Imagine this scenario: You’ve spent months, even years, perfecting your designs and bringing your products to life. You’re ready to open your retail store! Then someone asks, “How much do you plan to charge?”
You might not have even thought about it. All you want to do is create the best products you can and find a way to get them into the hands of delighted customers.
Pricing your products doesn’t have to be an overwhelming task. But you do need to strike a balance between customer satisfaction, profit margins, and overall store success. It’s a delicate task. And we’re here to help.
This article offers a strategic way to price your products. We'll summarize the crucial components contributing to a sound pricing strategy and provide a step-by-step guide to simplify the process.
How To Price a Product for Retail: It Depends
“It depends” is never the answer you want to hear, is it?
But there is no foolproof way to price products for retail. Every business is as unique as a fingerprint. Your business model, products, target customers, and even how you run your store make your business unique. And these factors dictate the pricing strategy that will work for you.
It’s a balancing act. First, there’s customer value. You want customers to feel like they’re getting a good deal. But lowering your prices might trigger a race to the bottom. So you’ve got to factor in making a profit. Then there's your store’s success. You’ve got to keep the lights on and the doors open and keep growing.
Related: How Much Does It Cost To Open a Retail Store?
How do you attract new customers, keep current customers happy, and sell enough products to stay profitable? Find the sweet spot — where your customers get value for money, and you make a decent profit — so your store not only survives, but thrives.
Step #1: Understand Your Costs
Before pricing your products, you need to know what it costs to produce them and get them into the market. Not only do you have the cost of raw materials and production costs, but you also have other costs that can sneak up on you.
- Fixed costs: These costs don’t change, no matter how much you sell. You’ll have the rent for your store and warehouse, employee salaries, insurance, permits, and utilities.
- Variable costs: These costs do change based on how much you produce and sell. Start with the cost of goods sold (COGS), which is how much it costs to make your products (raw materials, labor costs). Packaging and shipping costs fluctuate depending on your products' size, weight, and destination.
- Marketing: It’s easy to overlook marketing, but you must factor in costs for online ads, printing flyers, and any other marketing initiatives you launch. It’s an ongoing cost, too.
The first signal of success is reaching your breakeven point. In a nutshell, your breakeven point is when your sales cover all your fixed and variable costs. Knowing your breakeven point helps set your prices to ensure you’re covering costs — anything else on top is profit.
Step #2: Research Your Competition
Competitor research is vital to a good pricing strategy.
Your customers will compare your prices to other stores. You might lose potential customers if your prices are significantly higher for similar or even identical products. On the other hand, customers might question the quality and value of your products if your prices are too low. Use competitors as a benchmark.
Start by identifying your main competitors. Whether those are businesses in your local area or online retailers selling similar products, you can get a feel for their pricing strategies. Visit their stores, check their websites, or even purchase their products.
Related Read: 9 Differences of E-Commerce vs. Retail: Can You Do Both?
How do your competitors justify higher or lower prices? Product quality, customer service, and the overall shopping experience are all factors that contribute to their value proposition.
Once you’ve got an idea of where you want to price your products, consider the concept of positioning. How will your customers perceive your product in relation to your competitors? For example, you might charge higher prices if your products are made of higher-quality materials.
Find a price point that reflects the value you offer, but keep your competitors' pricing in mind.
Step #3: Determine Your Target Market
Picture your ideal customer — who are they? What do they like? What are their shopping habits? Once you know who you’re selling to, it’s a lot easier to price your products. If you try to please everyone, you’ll sell to no one.
Think about the group of people most likely to buy your product. You could categorize them by age, income, or lifestyle. This step is crucial; your target market has different expectations regarding price.
For example, luxury shoppers looking for high-end products may be willing to pay top dollar for your products. However, you'll need to price your products more modestly if your target market is bargain hunters.
How you price your product doesn’t just affect your profits; it also determines how people view your products.
By pricing high, customers may view your products as luxurious or high-quality. Your reputation plays a role here, too. Some customers are willing to pay more just based on your name. Speaking of customers, listen to them! They’re the ones buying your products. You could run focus groups and surveys to determine what they expect to pay for your products.
Pro tip: Use point of sale (POS) sales data to see which price points are most popular.
Step #4: Choose a Pricing Strategy
You’ve got a handle on your costs, scoped out the competition, and determined your target market. Now you’ve got to choose a pricing strategy, and there are various strategies you can choose from.
- Psychological pricing: Charm pricing involves setting prices just below a whole number ($9.99 instead of $10). Our brains see it as a bargain. Prestige and decoy pricing are other methods.
- Dynamic pricing: Surge pricing involves increasing pricing to maximize profits when demand is high. Demand-based and time-based pricing also work here.
- Competitive pricing: Through price matching, price leadership, and loss leading, you can use your competitors’ pricing strategies to win customers.
- Promotional pricing: Everyone loves a deal, discount, or promotion! Lean on bundling, volume pricing, and loyalty programs to price your products.
- Cost-plus pricing: Maintain a consistent profit margin by setting your prices based on production cost plus a markup.
For a deep dive into the strategies above, check out 5 Retail Pricing Strategies to Sell More and Delight Customers.
Your chosen strategy depends on your business, products, and market. Perhaps a combination of all of them will work best. It’s best to revisit your strategy over time to ensure it aligns with the market and your business goals.
Step #5: Test and Adjust Your Prices
Pricing is an art that requires some creativity, intuition, and trial and error. Your strategies will need regular checkups and adjustments to determine what works and what doesn’t. You’ll probably start with a hypothesis. For example, “My customers will pay $50 for this leather handbag.”
If it flies off the shelves, you have a winner. If it doesn’t, you need to adjust something.
You could try split-testing your pricing strategies. It’s best to do this in the research phase. Offer the same product at two different prices to different customer groups. How do prices affect your sales? Or you could use surveys to see which price point customers are willing to pay.
Through testing and adjustment, you can determine if your prices are too high, pushing customers away, or too low, leaving money on the table. You’re not trying to find the perfect price point here — you want to continually fine-tune your pricing strategies to delight customers and maximize profits.
Can Your POS System Help Price Products?
Absolutely! Your POS system is a powerful tool you can leverage to set prices. It’s a goldmine of data and insights into your business.
You can keep track of your costs, from the cost of goods sold to overhead expenses. Your POS system generates inventory reports to show you which products are selling well and which aren't, so you can adjust your prices to move inventory more effectively.
Detailed sales analytics show you how your sales are affected by different pricing strategies, and customer data helps track your customers’ buying habits, price sensitivity, and preferences. Some advanced POS systems let you bundle products together, offer mix and match pricing, and adjust your prices based on various factors, such as demand, time of day, or inventory levels.
Your POS system does a lot more than process transactions!
How To Price a Product for Retail: An Ongoing Process
There you have it! To recap the steps:
- Understand your costs
- Research the competition
- Determine your target market
- Choose a pricing strategy
- Test and adjust your prices
Follow this quick guide to confidently price your products, knowing you’ve done everything possible to get them right. Just remember that it’s an ongoing process.
At POS Nation, we work with thousands of retailers to help streamline inventory management, speed up checkout processes, and grow their businesses. With customizable software, easy-to-use hardware, and straightforward pricing, we can help your retail store drive profits and delight your customers.
But what should you look for in a robust POS system? How can you decide which POS system and provider is best for your business? Check out our free resource, the Buyers’ Guide, today.
