possibilities, so retailers calculated their prices manually.
Some people are dating its origins as far back as 1896.
Supposedly, the roots of this pricing strategy are to be found in the jewelry industry. Back then, a significant number of retailers settled on this strategy as a sort of “good enough” approach.
The thing is, in many cases, it managed to cover all of their costs and leave room for a significant profit margin.
However, many factors today are complicating the issue. Most importantly, software for price monitoring has made watching over your competitors a necessity.
Let’s say that you’ve bought 100 pairs of shoes from a certain brand or manufacturer. If the total purchase price was $5000 then it means that the price per unit was $50. So, if you apply the Keystone pricing strategy and double the price at which you bought the product then you’ll be selling a pair of those shoes for $100.
Another example could be taken from the jewelry industry, where it is believed that this term originated. In this case, if you bought a golden necklace for $150 you should be selling it for $300.
The wholesale price may depend on multiple factors. Those could be the labor cost, the material cost, or delivery fees. But, on the other hand, your price depends only on the wholesale price.
It’s crucial to be aware of the potential benefits and risks this pricing strategy carries. That way, you’ll be able to decide whether it’s the right choice for you.
Also, you need to have in mind that this strategy (and every other strategy for that matter) is more appropriate for some industries than others.
One of the advantages of Keystone Pricing that comes immediately to mind is its simplicity and ease of application. It’s as straightforward as a pricing strategy gets. Simply double the price at which you bought the product.
It takes away the stress which is usually included when considering a wider range of data, which may include info on your competitors or a more detailed insight into your customers’ behavior.
Furthermore, you may adjust your prices as needed if you notice any issues with your current ones. Be careful not to overdo it, however, because it may lead to customer frustration.
If you want to change your prices in a way that won’t alienate your customers, Price2Spy’s dynamic repricing function can help you with that.
From its simplicity also comes the fact that it doesn’t take much time to apply it. And this consequently means you’ll have more time to spare for other parts of your business.
There are also some drawbacks to this pricing strategy.
One of them comes from the fact that setting up prices this way doesn’t take into account your competition. It means that you are risking being significantly higher in terms of prices compared to your competitors.
This then leads to your products staying on the shelves and costing you more as time passes. There are some very competitive industries where markups go for much less than 100%, like retail grocers or cell-phone selling. In these and similar cases Keystone pricing would be inappropriate because there’s no way you can remain competitive with it.
On the flip side, you may actually be leaving some profit on the table with keystone pricing.
That’s right, sometimes a 100% markup is too low. Certain industries, like pharmaceuticals or luxury goods, can keep their markups even in the 4-digit range.
The main reason this can work in some industries is either scarcity of a product (either artificial or genuine) or a large demand for a certain product.
In this case, you should consider using a premium pricing strategy where the risk of leaving potential profit on the table is far lower.
With the appearance of price monitoring and dynamic repricing tools such as Price2Spy Keystone Pricing may seem obsolete.
There are, nevertheless, some specific situations and niche industries in which it is possible to use this pricing strategy.
For example, if you’re just about to open up your first brick-and-mortar store and locally you have no competition. This is a scenario in which, for starters, you may apply the Keystone Pricing Strategy before “feeling the pulse” of your customers.
Basically, if you’re in a starting phase of your business and the resources are tight Keystone Pricing may be one of the safe options.
The thing is though, you will eventually look to expand and grow your business. That’s when you’ll have to take into account your competitor’s actions and perform a more detailed market analysis.
That is also when pricing tasks become more complex and Keystone pricing becomes for most businesses too risky of an option.
Another thing to have in mind is whether you’re looking to start offering your products or services through an eCommerce platform. If that’s the case, you also need to know that it’s a game with similar but different rules.
Many tasks which used to be done manually and which made Keystone pricing adequate are now automated by software such as Price2Spy and room has been made for more advanced pricing strategies.
The truth is that keystone pricing is a strategy that has a hard time finding its place in today’s competitive world. Many tools have made price monitoring and price adjusting much more approachable to small and medium businesses.
What does this mean for you?
If you’re in the initial stages of your business endeavor or belong to a specific industry (eg. jewelry) then it may be alright to use the Keystone pricing strategy.
On the other hand, if you’re planning on expanding your business or going online you may need to find a more adequate strategy.
Today more than ever it’s essential to keep track of your competitors and act according to the market changes.
This is where Price2Spy can help you and give you an edge on the market.