Want to Increase Profitability? Optimize Your Retail Pricing Strategy With 3 Key Mind-Sets
Your retail pricing strategy is more than just a series of numbers. It’s a reflection of your brand image and a direct expression of the value you provide. It establishes a firm backbone for how you conduct business and the goals your organization strives for.
On a day-to-day level, the prices you set will empower your sales gurus and dictate your marketing initiatives. Thus, they can align your internal team, give customers a clear idea of who you are, and even serve as leverage in your quest for market position.
All of which is to say: The retail pricing strategy you adopt will, unsurprisingly, have a tremendous impact on your profitability. But how that looks in practical terms isn’t a simple concept; between your price-setting input and revenue-receiving output lies a convoluted ball of yarn. And within that ball of yarn — a hodgepodge of tactics and theories used by retailers everywhere.
The only way to know what will work best for you is by taking note of what’s worked for them.
The First Step Towards Your Profit Targets: Offsetting Costs
This is the most obvious function of a price: production requires spending, and properly set prices bring you back into the green.
Some costs are directly related to your goods, including that of manufacturing, labor, raw materials, and various channels of delivery and distribution. Likewise, you undoubtedly have a laundry list of expenses tied to other operational facets of your business: advertising, marketing, social, software, salaries, and even office rent.
As these expenditures add up, you have to consider how to budget for each of them accordingly, all while keeping your eye on profit. For some retailers, this means adopting a straightforward markup strategy, where an item’s listed price adds in a set percentage of that item’s cost. One variant called Keystone pricing sets the percentage at 100, thereby doubling the wholesale price.
But, of course, there’s a reason Keystone is a rare retail pricing strategy: the extent to which certain markups pay off depends on numerous external factors.
Next: Utilize Your Prices to Win the Market Battle
Consider how fluctuating inventory turns will influence your costs and, subsequently, your prices. Now let’s extend your scope to the whole industry: Shouldn’t changes to your competitors’ supply also have an impact on you?
This brings us to the idea of competitive pricing, where the focus goes beyond your doors to account for your rivals. This may entail pricing down, in which bargain deals help you win over customers and generate value from fading products (as long as you avoid price wars and abide by MAP pricing policies!). Or you may try setting higher prices than competitors to cultivate a prestigious brand image and collect higher product margins for each individual sale (see: Whole Foods).
Perhaps you want to be even more flexible with a retail pricing strategy that ebbs and flows in response to real-time market conditions. Such a dynamic pricing approach is gaining momentum due to its overall utility. Depending on what’s advantageous, you can spike your prices or reduce them.
With the proper software at your disposal, you can account for inventory scarcity and abundance as well as shifting expenses tied to manufacturing and operations. If existing competitors grow or shrink, you can immediately find out why and pivot accordingly. If new competitors enter the market; if they bring better, cheaper products; if revolutionary technology market-corrects your service … dynamic pricing lets you adapt and optimize value on the fly.
One further point of building your retail pricing strategy with competition in mind is to strengthen your value proposition. Pinpoint it, and make it shine through a crowded sea. However, if you really want to boost profitability, you have to look beyond your rival sellers to the people who matter most.
Finally: Play Into Your Customers’ Deep-Rooted Desires
You can focus all you want on catchy ads and enticing sales funnels, but don’t forget that pricing is also a form of marketing. As a matter of fact, it’s one of the most direct lines of communication you have with your customer base. Therefore, make it speak their language.
For starters, instill some contextual pricing. By giving prospects direction, you remove purchase barriers and simplify their entire buying process. Use price anchors — i.e., pricier offers that make your cheaper alternatives look all the more reasonable — and tiered options to bring in a wider audience. Many apps, in particular, present three levels of service with the knowledge that customers naturally gravitate towards the middle option. And it’s a widely accepted truth that people respond more favorably when prices of distinct items noticeably vary.
Which brings us to the psychological element at play: buyers are heavily swayed by presentation, even if they don’t realize it. It’s no secret that odd numbers, particularly ending in “9,” deliver more sales. Removing the $ sign and other excessive punctuation results in the same. One way or another, such tactics make people feel like they’re spending less money.
… That said, you can’t beat actually spending less money, though. Discounts shouldn’t be a Hail Mary for quick sales; they should be an integral part of your pricing strategy. You want to think about bundling certain items to sell more in the long run. Or adjusting based on holidays and time of year. Or matching the rise and fall of demand — price skimming is one such method that starts with a high price that steadily decreases as interest wanes.
When designing your retail pricing strategy, don’t pull all your eggs in one basket. Pricing is a die with more sides than we can possibly count. This article has only really just scratched the surface.
That’s why price optimization resources exist: to let you mix and match your framework as quickly as possible to optimize on the here and now. From suppliers to competitors to consumers, the entire market is an ocean in constant flux. Therefore, stay adaptable, trust the data, and ride each wave as it comes.
Sanjeev Sularia is the CEO of Intelligence Node, a real-time retail price intelligence platform that empowers businesses to drive product-level profitability and grow margins.
Sanjeev Sularia is CEO of Intelligence Node, a retail analytics and AI price optimization company that offers the world’s largest retail product index. Prior to founding Intelligence Node, Sanjeev was the CFO for Exclusively.in, a fast-growing high-end fashion e-commerce site acquired by Snapdeal, and CFO for Shersingh.com, a private label e-commerce company acquired by Myntra. Sanjeev is a graduate of London Business School and a Forbes Technology Council member.