In retail, choosing the right pricing strategy helps stand out among competitors, attracts more website visitors, and increases the company’s sustainability in the marketplace. The introduction of new business models and technologies as ways to sell products increases the need for a flexible pricing model.
To make sure you are keeping up with the pace of modern retail, review your pricing strategies and find out which tactics are the most efficient for your company. Here are some recommendations on how to build the right strategy to drive more revenue and recognition for your retail business.
What is Pricing Analysis for Retail Stores?
Pricing analysis refers to setting the cost of products or services based on thorough research of the market. At times, the depth of analysis can go as far as analyzing optimal pricing strategies by communication channels, location, and other segmentation factors.
The main goal of pricing analysis is to come up with a strategy that allows retailers to achieve the highest return on investment without giving up on audience engagement. Ideally, pricing decisions should not get in the way of customer acquisition and retention, while continuing to drive revenue to the company.
When considering how to approach pricing decisions, business owners usually rely on the following characteristics:
- Transactions and basket insights. Retailers can set different pricing strategies for various products based on their popularity among customers, the elasticity of the products, and the number of complementing goods associated with the items.
- Shoppers’ perception of the price. By finding out how much value customers place in items, retail business owners can make informed strategic decisions and make sure they are not overestimating or underestimating the cost of the product.
- Merchant’s judgment. At times, a merchant can rely on a personal vision of how much a product is worth. Moreover, all pricing decisions are subjective to a certain degree. Basing your strategy entirely on unfounded beliefs, however, is risky and likely to lead to financial losses.
To make sure you are choosing the right pricing strategy for your company, consider running a thorough pricing analysis before releasing a product. This includes familiarizing yourself with the most common tactics and strategies, analyzing their pros and cons, and determining which approach is most promising for the company’s future development.
Benefits of Product Pricing Analysis
Most retailers need to bring new products to the market as fast as possible, to attract customers before a competitor starts offering similar items. That’s why skipping product pricing analysis is common among brick-and-mortar, as well as e-commerce store owners.
The thing is, in the long run, you will end up losing more than you gained by skipping out on research. Here are the benefits of conducting price analysis in retail:
- Higher adaptability to market fluctuations. Running a recurring pricing analysis encourages business owners to keep track of the latest trends and tendencies in the industry. By researching, you will find out which new strategies competitors implement and thus can adopt innovative pricing practices before they become commonplace.
- Avoiding revenue losses. Guesswork in the decision-making process leads to either overestimating or underestimating the worth of the product. In the first case, a retailer loses prospective customers — first-time visitors might never come back once they label the brand as ‘expensive.’ On the other hand, low prices make the company unsustainable in the long run and limit business managers from maximizing revenue and efficiencies. A pricing analysis helps find the middle ground and sets a reasonable price for your goods.
- Being able to reach new audiences. Pricing analysis helps retail marketplace managers discover new lucrative customer segments. You can use the statistics, obtained during the research, to improve marketing and PR activities, increase the efficiency of your sales efforts, and tap into new markets.
- Improving strategizing efficiency. Pricing analysis gives foundation to your plans, helping estimate revenues and audience responses to the launch of new product lines more precisely. In addition, this research will offer useful insight into the company’s marketing, delivery, and customer acquisition strategies.
- Introducing new scalability opportunities. Pricing analysis is essential for any ambitious, rapidly growing company. With no research, there’s no way for international retailers to win over local store owners that are cheaper to maintain and better adapted to the conditions of the local market.
Top 7 Retail Pricing Strategies
Getting to know the most common pricing tactics is a crucial step in pricing analysis for retail business owners. By taking a closer look at the most popular retail pricing strategies and finding out about the risks associated with adopting them, a store manager will be able to make an informed strategic decision.
We want to review the seven most popular pricing techniques that both small-scale and large-scale retailers use to price goods. Take a look at them to find out which of these price points in retail fits your business model and goals.
1. Competitor pricing
By definition, this strategy refers to setting the cost of the product based on how other companies in the market price similar items.
There are three ways to implement competitor pricing:
- Product price = average price of a similar item on the market. This is the most risk-free way to set the cost of the product. On the other hand, it doesn’t allow business owners to stand out among competitors or generate more revenue than other retailers.
- The product price is lower than the average price of a similar item on the market. This strategy gives business owners a competitive advantage since shoppers are more likely to choose a cheaper product over a more expensive alternative. On the other hand, the tactic brings forth plenty of sustainability risks, lowering the profitability of the business. Other than that, shifting the positioning of a below-the-floor product to the premium segment will be harder — the company is likely to lose followers and collect negative mentions.
- The product price is higher than the market average. In this case, a retailer will be targeting the premium segment. Although setting an above-the-cap product price makes a business more profitable and allows it to appeal to audiences with high average incomes, such companies are limited in scalability, have a lower potential reach, and have to deal with high customer expectations.
If you are not ready to make pricing a part of your positioning, using the market average as a reference point when setting product prices is the wisest decision. On the other hand, if you want to attract more customers and increase brand awareness, going slightly lower than the average might be more convenient.
Similarly, if you run a sustainable, well-established business, launching a premium product targeted at premium customers might be a way to resonate with upper-class shoppers.
2. Value pricing
The strategy lies in setting the cost of the product based on the customer’s perception of its value. This technique is highly consumer-centric.
Keep in mind that prices will often fluctuate based on how people’s value systems change over time.
The value-based pricing strategy is a good fit for companies that sell highly personalized products, as opposed to retailers who offer standard items. That’s why the fashion industry is the first one to benefit from this tactic.
