Set up your shop
How do I Set the Price of My Retail Products?
12 January 2024
One of the major challenges new independent retailers face is setting the sales prices for their products. You need to ensure you’re priced to turn a profit on your inventory, but also able to turn over stock. It’s hard to strike a balance between profitability and affordability. So, what’s a retailer to do? Read on as we unveil some of the tips on how to evaluate your pricing and ensure you’re hitting your margins.
Understanding Pricing Strategy
Your pricing strategy plays a major role in your overall business and marketing strategy. Deciding whether you’re going to price to be competitive, to undercut competition, to turn a good profit margin on each item you sell… There’s a lot that goes into deciding how to price the products you stock on your shelves.
But pricing also affects the overall perception of your business. Counter intuitive though it may seem, overpricing stock can give the illusion of luxury and quality, which will greatly limit your target demographic, but may align with your goals and strategy. Under-pricing products, or working on very little margin, can make your business affordable and drive a lot of foot traffic and turnover, but may end up driving away a lot of upper-middle to upper-class clients.
One of the first steps in developing your pricing strategy and how to price your retail products is understanding your break-even point. We’ve covered the subject in great detail in this article. However, as a quick reminder, your break-even point is the point at which your total revenue from products and services you sell is equal to your total operating expenses, including stock, wages, rent, electricity, insurance… Everything!
When planning your pricing strategy, it’s important to keep this break-even point in mind. How much stock must you sell? Will selling fewer at a higher price allow you to break even, or is it easier to move more products with a smaller profit margin?
Deciding Price Points
Once you’ve analysed your costs, it’s time to figure out how to turn a profit. So now it’s time to really dig into the details of how to price your retail products.
When setting your prices, it’s imperative that you keep an eye on the competition’s pricing, especially when it comes to direct, local competition. In a troublesome economic climate, consumers tend to be much more price sensitive. Therefore, it’s all the more important to ensure that you aren’t overpricing your goods compared to the competition if you want to drive them to your point of sale.
Start by listing all your direct and indirect competition. Then, you can visit their website or head to their shop physically to check prices of competing goods. Take account of any additional services that they may offer as well, such as warrantees or price matching offers, as these can be seen by customers to be an added value outside of costs that may make up for any insubstantial difference in sales price.
There are also online platforms that offer real-time benchmarking of major players in any industry. This can allow you to make dynamic decisions about marketing or any price changes you wish to make. Keep in mind, these services are paid, so you’ll need to add this additional cost to your break-even point, and it might not be an imperative for you to have up-to-the-minute information, as long as you are regularly analysing your competitor’s prices.
Aligning with Customer Perception
There are a number of strategies you can employ to decide how you are going to price your items.
- Cost-plus pricing refers to the practice of marking up your wholesale prices in order to hit a certain percentage of margin or adding a flat-rate markup to every item.
- Loss leaders are products that you sell at or below wholesale purchase price in order to drive traffic to your retail location. These should be highly marketed, but keep in mind that you risk losing money on every purchase if you don’t convince buyers to purchase other items.
- Competitive-based pricing means you set your prices based on the local competition.
- Using the MSRP, or Manufacturer’s Suggested Retail Price. This is the easiest method for setting your prices as they come direct from the manufacturer. The MSRP will provide some profit margin over the wholesale costs, but it does leave room to be undercut by competitors.
- Value-based pricing means setting a price based on the customer’s perceived value of a product or the accompanying services.
- Psychological Pricing refers to the concept of using less than whole numbers to convince customers to make a purchase. For example, rather than pricing an item at £20, you can offer it at £19.99. Although these two numbers are basically equivalent, evidence shows that some customers tend to round to the whole number, completely ignoring the value after the decimal.
Assessing Value Based Pricing
Assessing the value of a product or service isn’t always easy. It requires keeping an eye on the competition as well as having an understanding of your customers’ unique situations and what they are willing to pay to acquire the product or services.
Carrying out market research is imperative. Once you have an idea of your target demographic, the market size, and the competitive field, it’s time to gather primary research data. That means speaking with your customers.
Set up interviews or focus groups where you can get first-hand input from potential customers, or send out a survey or questionnaire. Find out what benefits they see for your product or service and what they would be willing to pay for it.
From here, you will be able to set a price based on all the gathered data and the customers’ perceived value. However, you should be willing to shift prices based on actual results. This will help ensure you get the best margin to sale ratio to meet your profitability targets.
