For over 60% of consumers, pricing is the primary consideration when purchasing a retail product making pricing strategy a crucial aspect of retail management.
What is a retail pricing strategy?
Pricing strategy is the method, model, or process a business uses to set and update the price of its products or services.
Typically, retail pricing involves setting a price for the product that covers all manufacturing and operational costs and includes a profit margin.
But with the level of competition in the market and the sheer volume of substitute and replacement products, businesses have had to come up with innovative pricing and promotion strategies to gain a competitive advantage.
Factors that affect retail pricing strategy
Various factors affect the pricing strategy for a product or business. In fact, the factors themselves may differ from business to business. Some common factors that affect the pricing strategy are,
Internal factors: these are factors that the business can control.
Manufacturing and operational costs: This includes raw materials, labour, electricity, fuel, marketing, and sales expenses.
Business objectives: Business objectives like the business evolve and change throughout the lifecycle of the product and the company. At any given point, it could be to create awareness, increase acquisition, break even, market penetration, etc.
Product lifecycle: The price of the product may also differ based on which point of its lifecycle it is. For instance, during the entry stages, you might choose to price lower to capture the market and then adjust the price to fit the demand.
Brand image and value: how you position your brand can have a big influence on the price. If you want your products as luxurious and exclusive, you might price higher but if you’d like to come across as reliable and affordable you might price it somewhere in the middle.
Promotional strategy: The price of your product might have to be adjusted based on your promotional plans. If you are planning to run a lot of price promotions, then the price may have to be adjusted so as to not compromise on your margins.
External factors:
These are factors that the business will have little to no control over.
- Consumer demand
- Competitive landscape
- Customer purchase power
- Market trends
- Economy
10 popular retail pricing strategies
Price skimming: Sometimes businesses will set a higher price for the product initially and reduce the price as the product becomes more established in the market. This is an especially useful strategy if a business is looking to manage demand until it streamlines its supply chain. Businesses may also do this to quickly break even and then reduce the prices as a part of promotions.
Penetration pricing: The opposite of price skimming, in this case, the product is priced lower when it’s launched and once the business creates awareness and captures the market, the price is increased gradually. This is a great way to test customers’ willingness to pay. To avoid surprising the customer with a price raise, businesses tend to introduce products at a lower price as a “launch offer” or “launch price”.
Prestige or premium pricing: This strategy is employed by businesses who want to create a sense of exclusivity or luxury among their customers for their products. Here, the price of the product will be relatively higher compared to competing products.
It is however important to provide value in some way to justify the higher price. This can be in the form of personalisation, customer service, product quality or longevity, or brand value. Without this, your product might lose its novelty quickly.
Discount Pricing: This strategy is primarily used by businesses looking for a quick boost in sales, customer acquisition, or to enter a new market or customer base. By setting a higher price and offering a discount on it, you are incentivising the customer to make a purchase or try the product out.
While this is effective, it is important to not overdo it. If you offer discounts too often, customers will learn to wait for promotional periods to purchase your products. Similarly, constantly seeing your product on promotion might make customers question the quality or value of your product.
Seasonal pricing: If you deal with seasonal products like winter wear, air conditioners, hiking equipment, or festival ornaments, then your demand tends to peak during the season. You can increase the prices during the peak season to maximise profits and decrease prices during the off-season to incentivise customers to purchase and stock up.
On the other hand, you can also choose to sell at a lower price during the peak season to increase acquisition and brand awareness and gain a competitive price advantage over your competitors. As the name suggests, this strategy works most effectively for seasonal products however most retailers can take advantage of seasonal pricing to manage demand.
Pricing for omnichannel retail: This is primarily for businesses that sell their products on multiple channels. In this case, businesses can choose to price their products consistently across all channels or adjust prices for different channels to drive customers to their preferred channel.
Say, for example, you sell on your own website and third-party websites, you might want to use the third-party websites to drive sales and increase awareness after which you can attract them to your own website with attractive prices and promotions.
Bundle pricing: Bundle pricing is a form of discount pricing where you combine products that are usually purchased together into a bundle and give it a single price. This is especially useful if your objective is to upsell or cross-sell.
You can understand which products to bundle together by observing customer purchase behaviour or by monitoring what your competitors are doing.
Competitive pricing: Competitive pricing is where you base the price of your products on the prices of your competitor’s products. The key here is to identify the right competitor to compete with. For this, you need to understand your competitors, their products, their customer base, target audience, etc.. This will help you understand how feasible it is for you to compete with them.
A competitive pricing strategy works very effectively for retailers who deal in highly price-sensitive products and the most effective way to do this will be to leverage a good competitor price monitoring solution since monitoring and adjusting prices manually can be very time and resource-consuming and prone to errors.
Personalised pricing: Simply put, personalised pricing is showing different prices for different groups of people for the same product. Personalised pricing is becoming more and more popular thanks to monitoring technology and automation.
Some examples of personalised pricing include sending a discount coupon to a customer who has abandoned their cart, discounting a product to a customer who has viewed the product but did not make a purchase, sharing bundles based on past shopping behaviour, etc.
Personalised pricing is a great way to convert shoppers into customers and is very effective if your business is struggling with challenges like cart abandonment.
Dynamic pricing: A strategy that is gaining popularity due to the booming Ecommerce industry, dynamic pricing involves constantly adjusting your product prices based on competition, customer behaviour, market trends, etc.
This strategy keeps customers engaged and coming back thereby providing constant opportunities for the business to upsell, cross-sell, and gain insights into their behaviour. To implement dynamic pricing effectively, it is crucial to invest in the right competitor price monitoring solution and price automation solutions as dynamic pricing is almost impossible to do manually.
Choosing the right pricing strategy is crucial for the success of any retail business. While the 10 strategies discussed here are some of the most popular it is important to remember that pricing is not a one-size-fits-all solution, and retailers should continually monitor and adjust their pricing strategies to remain competitive and profitable in a constantly evolving retail landscape.
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