Product Pricing Guide
You also need to avoid the trap of under-pricing your items when you start a business.
Receiving a healthy stream of sales does you no good if you are unable to turn a profit from those efforts.
Paying your bills each month is one of those things we all kind of need to do!
Finding the correct price that reaches profitability without being too excessive for your customers is a balancing act that all companies and entrepreneurs follow.
Achieving the best possible point requires several factors to work together, including overhead costs, production, and even competitor pricing.
Your prices must go beyond the mathematics of each transaction.
You must be able to communicate the short- and long-term value of what each item offers to a customer if they decide to make a purchase from you today.
If you are going to be successful in this area, then these are the steps that you will need to follow when making your pricing decisions.
1. Choose the Correct Pricing Strategy
Keystone pricing is the benchmark that most companies use when they sell retail products.
This process will double the final cost of an item to create a healthy profit margin.
Let’s say that you decide to start making candles to sell online.
The combination of your time, labor, materials, and overhead costs comes to $3.50 per product.
That means you would want to sell the item at $7. Each transaction guarantees a $3.50 profit.
There are times when you will want to change this price as well, like when you are having a sale right before Christmas.
By knowing what your bottom line happens to be ($3.50 per product in cost), you know that a profit is still possible if you sell the item at $3.51.
Of course, you won’t stay in business long when you’re making $0.01 per candle.
That is why you will see prices marked down between 20% to 80%, depending on where you decide to shop.
That markdown comes from the margin price ($7.00) per candle.
If you were to run a 20% sale, then you would discount that candle by $1.40.
Your transaction would be for $5.60, which means you still made $2.10 in profits.
2. Dealing with the MSRP
MSRP stands for “manufacturer’s suggested retail price.”
If you decide to start selling highly standardized products, then this is the price point at the retail level that the manufacturer of the product wants you to set for your customers.
From a retail perspective, you can save yourself a lot of time by following these guidelines.
The only problem with the MSRP is that most retailers are unable to compete on price when using this strategy.
If everyone is following these guidelines, then your competitors are selling the product at the same price you are.
AriZona Beverages provides an excellent example of this strategy.
On many of their beverage cans, you will find “Great Price! 99 Cents!” actually printed for the customer to see.
Some convenience stores who need to up their profit margin will then be forced to place a sticker over this price to tell customers that the MSRP doesn’t apply.
That practice is something that AriZona Beverages doesn’t like to see either.
If you find that selling items at an MSRP is your only choice, then consumers must see more value in your brand than what your competitors offer.
You can provide that by providing better service, additional products, or more convenience in the shopping experience.
3. Online Selling and Bundle Pricing
If you ask writers, graphic designers, logo makers, and other artists who sell their services online what their biggest complaint happens to be, the answer is usually the same: bundle pricing.
Many customers believe that when they purchase items in bulk, then they are entitled to a discount.
It’s like when you go to McDonald’s and order a combo meal instead of each item separately.
By buying multiple things, the customer gets to save a little bit.
From the perspective of the artist who provides services, it takes just as long to create 4 items for one customer as it does to make four items for four separate transactions.
If they offer a discount on those items, then it eats into their margins.
That can mean the difference between eating healthy foods for the week or living off of macaroni and cheese.
Retail sales are a little different, even with online selling.
Bundles are a way to promote added value without requiring a hefty discount.
Nintendo found that they sold more consoles with their GameBoy system when it came bundled with a game instead of requiring individual transactions.
This outcome occurs because you offer a higher perceived value for a lower cost, which can eventually lead to more significant volume purchases.
The downside to this strategy is that once you start bundling items, it becomes more challenging to sell them individually at a higher price point.
4. The Risks of Discount Pricing
Retailer J.C. Penney, through the leadership of CEO Ron Johnson, tried to transform the retail sales process by going to a fair-and-square pricing strategy instead of using discounted pricing.
The thought was simple: by telling customers what they could expect to pay at any given time for an item, then they would know what they would want to get.
The idea FAILED miserably.
Customers like it when there is discount pricing available to them.
Johnson thought that because everything in the store typically sold at a 50% discount from the list price anyway that being upfront about the savings would be helpful.
Even if the savings from discount pricing does not translate into something significant, consumers like the feeling that they get when they find something they need at 70% off.
They are even more likely to shop for other items in the store if this happens, which can lead them to spend more than they anticipated.
This process applies to online shopping as well.
The only problem is that if you use this strategy frequently to bring traffic to your physical store or e-commerce platform, then it could hinder your customers from purchasing an item at its regular price.
5. Loss-Leading Pricing and Its Benefits
Let’s say you went to Apple’s website because you were lured by a $150 discount on a new MacBook Air because it was a certified refurbished product.
Now that you are on the site, you end up walking away with a Magic Mouse, a new protective cover, and an extra charger because you feel like these items will help you to be more productive as well.
Retailers attract customers by promoting a specific discount on what they know is a hot-ticket item.
Then they encourage their shoppers to buy additional items before leaving the store by supporting value through the presentation of problem resolution.
It is like having an upsell happen after the process took steroids.
When people experience the opportunity to buy something they want at a discounted price, then it creates a feeling which has an addictive quality to it.
They want to experience it again, so they will begin to shop around for more items.
