Throughout my tryst with e-commerce, I’ve been frequently asked regarding what would be the best retail pricing strategy or strategies to adopt. Now, I know that the Flipkarts and the Snapdeals are worth billions of dollars, but do they pull any profits in yet? Not at the last count, despite being there for several years now. I feel one of the flaws they have is an improper comprehensive retail pricing strategy.
There are a lot of factors that can influence the profitability and a retailer’s bottom line. Setting right pricing is a crucial step towards achieving that wanted profit. One of the main objectives of retailers is to make a profit, but figuring out what and how to price products is actually not as easy as it seems.
Before you can determine which retail pricing strategy to use in setting the right price for your retail products, you must first know the costs associated with the products. Two key elements in factoring product cost is the cost of goods and the amount of operating expense.
The cost of goods includes the amount paid for the product, plus any shipping or handling expenses. The cost of operating the business, or operating expense, includes overhead, payroll, marketing and office supplies.
Regardless of the pricing strategy used, the retail price of the products should more than cover the cost of obtaining the goods plus the expenses related to operating the business. A retailer simply cannot succeed in business if they continue to sell their products below cost. At Ebay, we used to have sellers’ meetings to stress vehemently what we called “the ideal sourcing of products”.
Now that you understand what your products actually cost, you should look at how your competition is pricing their products. Retailers will also need to examine their channels of distribution and research what the market is willing to pay.
Many pricing strategies exist and each is used based on particular sets of circumstances. Here are a few of the more popular pricing strategies to consider:
Markup on cost can be calculated by adding a pre-set (often industry standard) profit margin, or percentage, to the cost of the merchandise. Markup on retail is determined by dividing the dollar markup by retail. Be sure to keep the initial mark-up high enough to cover price reductions, discounts, shrinkage and other anticipated expenses, and still achieve a satisfactory profit. Retailers with a varied product selection can use different mark-ups on each product line.
Manufacturer suggested retail price (MSRP) is a common strategy used by the smaller live and online retail shops to avoid price wars and still maintain a decent profit. Some suppliers have minimum advertised prices but also suggest the retail pricing. By pricing products with the suggested retail prices supplied by the vendor, the retailer is out of the decision-making process. Another issue with using pre-set prices is that it doesn’t allow a retailer to have an advantage over the competition.
Consumers have many choices and are generally willing to shop around to receive the best price. Retailers considering a competitive pricing strategy will need to provide outstanding customer service to stand above the competition.
Pricing below competition simply means pricing products lower than the competitor’s price. This strategy works well if the retailer negotiates the best prices, reduces costs and develops a marketing strategy to focus on price specials.
Prestige pricing, or pricing above competition, may be considered when location, exclusivity or unique customer service can justify higher prices. Retailers that stock high-quality merchandise that isn’t available at any other location may be quite successful in pricing their products above competitors.
Psychological pricing is used when prices are set to a certain level where the consumer perceives the price to be fair. The most common method is odd-pricing using figures that end in 5, 7 or 9. It is believed that consumers tend to round down a price of $9.95 to $9, rather than $10. At Ebay, we initially encouraged for example, auctions beginning at $0.01; bulk items put up for sale for $9.99, instead of $10.
Other Pricing Strategies
Keystone pricing is not used as often as it once was. Doubling the cost paid for merchandise was once the rule of pricing products, but very few products these days allow a retailer to keystone the product price.
Multiple pricing is a method which involves selling more than one product for one price, such as three items for $1.00. Not only is this strategy great for markdowns or sales events, but retailers have noticed consumers tend to purchase in larger amounts where the multiple pricing strategy is used.
Discount pricing and price reductions are a natural part of retailing. Discounting can include coupons, rebates, seasonal prices and other promotional markdowns.
Merchandise priced below cost is referred to as loss leaders – a good example is the Xiaomi mobile phone mega sale on Flipkart last year. Although retailers make no profit on these discounted items, the hope is consumers will purchase other products at higher margins during their visit to the store or marketplace.
As you develop the best pricing model for your offline or online retail business, understand that the ideal pricing strategy will depend on more than costs. It also depends on good pricing practices.
It is difficult to say which component of pricing is more important than another. Just keep in mind, the right product price is the price the consumer is willing to pay, while providing a profit to the retailer.