Pratikkumar P. Gaikwad | 15 min read | July 06, 2020
It is a juggling act to set the right prices for your products. Low pricing is not necessarily perfect, because the company may see a good influx of sales without making any profit. Similarly, when a commodity is sold at a high price, a store can see fewer sales and “price out” more budget-conscious consumers, reducing market share.
Each small business, in the end, will have to do its homework. Retailers must weigh factors such as cost of production and industry, expectations for sales and pricing for rivals. But then it’s not just pure math to set a price for a new product or even an existing product line. That can, in fact, be the simplest step in the process.
This is because numbers are acting exactly in a rational manner. On the other side human beings — well, we can be a lot more complicated. Yeah, the calculations you have to do. But beyond the hard data and the number-crunching process, you need to take a second step.
The art of pricing also allows you to quantify how much human activity affects our perception of price.
To do so, you’ll need to look at various pricing approaches, their psychological effect on your clients, and make your decision from there.
2. Retail price: Choose the right pricing strategy for your brand
Most retailers measure their purchasing choices using keystone purchasing (explained below), which effectively doubles the product’s value to create a reasonable margin for profit. Nonetheless, in certain situations, depending on the particular circumstance, you may want to label the items higher or lower.
Here’s a simple method for estimating the selling price:
Retail Price = [(Item cost) (100-percentage markup)] x 100
For eg, you choose to sell a commodity that costs you $15 at a discount of 45 percent instead of the normal 50%. Here’s how the selling price will be calculated:
Retail Price = [[(15)] x 100
Retail Cost = [(15 − 55)] x = $27
Although this is a fairly clear mechanism for markups, this pricing technique in a retail company does not work on every commodity. Since the growing retailer is special, we’ve rounded up 10 different pricing approaches and evaluated each one’s advantages and drawbacks to ease the decision making.
3. Suggested sale price by manufacturer: What is MSRP?
The MSRP, as the name suggests (no pun intended), is the amount that a manufacturer sets before marketing a product to consumers. Manufacturers started using MSRPs first to help standardize various commodity rates across numerous locations and retailers.
The MSRP is mostly used by manufacturers for highly standardized goods ( E.g. electronics and kitchen equipment).
Key Benefits: You can save yourself some money as a seller, simply by using the MSRP when selling your items.
Drawbacks: Retailers using MSRP are unable to negotiate on demand — most retailers in a particular market can sell their commodity for the same demand with MSRPs.
4. Keystone pricing: A clear recipe for marking up
It is a pricing tactic which retailers are using as a simple thumb rule. Essentially, that is where a manufacturer would just twice the wholesale cost they paid for a commodity, to calculate the retail price. Now, there are a variety of situations where the price of a commodity that uses keystone pricing may be too low, too high, or just right for your market.
When you have goods with a high turnaround, significant shipping and processing costs that are in any way rare or limited, otherwise you may be selling yourself short with keystone pricing. In each of these situations, a manufacturer will definitely be able to use a higher discount mechanism to lift the selling price on certain items in demand.
On the other hand, if the goods are heavily commoditized and readily available anywhere, it can be difficult to pull off with keystone pricing.
Key Benefits: The keystone pricing strategy functions as a quick-and-easy thumb rule that guarantees a large profit margin.
Drawbacks: It might be unfair for a manufacturer to sign a commodity that is high, based on the supply and the market for a specific product.
5. Multiple prices: The package prices Key Benefits and cons
We’ve already seen this pricing tactic in grocery stores, but clothing is also that, particularly for shoes, underwear, and t-shirts. Retailers market more than one commodity at a single price using the multiple pricing technique, a practice also known as merchandise package pricing.
For example, a report investigating the impact of bundling products noticed in the early days of Nintendo’s portable Game Boy console, it sold the majority of goods while the consoles were combined with a game rather than single items alone.
Key Benefits: This technique is used by marketers to create higher relative value at a lower cost — which can potentially lead to larger volume purchases.
Drawbacks: If you package goods at a reduced cost, you may have difficulty attempting to market them at a higher cost separately, causing cognitive dissonance for customers.
6. Prizes for penetration and discount
It is no wonder that shoppers enjoy discounts, coupons, rebates, seasonal promotions, and other markdowns related to this. This is why discounting is a key selling tool for retailers in all markets, used in a Tech Advice report by 97 percent of survey respondents.
Focus on price rates provides many opportunities. The more noticeable examples include foot traffic to the store, discharging unsold products, and attracting a more price-conscious community of consumers.
Key Benefits: The discount pricing approach is successful to draw more foot traffic to the store and get rid of out-of-season or old stock.
Drawbacks: This could earn you a name as a discount seller if used too much, which could discourage customers from purchasing your goods at normal rates.
Penetration Pricing is also a business technique useful to emerging brands. Essentially, in order to win market share, a cheaper price is initially used to launch a new drug. The tradeoff of extra income for consumer recognition is one that many young companies are able to make to get their foot in the door.
7. Pricing loss-leading: increasing the total value of the purchase
We’ve all done this: The Key Benefitspect of a discount on a hot-ticket offer lures us into a supermarket. But instead of walking away with just that product in hand, you also ended up buying a few more.
If so, you’ve got a taste of a sales plan for the loss leader. Retailers use this tactic to lure consumers with an attractive discounted product and then inspire buyers to buy additional products.
A perfect example of this technique is a grocer, who reduces the price of peanut butter and sells additional goods like bread loaves, jelly and jam, and honey. The retailer might provide a special package price to allow consumers to purchase such extra items together rather than just offering a single container of peanut butter together.
