Retail Pricing Strategies: Finding the Right Price to Maximise Your Profits

What is pricing strategy?

The importance of appropriately pricing your products cannot be understated. There are a number of different pricing strategies to consider, however the goal always remains the same – to maximise sales and profits, win out against your competitors, and satisfy your customers.

An effective pricing strategy is important because price alone is the single greatest determinant of your profitability. No other factor is at your discretion to the degree that pricing is, and when you get it right it can boost your business’s growth trajectory, opening you up to opportunities such as expansion and new hires.

There are five factors that influence the pricing of products. 

1. Costs – this includes fixed costs you’ll have to pay regardless of sales, such as rent, utilities and wages, as well as variable costs which includes the expenses incurred to produce and deliver your products.
2. Customers – understanding your consumer audience and their purchase motivations will help you determine your pricing. Are they motivated by affordability or prestige? And what is the spending power of your target market? This can be determined by analysing the age and average income of your customers.
3. Positioning – where do you want to be in the market? If you want to be the most luxurious brand, price your products appropriately. The same goes for aspirations to be a beat-it-by-10% brand.
4. Competitors – how your competitors price their products will give you a benchmark for the level of quality and inclusions expected from particular price points.

4 common pricing strategies

When it comes to setting the price of a good for sale, there are four main strategies: cost-based pricing strategies, competition-based pricing strategies, value-based pricing strategies, and product-based pricing strategies.

Cost-based pricing strategies

Cost-plus pricing

With this strategy, you apply a small margin or markup to the costs (both fixed and variable) of producing and distributing your goods. When using this strategy, it’s critical that you factor in all relevant costs, otherwise you could end up putting a dent in your bottom line.

Competition-based pricing strategies

Going rate pricing

This straight-forward pricing approach simply involves using the market price leader’s pricing as a benchmark in order to remain competitive. However, no two business’ costs are ever the same, so it’s important to ensure you can afford this pricing.

Value-based pricing strategies

Value pricing

This strategy involves determining what your customers think your good is worth, which could be substantially higher than the actual costs to produce it. For example, if the product streamlines a process for them, saving the customer time, that value is reflected in the price. While this may be an appealing option, it can also involve costly market testing to get right. Meanwhile the cost of getting it wrong could be detrimental.

Premium pricing

If you’re playing within the luxury market, your customers expect higher levels of quality, performance, service and pricing. Often the price alone can add a ‘premium’ appeal to the product, signalling prestige.

Product-based pricing strategies

Penetration pricing

To capture a new audience or market share, this strategy involves entering with a low initial price to achieve a high point in sales. Once this point is achieved (and brand loyalty has been gained), the product is then restored to a normal price level.

Skimming pricing

In contrast to penetration pricing, this strategy sees your product enter the market with a preliminary ‘premium’ price in order to excite audiences who are after in-demand and highly valued products. Once the desired profit point is hit, the price is then restored to a normal price level that is more accessible for a wider market.

Loss leader pricing

This strategy involves winning customers with a low price that is below cost in the hopes that customers will also purchase your other goods. An example of this is $1 milk at major supermarkets and $1 coffees at 7Eleven. It’s also a strategy used during sales seasons such as EOFY to shift surplus stock by pairing it with other high-value products.

How to decide on pricing strategy

When choosing a pricing strategy, revert back to the list of factors at the beginning of this article. Understanding your costs, customers, positioning, competitors and ideal profit will help you pinpoint the ideal pricing strategy for your products. 

However, it’s important to note that it’s unlikely you’ll ever choose one strategy and stick with it. In fact, your approach to all elements of business will adapt and change over time, just like markets do, which is why it’s important to remain agile. An end-to-end payments system that can give you an overview of your sales data will afford you this agility. In fact, a complete solution like Zeller can equip you with real-time visibility of settlements and card payments across every business location and terminal.