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As a retailer, setting a reasonable price is a crucial part of running a profitable business. Price a product too high, you may not move products quickly enough. Price it too low, and now you’re eating into your bottom line.
Setting prices is a tough but critical part of running a profitable business. And it’s especially important for independent retailers since small changes to your profit margin can make an outsize impact. Let’s break down the hows and whys retailers choose prices for their products, so you can plan with confidence.
What are retail prices?
A retail price is the number you see on the price tag. It’s the final cost of an item in a store, the price that the customer pays.
By the time a product is ready to be bought in-store, it has completed its journey through the supply chain, and at each step of the way, its price has gone up. Wholesalers usually sell their goods in bulk to retailers at the wholesale price. Retailers then sell those items individually at an increased price in order to maintain profit.
Many factors go into a retail pricing decision. A retailer will consider what they paid for the item, supply and demand, market trends, and competition.
What’s the difference between retail price and MSRP?
You’ve likely heard of MSRP, the manufacturer’s suggested retail price. People sometimes use this term interchangeably with retail price, but there’s a key difference. As you might conclude from the term, the MSRP is just the recommended retail price from the manufacturer to the retailer. It’s a helpful ballpark number to consider, but retailers don’t have to mark an item at this price; they can set their own prices to sell in stores.
Retailers might decide to sell above, below, or equal to the MSRP depending on their business strategy. The main advantage of using the MSRP as your retail price is it can give you a clear and consistent benchmark for pricing that’s aligned with the industry standard.
What might influence the prices you set?
Different types of stores have different pricing needs … and since independent shops often don’t have the financial cushion that big-box stores do, savvy pricing is vital. While you can use the MSRP as a starting point, there are plenty of reasons you might choose a different price—and some are more psychological than you might think! Here are some considerations to keep in mind:
- Profitability: As we mentioned above, your retail price needs to generate enough of a profit margin for your business to be sustainable. Calculate how much you need to mark up the wholesale price to be in the black.
- Shopper perception: Your prices should make sense for your target audience and be in line with their expectations. Consider whether you’re targeting luxury shoppers, bargain hunters, or someone in between. For example, in a fancy boutique, if an item is priced too low, a shopper might wonder whether it’s poor quality. They might not feel like they’re buying something special and luxurious after all.
- Competition: Sometimes the price you set can be influenced by other stores’ choices. Is the shop next door selling the same item for a lower price? If so, you’ll likely lose out on those sales. Think about the volume of sales necessary to make a discount worthwhile.
Getting price right: 5 frameworks to know
The pricing strategy you choose depends heavily on your business goals, existing marketing conditions, and even shopper psychology. There are plenty of pricing strategies, some more specialized than others (you can check out a more exhaustive list here). Below we’ll highlight a few of the most common ones to get you started.
1. Cost-plus pricing
This is a popular pricing strategy due to its simplicity. You take the price you paid for the product as well as any associated costs (like shipping or labor), then add a fixed percentage on top of that. If you decide on a markup of 25%, then you multiply the cost of your product by 1.25 to get your retail price. For example, a sweater you bought wholesale for $100 per unit will be marked up to a $125 retail price. Retailers choose this strategy because it maintains a consistent profit margin across their offerings.
2. Competitive pricing
This pricing strategy is based on the competitive landscape of your niche. Using this method, you monitor the market, pay attention to what your competitors are charging, and set your own prices based on that research. This is common in markets where many retailers are selling identical products. One thing to note is that it’s possible to fall into a pricing war, where each competitor reduces prices over and over again in a race to the bottom. It can be difficult to maintain for a smaller business that doesn’t buy and sell in large volumes.
3. Value-based pricing
This is where the power of perception comes in. If your product is perceived as a premium or exclusive item, then you can charge however much you think the customer would pay for it. This pricing strategy is based on perceived value and appreciation for a product and the shopping experience. It works best for luxury items, rare items, and sometimes handcrafted items. If a high-end handbag is seen as a status symbol, then the retailer can demand a higher price than competitors selling a similar bag. Value-based pricing is best for retailers who know their shoppers well and can create an effective brand story.
4. Penetration pricing
This strategy is all about the long game. With penetration pricing, a new retailer makes their foray into the market with discount pricing. This strategy attracts their first customers and grows their market share quickly. Then over time, they gradually raise their prices to match the industry standard and turn a profit. This move can help you stand out right away, but it can also be risky if your customers get used to lower prices and then decide to move on when you start increasing them.
5. Keystone pricing
Like cost-plus pricing, this pricing strategy is used by some retailers because it’s a clear formula. You double the wholesale cost, and there’s your retail price. If the scented candle you bought costs $14 per unit wholesale, then your retail price would be $28. It’s a nice profit margin for the retailer, and it doesn’t require extensive research or calculations. However, it doesn’t account for other factors we’ve described like supply and demand and competitors’ pricing.
There’s no one-size-fits-all approach when it comes to retail price, and as an independent retailer, it’s up to you to choose what’s best for your business. Now that you’re armed with a bit more information and some strategies, you can set retail prices to maximize your bottom line and help your store thrive.
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