Balancing Profitability and Affordability
There is a fine balance to be struck when pricing your retail products between profitability and affordability. The more affordable the price is for your target demographic, the more traffic you’re likely to see. However, if you’re unable to maintain profitability, you risk closing your doors, or at the very least not being able to reinvest into growing your business.
There are a few tricks you can implement to optimise this balance:
- Customer segmentation through product offerings. Your largest profits are likely to come from high-end, expensive goods or services. However, many of your customers may not be able to afford these ranges, even if they represent good value for money. By offering different tiers, you are able to cater to a wider range of customers and still propose high-end items at a great profit margin.
- Reduce overhead by optimising the back end of your business: find the best tools to automate stock and shipping, look for better insurance or electricity rates, rework opening hours to avoid paying wages when underproductive, etc. Simply improving costs can help you increase profits without affecting prices.
- Source affordably. Think about working with a wholesaler such as Ankorstore who connect independent retailers and manufacturers. Optimising your sourcing give you some leeway when pricing for your clients.
Dynamic pricing is a concept you’re likely to be aware of. Any time you go into a greengrocer and find perishables marked down, you’re seeing an example of dynamic pricing. Dynamic pricing, however, plays a bigger role for retailers today. As an independent retailer today, you could use electronic shelf labels to update prices on the fly via your information system. This will enable you to react to shifts in supply, your conversion rates, and even the time of the day, to hit your sales goals.
Using specific software, retailers are able to take advantage of changes in market demand and other external factors, such as competitor pricing, to update prices in real time. The more you are able to harness the power of data, the more you will be able to react to shifting trends.
Promotions and Discounts
Discounting items also plays an important role in dynamic pricing strategies. Not only is this a great way of turning over products and clearing shelf space, but, when coupled with appropriate advertising, it is also a great way to drive traffic.
Selling items at a loss can help drive customers to your point of sale. And, in many cases, if an item isn’t selling at a profitable price point, it can be better to recuperate some of your costs than sit on unsold stock.
Of course, seasonal sales are often expected in the retail space when welcoming new seasonal line ups or when preparing for the holidays.
The retail world is constantly evolving, trends and competition come and go, and the economy shrinks and grows based on innumerable external factors. It’s important to keep that in mind when it comes to defining your pricing strategy; you must be able to evolve with the times. Staying flexible with your pricing strategy will help ensure your best chance at success.
Another way to improve your chances is by connecting with other independent retailers and experts in the retail sector. Ankorstart is a completely free programme that works to connect retailers with experts who can help them understand how to develop pricing strategies, create a business plan, and so much more.
Join the thousands of independent retailers who rely on Ankorstart’s expert advice and counselling
What is value-based pricing?
Value-based pricing is a pricing scheme not based on any concrete metric, such as wholesale purchase price plus x percent, but rather on the perceived value the product or service provides your clients. Carry out market research and keep an eye on competitors’ prices to get a clear idea of what people are willing to spend. You can even query your customers directly about a product or service to see what they would spend and what they find valuable in the offering.
How can I hit my profit margin goals?
Hitting your goals is a great achievement! But be realistic with the goals you set, especially if you want to build a good rapport with your customers. Balance profitability with affordability to keep customers coming back while ensuring you can continue operations. One pricing strategy, known as cost-plus pricing, is a simple system where you add a flat rate on top of the purchase price. This makes the pricing incredibly easy to figure out but may make you less competitive and mean missing out on more sales, which could improve turnover more than selling less units at a higher price.
What is dynamic pricing and how does it affect retailers?
Dynamic pricing is a pricing scheme that takes into account all kinds of external data in order to set an up-to-the-minute price point for your goods and services. From competitor’s prices to market conditions and supply and demand, a dynamic pricing system tries to choose the best price to capitalise on current trends. A lot of dynamic pricing today is handled through software and algorithms that may help give you a leg-up on the competition.
Related posts "Create my product assortment"
In this interview, we get into the crucial topic of stock management, offering concrete and practical advice to help you build your assortment strategically and effectively. Nicolas Loeuillet shares his experience, valuable insights and tips on creating a balanced and profitable assortment.
Follow Ankorstart’s advices to learn to find out the best places to source women’s clothing from and how to work successfully with your suppliers.
Discover how to make the right choices to be competitive when buying wholesale clothes for kids, thanks to Ankorstart’s expert advices.
Managing the supplies of your retail store with alcoholic beverages is a strategic matter. Discover how to simplify this process thanks to Ankorstart’s experts.