Although the original item may be priced at a loss, the seller profits from the buyers purchasing the other items when in-store.
Key Benefits: For retailers, this tactic will work wonderfully. Encouraging customers to purchase several products in a single deal not only increases average revenue per buyer but may also offset the lack of income as a result of the price drop of the initial product.
Drawbacks: Similar to the result of using discount rates so much, consumers tend to expect bargains as you overuse loss-leading prices, and may fail to pay the full retail price.
8. Psychological price: Using charm prices to sell more for odd numbers
Research has shown that when traders expend capital they experience pain or loss. It is then up to retailers to help reduce this discomfort, which may increase the probability of consumers making a purchase. It has historically been done by retailers with rates ending with an odd number such as 5, 7, or 9. A manufacturer, for example, will be selling a drug at $8.99 rather than $9.
In William Poundstone’s book Priceless, he grouped eight experiments on the use of charm values and found that they boosted sales by 24 percent on average relative to their surrounding ‘square’ price points.
Yet how do you want to use the odd number in your pricing strategy? When it comes to a range of supermarket pricing approaches, the number 9 is paramount. The MIT and University of Chicago researchers conducted an experiment with a typical women’s clothing brand with the following prices: $34, $39, and $44. Guess which one has sold the most?
That’s right — pricing the item at $39 outsold only its cheaper $34 counterpart.
Key Benefits: Charming pricing helps retailers activate buying impulses. Finishing rates with an odd amount gives consumers the impression they are having a deal — and that can be hard to avoid.
Drawbacks: If you sell premium goods, reducing the price from a whole amount like $1,000 to $999.99 that potentially harm the reputation of your brand. This pricing strategy can give luxury consumers the illusion that the goods are faulty or that they are down-market for a similar reason.
9. Aggressive pricing: Reducing the competition
Comparative pricing, as the name of this pricing technique implies, involves using rival price data as a benchmark and actively selling the goods below theirs.
Outpricing your rivals will affect consumers who are price-conscious when purchasing your goods over comparable ones. But from a pricing perspective this “race to the bottom” isn’t always the best strategy for every business and product.
Here’s how we sum up the benefits and disadvantages:
Key Benefits: This approach will be successful because you can reach a cheaper cost per product with your vendors while cutting prices and aggressively supporting your exclusive pricing.
Drawbacks: It can be hard to sustain when you’re a smaller retailer. Higher costs mean smaller profit margins, and you’re going to have to sell more inventory than rivals do. So consumers can not often search on a shelf for the lowest-priced item, depending on the goods you offer.
10. Premium pricing: beyond competitive pressure
Here, you ‘re taking the pricing strategy from above and going to the other end of the spectrum. Brands are benchmarking their rivals while purposely selling goods above theirs and positioning themselves as more expensive, exclusive, or unique. A high quality, for example, plays in the favor of Starbucks as customers choose them over a lower-priced rival like Dunkin ‘ Donuts.
Research by economist Richard Thaler looked at people camping out on a beach desiring to drink a cold beer. In this case, they ‘re given two options: buying a beer at either a run-down convenience store or a local beach hotel. The findings showed people were even more likely to pay higher rates for the same beer at the bar. Sounds nuts, right? Okay, this is the strength of the meaning and the high-end promotion of the brand.
Key Benefits: This pricing approach will work with the company and goods with its “halo effect.” Consumers believe that, regardless of the higher price relative to the competition, the goods are of lower quality and more superior quality.
Drawbacks: Based on the geographic location of the shops and potential buyers this price policy can be difficult to enforce. The approach would not be successful if consumers are price-sensitive and have many other choices for purchasing comparable goods. That is why knowing your potential consumers and conducting market research is important.
11. Pricing anchor: Build a point of reference for shoppers
Anchor pricing is another strategic marketing strategy that has been used by marketers to build a positive comparison. Essentially, both a negotiated price and the original price are displayed by a retailer to assess the benefits a customer will reap by making the purchase.
Creating this kind of comparative pricing (placing both the discounted and the initial rates side by side) causes what is known as the cognitive bias that anchors. In Dan Ariely’s MIT report, students were told to write down the last two digits of their social security number and then imagine charging the amount for things they didn’t know the worth of — in the experiment, they used examples such as food, candy, and electronic equipment.
Afterward, they were asked to bid for certain products. Dr. Ariely noted that the bids made by students with a higher two-digit number were 60-120 percent higher than those with lower security numbers. That’s because of the “anchor” higher quality, i.e. the social security number. Consumers set the initial price as a comparison point in their heads, then “anchor” it and form their opinion on the marked-down price mentioned here.
The other way you can take advantage of this idea is by purposely putting a higher-priced commodity next to a cheaper one to attract the interest of a buyer.
Most companies around industries use anchor pricing to control the purchase of a mid-tier commodity by consumers.
To sum up, below are the key benefits and drawbacks of the pricing approach for anchors:
Key Benefits: When you rate the initial price as much higher than the sale price, a buyer can be swayed into making a decision dependent on the perceived bargain.
Drawbacks: When the anchor price is unreasonable, it will result in a collapse in the brand’s morale. Customers can easily check online pricing products against their competitors — so make sure that the prices listed are reasonable.
12. Putting the best selling approach forward
A black-and-white solution to setting a price policy rarely occurs. For any form of a retail company, not every price approach will work — every brand will have to do their homework to determine what works best on their products to target customers.
So that you have a better view of some of the supermarket industries’ more popular pricing techniques, you will make a more educated decision.