How to Price a Product for Retail and Maximize Profits
Determining how to price a product for retail is one of the most fundamental questions a business should ask. The right answer will maximize profits and foster growth.
Product pricing may seem straightforward on the surface, but there is a wealth of factors to getting this incredibly nuanced aspect of business management just right. When done well, product pricing ensures a company is able to maintain profitable inventory management. When done poorly, however, everything from stock profits to sales volume can suffer.
While there is no one way to get it right, key objectives to product pricing should center around understanding the target market, competitor prices, and perfecting that balance between quality and price. With balance and dynamic pricing being key, it's also vital to avoid under or overpricing.
While it's tempting to underprice during a tough economy, this can impact a customer's view on whether that item is of value or quality. On the other hand, overpricing can drive customers to check out the competition and seek a better deal.
8 Popular Pricing Strategies
Business success revolves around choosing the optimal mark-up price of products. So how do businesses strike that perfect balance and make good price decisions to ensure maximized profit margins?
Creating retail pricing objectives is key (what are the company's financial, marketing, and strategy targets?) and then using those as a foundation to implement effective pricing methods.
Consider the top eight pricing methods below.
1. Manufacturer suggested retail price (MSRP)
The MSRP refers to the figure set by the manufacturer as the recommended retail price. This is obtained by taking into consideration the price of similar products, the total cost to manufacture the item (such as material cost), and a profit margin that incorporates both the manufacturer and the retailer.
Once set, a manufacturer will deliver the product for a wholesale price which is roughly half that of the recommended retail price. This figure can be a good gauge or starting point for businesses and is referred to as cost-based pricing.
While the MSRP is a sure-fire way to generate profit, there are pitfalls to be wary of, such as if the figure is artificially skewed for retailers to implement generous discounts, or when the market fluctuates to make this price unfeasible.
2. Keystone pricing
This pricing system simply works by setting a retail price that is double that of the goods sold. While it is easily implemented and researched, it shouldn't be utilized for every product. It can also harm potential profit - particularly if it's used for high-demand items that could be priced higher.
3. Bundle pricing
For a simple marketing and selling strategy, bundle pricing gives retailers the chance to package related products together and then sell them all for one price - leading directly to increased sales.
This strategy is implemented far and wide in tech and entertainment industries (such as cable companies bundling together several channels for a package price) and allows companies to cut down on campaigns and promotions across individual products, saving time and money. It also has high customer appeal as it gives the impression of more bang for your buck.
4. Discount pricing
This is the most useful method for companies looking to clean out old stock or out-dated products. Discount pricing is used to help businesses clear out inventory quickly by offering a reduced price to customers. It's also a great strategy for businesses looking to sell high volumes of a product and is particularly useful during slow sale periods. This technique can be implemented for short periods of time to generate urgency and works best when it is not doled out too often.
5. Loss-leading pricing
Sometimes getting customers through the door and building brand awareness and clientele requires an initial profit loss. This is where loss-leading pricing can be useful as it seeks to price select items below the profit margin in the hopes of luring in customers.
A great example of loss-leading pricing includes two for the price of one deals or, in the restaurant business, half-priced menu items on certain days of the week. Over a short and strategic time period, this can also be an incredibly effective tool to poach customers from the competition.
6. Below competition pricing
This method is all in the title - it involves pricing stock below that of the competition in a bid to undercut them. However, while this strategy can indeed be effective, there's a chance the competition will undercut theirs even further, precipitating a price war that's financially harmful to both parties.
7. Above competition pricing
Unlike below competition pricing, this strategy seeks to do the opposite in the hopes of fostering a high-end or premium environment that attracts a more image-conscious and cashed-up buyer who is willing to pay more for status.
While it's every seller's dream to charge more and instantly increase profits, this method can only be effectively implemented on certain products and usually only via recognizable brands with a reputation for luxury and quality. This method also falls into value-based pricing territory, as it places a tangible price on brand recognition and a sense of opulence or wealth.
8. Anchor pricing
This concept involves setting an asking price that is higher than what a customer should pay, with the objective of leading the customer to mentally set a price they'd like to pay, knowing from that point it will be a negotiation.
This might seem like unnecessarily hard work, but this can be a clever way to create an atmosphere where the customer can feel empowered and as though they're in control of getting a good deal. If they reach that set price in their minds, there's a good chance they'll also seal the purchase deal. This pricing method is particularly seen in car dealerships and real estate.
With a wealth of methods on hand, the bottom line for businesses is to price intelligently to ensure whatever pricing strategy is implemented generates a profit. To do this, inventory management software can be further used to proactively track existing stock within the business, produce accurate inventory reports, and ensure the profitability of certain products and their price points.
Being aware of cash flow and the popularity of certain items is crucial to generating a profit. Once a company has used a pricing calculator and automated software to unearth average monthly overhead costs, appropriate pricing strategies can be implemented.
- What is Inventory Management? A Primer for Small Businesses
- How to Calculate Safety Stock- Step by Step Guide
- Inventory Loan- Is It Right For Your Business & How Can You Apply?
- How to Calculate and Manage Inventory Cost in 4 Steps
- How to Price a Product for Retail and Maximize Profits
- 5 Retail Inventory Management Strategies to Improve Efficiency
- What to Know Before Investing in Retail Inventory Management Software
- What is Supply Chain Management and Why is it Important?
- What is the Difference Between Perpetual and Periodic Inventory?