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Pricing Strategies for Profits, Part 2

What is retail pricing? Part 2

Retail pricing is the bedrock or foundation for every business that sells its products to customers, whether from a brick-and-mortar facility or online. Your customers come to you with a number of factors they care about before they make a purchase decision. However, what they are willing to pay for an item or service will definitely be close to the top of their list.


When you set prices for the products you offer, you can take one of several approaches, depending on your overall business goals for the short- and long-term. The traditional approach includes setting the retail price for any given item or service includes the cost you pay for that item (by wholesale purchase or making it from components) and any markups you add so you make a profit from selling that item.


Here are some additional retail pricing practices you may want to put into effect in your business.


7. Psychological pricing

Psychological pricing, also known as “charm pricing,” relies on the customer’s perception that prices ending with numbers like 5, 7, or 9, with 9 being the most popular are a better deal. That’s why a retailer will price something at $24.99, rather than setting the price at $25.00. Customers automatically “round down” the price and tend to perceive $24.99 as a better deal than $25, despite the obvious truth.


Pros: Psychological—or charm—pricing is heavily used by national and private label brands wanting to boost overall sales to consumers with impulse purchases of inexpensive to mid-range products.


Cons: Psychological pricing can only be invoked for certain brands. If you are marketing a premium or luxury brand, using psychological pricing can boomerang on you, making your brand appear “cut-rate,” “devalued,” or “sneaky” in your customers’ eyes.


8. Competitive pricing

This practice uses your key competitors’ prices as a standard and setting your prices just slightly lower. Retailers using this approach expect to offset their somewhat lower profit margins by increasing their overall sales volume.


Pros: This is a strategy used by large retailers that can leverage their buying power and negotiate excellent deals to lower their per-unit costs. With the competitive pricing approach, the large retailer can really accelerate ahead of its competition.


Cons: If you are a smaller business, you must be able to sell high volumes of the product to sustain a profit margin with the lower pricing. This method may also affect the customers’ perception of your brand as the discount alternative, rather than a preferred brand.


9. Premium pricing

Premium pricing is the exact opposite of competitive pricing, where you set a price point at a higher price than your competition, implying greater quality and prestige.



Pros: If your premium pricing is enacted with premium-brand marketing tactics, this approach helps your brand be elevated in the customer’s perception as a “first-class, high quality” luxury brand.


Cons: Before initiating premium pricing, carefully consider your target customer group. Many factors contribute to how a product is priced and perceived, such as your target customer base’s overall buying power, the perceived (and real) quality of your competitors’ products and brands, and even your geographical location.


10. Anchor pricing


Anchor pricing places the discounted and the original prices of an item together, showing the customer how much they’re saving over the original price. You may see this every day at big box stores.


This approach brings on anchoring cognitive bias in the customer’s mind. With this method, the customer accepts the original posted price as the true value of the item as they decide whether to buy the item at the posted sale price.



Pros: Listing the original (anchor) price next to the discounted price makes the customer feel like they’re getting a good deal, acting as an unconscious incentive to buy the item while it is on sale.


Cons: Don’t increase the original price to an unreasonable level to make the discounted price look better. Consumers are quite adept at comparison pricing today than they used to be. With the omnipresence of smartphones, the customer can check online and competitors’ prices instantly, causing them to form a bad impression of your pricing practices.


11. Channel pricing


Channel pricing with this method, retailers often set different prices for the same product depending on where it’s sold. For example, selling on Amazon is priced differently than in the big box store nearby. This is a relatively new approach that’s trending for retailers selling products through multiple channels including brick-and-mortar facilities, online aggregators such as Amazon, store websites, and social media accounts.


Pros: Channel pricing can be a great incentive for customers to choose a particular channel for purchasing as driven by the retailer to one channel rather than others.


Cons: Consumers might feel tricked if you offer the same product at different price points based on where it’s marketed. You can get around this by keeping prices the same everywhere and offering a channel-only discount, such as online only or in-store only.


12. Wholesale pricing


Wholesale pricing is often used by retailers who sell their products business-to-business (B2B) rather than directly business-to-customer (B2C). This allows the retailer to offer prices at the original/base price to the end-user customer and at a lower wholesale price to other channel retailers, which then sell the products to the end-user customer for a profit.


As you set the wholesale price, first calculate the cost of goods manufactured (COGM), including all material and labor costs plus any additional costs such as transportation and your fixed/overhead expenses. Don’t forget to factor in your profit margin of at least 50% before establishing the wholesale price.


Pros: Wholesale pricing is a tried and true option for retailers who need to move large amounts of slow-moving products. Wholesale pricing is also valuable for brands introducing their associated products to a whole new shopping demographic.


Cons: If you decide to use wholesale pricing, take care to ensure that your overall sales volume remains consistent and profitable. One way to do this is to set a minimum required quantity to get the wholesale pricing.


Questions or comments? Want to add to the conversation? Contact Mike Krause at (305) 723-1234, Mike@SalesSensePayments or please visit SalesSensePayments.com.


For all your credit card processing requirements, contact Mike Krause at (305) 723-1234, Mike@SalesSensePayments or please visit SalesSensePayments.com.



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