Do you have high sales volume but declining profitability? Well, are you using the right pricing strategies for your business?
Pricing is one of the most important pillars for the success of a D2C business. As pricing makes a huge impact on profitability of a business, big companies in every industry are extremely careful with their pricing, spending millions of dollars to find the best pricing strategies.
But pricing is also one of the most overlooked factors by small business owners. Many small businesses simply price their goods and services based on the cost of goods sold. However, this is really risky for businesses. Setting the price too high will lead to a drop in sales volume, while a price too low will eat into your profitability.
Today we will look into various pricing strategies for retail to achieve better prices for your products, and maximize your profits.
What are the most common yet practical pricing strategies?
There are more than a dozen pricing strategies that businesses use today to maximize sales. In this blog, we will focus on practical pricing strategies in the retail industry, but many of these apply to other industries as well.
Competitive pricing or Competition-based pricing is the most commonly used pricing strategy as it is simple and effective. This strategy works by setting prices based on how competitors charge for the same or similar products. This strategy is suitable for businesses with a lot of competitors and benchmarks can be easily found.
You can use the Konigle Competitor Tracking Tool to easily track competitor prices and also identify over-priced and under-priced products in your catalog.
Markup pricing or cost-plus pricing is also one of the most popular pricing strategies, especially for retail businesses. Markup pricing refers to adding a price margin on top of cost of goods sold. Businesses employing this strategy normally determine the prices based on the revenue or profit goal set. It is often used together with competitive pricing. You can use Konigle Bulk Price Editor to update price with respect to costs of your products.
Here's an interesting story how the Tom Gun Movie taught Value Based Pricing to our co-founder Jatin.
Value-based pricing refers to setting a price based on how much the consumers are willing to pay. This is often used for differentiated products. By monitoring the prices of similar products, you can figure out how much people are willing to pay for products with similar features or of the same category. This also depends on a business’ understanding of their customers’ pain points.
Then, you can carefully analyze how your product is different from the monitored ones and decide how to adjust your prices.
Premium pricing is to keep the price of products artificially high in order to give customers favorable perception and prestige.
This strategy is often used for luxury goods or premium goods. For example, luxury handbags such as Gucci, Chanel and Hermes are priced much higher than normal handbags. The high prices bring pride and prestige for their customers, and products like this actually have increased demand for higher prices.
Penetration pricing for introduction phase works by setting a low price for a product in order to increase market share rapidly. This is normally used for products newly introduced into a competitive market. Businesses, which use penetration pricing, hope to attract consumers to convert to new brands or new products with low prices.
The prices set are always much lower than the competitors’ prices. However, this strategy can be highly risky if the prices set are lower than the costs of goods sold. It can also trigger a price war, which is unfavourable in the long run.
For example, when European supermarket Aldi entered a new market, they often price their products lower than their competitor Tesco, in order to grab the market share.
High low pricing (for promotional period) is most commonly used by small retail businesses for products which are a fad or seasonal. This refers to setting the price highly at first when the product is popular and then reduces the price through promotion or through clearance sales when the fad is over.
This strategy is often used by clothing retailers such as Uniqlo, especially for UT series. Prices are often reduced after 2 months of initial launch in order to clear stocks.
You can run scheduled high-low pricing via the Konigle Deadstock Prevention Tool.
Price skimming refers to setting the highest price when introducing a new product and then reducing the price gradually. This is mainly used for products with a short product life cycle. For example, electronic gadgets such as iPad and Nintendo Switch have the highest price when they are first introduced and then the price lowers as time passes.
You can automate the price Skimming process for your online store using the Konigle Price Skimming Tool.