You will even find other pricing strategies offered here to keep pushing the value proposition higher, such as bundling, to encourage more purchases.
Whenever there are multiple items purchased in a single transaction, it will boost your overall sales-per-customer figure.
The only disadvantage here is that if you use hot-ticket pricing too often, then your customers will expect bargains.
You might also find that they will only purchase the one item that is steeply discounted, which could hurt your overall profits at the end of the day.
6. Mental Pricing Strategies
People struggle to purchase items because shelling out some cash for something is a painful experience.
We all encounter this issue with every transaction, no matter how wealthy we are.
That is why families opt for the 80/20 ground beef instead of the 93/7, buy Powerade instead of Gatorade, or purchase generic medications whenever possible.
By spending less money, we can ease the pain of financial loss.
That is why you will find that many retail prices are sold at $9.99 instead of $10.
Even though the difference is only $0.01, it feels psychologically to the consumer that they are not spending as much on the item.
The pain from the transaction is, therefore, less, which means there are fewer obstacles in place for the sale.
William Poundstone looked at several different studies that involved these charm numbers from a retail perspective.
He found that retailers could increase sales by up to 24% simply by pricing items near their rounded upward price points.
What is unique about this process is that people are somehow attracted to odd numbers, especially when a 9 is involved.
An experiment on the prices of clothing items priced at $34, $39, and $44 found that customers preferred the item priced in the middle, despite its expense, because of the perception of added value.
There is one exception to this pricing strategy to consider, and that is if you sell luxury goods.
If you lower prices from a whole number with these items, then it can hurt the perception of the brand.
You want to mark up in this situation instead of marking down.
7. Anchor Pricing
If you shop on Amazon, Walmart, or similar large online retail sites, then you will see this pricing strategy in use quite often.
With anchor pricing, you are allowing customers to see what the MSRP is for the product they want, and then you offer them a discounted price that shows how much they can save with a purchase.
You can also use anchor pricing as a method for allowing a customer to choose between different packages or products that you offer.
Shopify follows this process by offering three different plans that customers can compare when setting up an online store. A basic shop is $29 per month, while the “standard” plan is $79.
If you need advanced features, then it would be $299 per month.
People are willing to pay more for an item under this strategy if there are three elements in play during their review of it.
– The original cost of the item is at a premium level.
– There is a significant discount that is available.
– The product in question has a proven quality to it.
There are times when some retailers try to take advantage of this pricing strategy by raising the stated list price to then offer a discount.
Even the larger chain stores use this trick sometimes.
Researchers tracked up to 10 prices of big-ticket items at 7 national chains in the United States for 44 weeks beginning in the summer of 2014.
Most of the price checks were performed online, but spot checks at physical locations were also performed.
Three of the stores (Sears, Kohl’s, and Macy’s) had items on sale almost always or always during that time.
Sears had two pieces there were on sale for all 44 weeks.
If you provide comparison pricing like Amazon as a small business, you can cause your customers to start thinking of you more like they would see Sears.
That is why it can be beneficial to intentionally place items that have higher prices next to ones which are cheaper.
This structure will draw the attention of the customer to the item of lesser cost, which will then allow them to create a moment of comparison.
Most will decide that the item that is priced less will offer the most value, which can then trigger a sale.
8. Pricing Above the Competition
Why do people purchase items that cost several times more than what competitive products are in the marketplace?
If you buy coffee at Starbucks, then it is similar to the beverages that you can get at Dunkin.
You can purchase a Motorola phone for a lot less than an iPhone XR.
You can price items above the competition when you can offer more value in the context of what is being offered.
People buy Apple products not because of the device, but because of the way the brand makes them feel as an individual.
It makes you feel good to purchase an iPhone because it feels like you’ve “made it” as a consumer.
You are joining an “elite” group of people who can afford the same products you do.
Some people still purchase Apple products because they want to support the ideas offered by Steve Jobs.
He was a creator, so using items from his company makes the customer feel like they can be a creator as well.
The same truth applies for people who purchase coffee at Starbucks over Dunkin, or households that buy something from a local coffee shop instead of their local Starbucks.
It always comes down to how someone feels and their perception of the value that occurs with the transaction.
Higher prices help to create the perception that what you sell has better quality than what the competition offers, even if that may not necessarily be true.
It is a strategy that can be challenging to implement if you are just launching as a brand because there is no foundation of knowledge to base an opinion on what you offer.
Customers who are sensitive to price will avoid your business as well.
If you can make several sales at a premium point, then you will more than make up for the loss.
That is why it is essential to understand what the needs of your market happen to be as you set a pricing strategy.
Only market research will give you the information needed to help you know if this option could work for you.
A Final Thought on Pricing Strategies
Many retailers look at their pricing strategy as one that relies on pure mathematics.
Although that is one part of this process, it cannot be the only component of how you set the prices for what you sell.
Humans are complex creatures who appreciate the value of what goods or services can do more than the actual cost that they pay.
It is a balancing act because the customer weighs the value of an investment in your items with the benefits they will experience when you solve problems for them.
Even though it would be nice for there to be a black-and-white approach to a pricing strategy, some of these ideas will not work for every type of retail business.
It is up to you to determine what your customers want, and then find a way to make that need work with your overall finances.
Use these suggestions to make an informed choice about your pricing strategy today.
