Video:Retail Pricing Strategies

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Transcript:Retail Pricing Strategies

There are many outside influences that affect profitability and a retailer's bottom line. Setting the right price is a crucial step toward achieving that profit. Retailers will also need to examine their channels of distribution and research what the market is willing to pay.

Costs to Be Considered

Before we can determine which retail pricing strategy to use in setting the right price, we must 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.

Mark-Up and Vendor Pricing Strategies

Here are some retail pricing strategies. Mark-up Pricing: Mark-up on cost can be calculated by adding a pre-set (often industry standard) profit margin, or percentage, to the cost of the merchandise. Mark-up on retail is determined by dividing the dollar mark-up 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. Vendor Pricing: Manufacturer suggested retail price (or MSRP) is a common strategy used by the smaller retail shops to avoid price wars and still maintain a decent profit.

Competitive and Prestige Pricing Strategies

Competitive Pricing: 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.

Other Retail Pricing Strategies

Psychological Pricing: It 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. Among the other pricing strategies are: Keystone pricing – This includes doubling the cost paid for merchandise, but very few products these days allow a retailer to keystone the product price; Multiple pricing – This involves selling more than one product for one price, such as three items for $1.00; and Discount pricing - Discounting can include coupons, rebates, seasonal prices and other promotional mark-downs. 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.

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