Promotion techniques like attracting influencers for endorsements, hosting fashion shows, and launching limited edition items are all directed at increasing the value of the brand or a particular item and being able to set a higher product price in the future.
3. Markup pricing
Markup pricing — also known as ‘a percentage over the cost’ pricing is the strategy that implies taking the production cost of the product and adding a revenue markup to it.
This approach gives retailers confidence in being able to profit from every sale.
Other advantages of markup pricing are:
- It does not fluctuate over time
- It is easy to calculate and doesn’t require conducting a lot of research
- It makes it easier for product stakeholders to calculate return on investment
On the other hand, the system comes with evident drawbacks, such as:
- It encourages wasteful expenses among consumers
- It reduces business flexibility and narrows down the number of scalability opportunities
- It doesn’t take customers much time to figure out they are being manipulated, thus, a retailer is at risk for bad publicity and reputational losses
4. Keystone pricing
Keystone is a way to price merchandise where the products’ wholesale price is taken as a starting point and then doubled.
Although keystone pricing is extremely profitable to business owners — the initial markup starts at 50% — using it as a chief pricing strategy is unreasonable.
Keystone pricing is not a flexible strategy. In most fields, a retailer that uses this technique will not be able to attract multiple customers since a lot of competitors offer lower markups or sell a product at their wholesale price.
Having said that, keystone pricing is a solid strategy for setting the cost of products that are challenging to produce or that are unique to the market. Also, the tactic is often used in conjunction with discount pricing — a retailer sets the 50% markup as the original price and applies a 25% discount. In this case, a customer might feel like he is saving money when, in reality, the seller manages to sell an item with a solid markup.
5. Multiple pricing
Also known as multiple-unit pricing, the technique lies in setting a price for a bundle of units as opposed to estimating their value individually.
It’s harder for customers to understand if the offer is reasonable when they are paying for products in bulk. There’s a cognitive bias that getting a bundle of goods might mean choosing a better deal. Store managers can use multiple-unit pricing when:
- The product is at risk of being spoiled. If you need to push a large number of products limited by a due date, implementing the strategy is a good way to generate revenue and free up the warehouse.
- To bring new products to the market. Multiple pricing is one of the most powerful penetration tools out there. Bulk sales help retailers create offers that are different from the ones competitors offer. This way, a new product might appeal to larger audiences and generate higher demand.
- To create large customized deals. To increase the size of the order, a retailer can add a couple of free units to the package. This way, the store owner will encourage shoppers to spend more at the store — purchasing a high number of items will eventually become a customer’s habit, and a retailer will be able to generate more daily revenue.
6. Discount pricing
Although discount pricing is widely used as a complementary strategy, retailers can use it as a standalone tactic as well.
There are different ways to present a product discount — here are some ideas:
- Seasonal discounts or special occasions — Black Friday, Christmas, and such
- Loyalty discounts that help build a long-lasting relationship with a recurring customer
- Volume discounts encourage customers to get more product units, increasing the market penetration of an item or helping exhaust stock
- Promotional discounts are common when a product is no longer trendy and is at the end of the life cycle
Although discounts tend to reduce the profitability of a business, implementing discount pricing might allow retailers to kill two birds with one stone:
- Reducing warehouse maintenance costs by getting rid of surplus stock
- Increasing in-store or online traffic flow
- Improving customer retention by praising clients for loyalty
7. Psychological pricing
This retail pricing strategy is based on the idea that people are more inclined to get products with some types of prices than others.
The most popular application of psychological pricing is the theory of odd numbers, according to which it’s easier for a prospective customer to choose the product if the price ends in an odd number — $1,999 instead of $2,000.
There are other psychological pricing strategies store managers can explore:
- Creating artificial constraints that create a sense of urgency and encourage a prospective customer to make up their mind. Limited edition items and one-day sales are examples of such an approach.
- Choosing verbal descriptions instead of numerical values when offering discounts. Using the wording ‘Buy two at the price of one’ is more efficient than the same offer phrased as a ‘50% discount.’
- Paying attention to the length of pricing. For instance, deleting significant figures and turning $15.00 into $15 makes the latter be perceived as a better deal. A customer will be inclined to believe that a product with a cost of $15.00 is more expensive than the one for $15.
At bvblogic, we use our experience in completing retail projects to help companies price their products reasonably. Recently, we collaborated with MOYO, one of the largest electronics retailers in Ukraine. Our analyst team ran a successful pricing analysis for the company’s stores all over the country.
Here’s what bvblogic took into account:
- The perceived value of the product the retailer offered;
- Analytics on the average price of the model on the market;
- The company’s business goals — attracting more traffic to the store, getting rid of surplus stock, etc.
- Scalability opportunities — we used dynamic pricing to adapt offers to different user categories across various locations.
After thorough analysis and associated work on this project, the store reported an increase in customer retention and acquisition rates. After recognizing the importance of price analysis, the company was able to generate more revenue, tap into new scalability opportunities, and build flexible promotion strategies.
Pricing analysis is a reliable way for store managers to ensure they are not missing out on potential revenue or attracting more customers. Researching the market and being familiar with the most common retail pricing methods helps organizations stand out among competitors and build sustainable businesses.
To conduct a thorough pricing analysis, reach out to Bvblogic. Our team will research the market, analyze your company’s business model, and create a personalized retail pricing strategy for your business.
Leave us a message— we will help your e-commerce stores to price your items the right way.