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Which retail pricing strategy is the best for your business?

Written by Spencer Durrant on October 7, 2015 in Strategies & Tips

image of money

Trying to figure out the best prices for your products can present one of retail's biggest challenges.

How do you choose the pricing strategy that will maximize your company's sales? Let's start by taking a look at existing strategies and their best use cases. 

Keystone pricing

According to Shopify, the majority of retailers will benchmark their product pricing by using keystone pricing. Keystone pricing is essentially the practice of selling products at a 50% markup over cost. That margin may be too high, or too low, for your store - it all depends on your market and fulfillment costs. However, using the keystone pricing model will give you a jumping-off point from which you know you'll achieve an ample profit margin. You can test products at that 50% markup price point and adjust prices accordingly. 

Realistically, keystone pricing isn't a viable option if you're moving products that are competitive or are available in large quantities from other retailers. However, if you're selling in a niche where product turnover is slower or the product is harder to come by, a 50% markup is worth testing. 

Keystone pricing may not prove an effective blanket strategy for your business, but you can use it as a basis for evaluating the potential of any given product to produce a healthy margin and, thus, where that product could fit in your merchandising strategy.

Loss-leading pricing

This is a popular and effective pricing strategy when used wisely. Loss-leading pricing is the practice of offering a few products at steep discounts - lower than all of your competitors - in order to lure customers into your store. 

The theory behind this strategy is that once you get the attention of your customers with great pricing on one item, they'll purchase a few other products while they're on your site. 

The trick to this strategy is to pick an item that, when priced below the levels of your competitors, will generate enough traffic in order to make the price drop worth the cost. As the name implies, loss-leading pricing means you'll be taking a hit, or breaking even, on the target product(s).

How do you know when to use this strategy and which products are the best ones on which to slash prices? 

Choosing a product depends largely on the goal you have behind offering loss-leading pricing in the first place. Are you trying to attract new customers, or bring back old ones? Your goals will influence which products you choose. 

Generally, retailers will use loss-leading pricing on products that need to be moved quickly. One example is how retailers use it to move seasonal fashions. 

Once you've chosen the product(s) you'll offer at a loss, you can then list other related high-margin items alongside them in your online store. By listing the higher margin products alongside the ones on sale, you increase the likelihood that customers will buy them in conjunction with the sale item. 

Psychological pricing

Numerous studies have been conducted to determine which prices consumers find most attractive. You can find mounds of research on this topic from most retail-focused publishers. This information is the basis of psychological pricing strategies - they're backed by research and results, proving that customers prefer a certain price point over another. 

Which psychological pricing strategies are the most effective? 

The one tactic that is probably most well-known is the practice of ending your prices in an odd number - specifically the number 9. Products priced at $99 instead of $100 sell more because they appear to be a better deal. 

In fact, the number 9 is so powerful that it can beat out cheaper prices. For example, in an experiment performed by MIT and the University of Chicago, researchers tested a standard women's clothing item at the price points of $34, $39, and $44. 

The item priced at $39 sold better than the item at $34. Why? Because the customers perceived that $39 was a better deal than $34. It may seem counter-intuitive, but this method is widely used and highly effective. 

Another popular psychological pricing technique is to use bundled pricing. By offering more than one item for one price, customers perceive that they're getting a better overall deal than if they'd bought all the items separately.

These aren't the only product pricing strategies in existence, but they prove a point - pricing strategies actually do make a difference in your sales. It may take some serious research, and trial and error, before you find the right strategy for your niche. But once you do, you'll see a steady, sustainable rise in your sales volume. 

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