Selling any product without knowing its worth is like taking a road trip without plotting a course to your destination; you might drive in circles or reach a dead end.
You can’t pluck numbers out of thin air. Setting the manufacturer’s suggested retail price (MSRP) is an excellent place to start, but it often works better for mass-produced items.
You’ll want to consider a more nuanced approach for your small retail business.
Price is a key detail for consumers. More than an arbitrary number, price indicates value and helps customers decide whether to buy your products or shop elsewhere. It’s important to note that many customers compare prices online, sometimes while they’re standing in your store!
This article gives you five retail pricing strategies you can implement today. Before diving in, decide your goals and which strategy will work best for your store.
Sell More With These Retail Pricing Strategies
You can use various methods to set prices for your products or services. The trick is finding the sweet spot between what customers are willing (or expect) to pay and making a profit.
Finding a balance between high and low prices is a challenging task. Price your products too high, and your customers might suffer sticker shock. Yet pricing too low might make customers skeptical about your offer's quality and value.
When deciding on a strategy, consider your target market, business objectives, and the value of your products. Here are a few tips:
- Know your customers: What do your customers value? How much are they willing to spend?
- Determine your costs: How much does it cost to produce your products (materials, labor, manufacturing)? What are your indirect costs (overheads, shipping)?
- Look at competitors: How do they price similar products? Identify your position in the market.
How to Choose a Pricing Strategy
Identifying a pricing strategy is easier when you know who you’re trying to reach.
Creating customer profiles is an excellent place to start. You can use your point of sale (POS) system to collect data such as demographics, preferences, and purchasing habits. For example, your customer loyalty program can help identify ideal customers and their buying behavior.
Take seasonality into consideration. We’ll go into more detail later, but as seasons change, so will your pricing. Smart inventory management and business reports can help identify trends and what sells best at specific times of the year.
Lastly, set goals and objectives. Are you looking to increase sales or maximize profits? Maybe you want to establish a luxury boutique. Whatever your objective, make sure your pricing strategy aligns.
1. Psychological Pricing
How do your customers react to prices? How customers perceive prices usually depends on the product’s ability to meet their needs. For example, people will pay more for a product if they think it offers good value, satisfies their needs, or solves a particular problem.
There are a few popular methods:
- Charm pricing: How many prices do you notice that end in .99? Charm or odd pricing involves setting prices just below a whole number ($9.99 instead of $10). It makes the price seem lower than it is, and our brains see it as a bargain. Every cent counts.
- Prestige pricing: Positioning products at a higher price point creates an air of exclusivity and luxury. When customers purchase higher-priced products, it might make them feel like a VIP.
- Decoy pricing: Decoy pricing aims to make other options appear more attractive by offering multiple pricing options. For example, say your boutique sells purses. The basic purse is $50, the designer purse is $140, and the premium designer purse is $160. The designer purse is the decoy because, for just $20 more, customers can get the premium designer purse, which features better quality leather and additional compartments.
Pro tip: Use your POS system to analyze sales data and identify the most effective price points for your products.
2. Dynamic Pricing
Seasons, markets, and consumer demand have one thing in common — they change. Setting your prices and taking a back seat isn’t an option. Dynamic pricing allows you to adapt your prices, maximizing your revenue and staying competitive by optimizing prices in real time.
- Time-based pricing: With time-based pricing, you can fine-tune prices based on the time of day, day of the week, or season. Perhaps you have products you need to sell on the day — simply mark down prices an hour before closing time. To dig a little deeper, you could introduce lower prices during off-peak shopping hours or offer promotions on summer attire as fall approaches, making way for the new autumn collection.
- Demand-based pricing: Customer demand changes. What’s the current demand for the product you’re trying to sell? If it’s high, you can price your product higher. Let’s say you’re trying to sell your winter stock — you might lower the prices of winter coats as spring approaches and demand decreases.
- Surge pricing: During periods of high demand, you can increase prices to maximize profits. For example, a concert merchandise stand capitalizes on excitement and urgency by selling limited edition items right before the show starts.
Pro tip: Advanced POS systems can track real-time sales data, monitor inventory levels, and analyze consumer behavior, providing insights into demand patterns and market trends.
3. Competitive Pricing Strategies
If you’re not keeping an eye on how your competitors price similar products or services, you’re missing opportunities to win customers.
- Price matching: Some retailers offer a policy that guarantees they'll match the price of an identical product from a competitor. It shows customers that they won’t find a better deal elsewhere. This is effective if customers prefer your store but find lower prices in other stores. You can win them back.
- Price leadership: Sometimes, it pays to be a trendsetter in your market. Although it could lead to a race to the bottom, setting the lowest price for specific products can give you the edge. For example, a general store might offer a “lowest price guarantee” on staples like bread and milk.
- Loss leaders: You sometimes have to lose a little to win big. To attract customers to your store, you intentionally set a product's price below cost, banking on the fact that they will buy more once inside. For example, a clothing boutique might offer heavily discounted trendy sunglasses, knowing customers will likely pick up a few more items once they browse the store.
Pro tip: Some POS systems offer features allowing retailers to monitor competitor prices through manual input or integration with online price comparison tools.
4. Promotional Pricing
Everyone loves a deal, discount, or promotion. You want to attract customers with irresistible offers and incentives so they’re excited about shopping in your store. Promotions are an excellent way to grow sales and build loyalty. But you need to get them right — timing is crucial.
- Discounts: Offering discounts is the perfect way to attract budget-conscious customers, clear out excess inventory, and generate a buzz around seasonal events or product launches. For example, a home decor store might offer a 25 percent discount on candles during the holiday season.
- Bundling and volume pricing: Two-for-one or BOGO (buy one, get one free) offers are hard to resist. Customers love the added value and might buy more than they planned. For example, beauty stores could offer "buy two, get one free" deals on nail polish. The offer encourages customers to purchase more than one nail polish since a third one is free.
- Loyalty programs: Reward customers for their repeat business by providing a loyalty program. It encourages them to return to your store and makes them feel valued. Offer perks like discounts, points, or freebies to show your appreciation.
Pro tip: Some POS systems have loyalty programs baked in. You can manage discounts and promotions, analyze sales data to determine the effectiveness of various tactics, record customer data and purchase history, and apply rewards as needed.
5. Cost-Plus Pricing Strategies
It’s a simple tactic, but cost-plus pricing helps maintain a consistent profit margin across your business. You set prices based on production cost plus a markup.
- Determine accurate product costs: The actual cost of your products takes two factors into account. Direct costs include materials, labor, and manufacturing. Indirect costs include overhead expenses and shipping costs.
- Calculate markup and profit margin: You own a clothing store. You want a 50 percent profit margin on your latest summer dress line. If your product cost is $20 per dress, you'd add a 50 percent markup ($10) and set the retail price at $30.
- Adjust prices based on changing costs: Production costs and overhead expenses will inevitably change. When they do, you’ll need to adjust pricing to keep your profit margins steady.
Pro tip: With an advanced point of sale system, you can track product costs, monitor inventory levels, and automate price changes based on cost fluctuations. You can update prices in real time and reduce manual effort.
Implement Retail Pricing Strategies With a Robust POS System
From psychological to cost-plus pricing strategies, you have five actionable strategies to help find the sweet spot between delighting your customers and maximizing profits. But how do you put these strategies into action?
At POS Nation, we provide a robust POS system that is crucial in implementing and managing these strategies. Features include:
- Automated inventory management
- Real-time sales data analysis
- Customer behavior reports and loyalty features
- And more!
A comprehensive POS system unlocks valuable insights to guide you in making data-driven decisions, so you can easily implement these pricing strategies.
Schedule a demo with our retail experts, and we'll show you how a robust POS system can revolutionize your retail pricing game.