Retail 101: How to Price a Product

Retail businesses need to have a pricing strategy. Pricing a product is part marketing, part psychology and part guesswork. This can make it one of the most difficult parts of managing a retail business. retail store.

“Very few merchandising decisions have as sweeping an impact on business performance as how to price items in the product assortment,” said Josh Pollack, associate partner and pricing practice lead at the Parker Avery Group.

“When set thoughtfully, pricing can be a major factor in conveying the brand positioning and value proposition of a retail concept. Pricing approaches differ significantly when considering short-run designer garments (where a higher price might add to the cache) than when planning for everyday pantry items, such as eggs,” said Pollack.

In this article, we’re going to throw the floor open to retail experts like Pollack and others, who will give you their suggestions and tips for getting your product pricing right. We’ll cover:

Let’s start with some more thoughts on why pricing matters so much.  

Setting the right price is crucial 

“The right price is a sweet spot that keeps your product competitive and valuable in the market while safeguarding your profit margin and taking into consideration all your costs,” said Ian Sells, CEO and Founder of Rebate key. 

Calculating your product pricing 

Pricing is all about balance. “Setting prices too high will prevent customers from buying your product, but setting them too low may mean that you don’t cover enough of your costs and aren’t making an appropriate profit margin,” said Darren Litt, the co-founder of Hiya Health, which sells children’s multivitamins.

So let’s take a quick look at some of the ways RetailersIt is possible to calculate prices for products.

• Cost-plus pricing:To arrive at an estimated profit margin, subtract the production cost from the retail price. 
• Value-based pricing: This allows you to calculate the price your customers will pay before adding costs. This method allows you to determine the prices that similar products are being charged by other companies so you can target your market.
• Competitor-based pricing: Look at the products of your competition and compare them to yours. Do you lose margins by discounting too much or charging more for similar products than other businesses?
• Elasticity-based pricing:  ‘Elasticity’ is how customers’ respond to price changes. This can be determined by analysing the price and sale quantities from past transactions, and comparing prices to unit sales. 
• Cross-product based: Prices for some items in a particular range may be higher than others.  For instance, the prices of different brands of yogurt and cat food of similar sizes are usually the same. 

You should also consider gross margin pricing and keystone pricing when pricing retail products. 

Brick-and-mortar vs ecommerce pricing 

Keep in mind that you’ll need to shift your approach to pricing across brick-and-mortar and ecommerce too. 

“We sell both in store and online and have found that our lower price point products sell better online versus our higher price point products, which sell more in person,” said Morgan Futrell of Moonshine & MagnoliasThe boutique is family-owned and operated in North Carolina. 

• Be sure to remember shippingFutrell recommends similar businesses consider how shipping costs might be included into pricing.  “A $5 shipping cost will not cover the amount that it will cost to ship anything in a padded envelope, therefore this cost should be either included in the product price or result in a calculated shipping option,” she suggests. 
• Don’t spend profit to ship product. You can price your items to ship online by bringing them into UPS. This information will allow you to decide if shipping rates or price increases should be made.

Customers love free shipping. However, offering it all the time may reduce the effectiveness of pricing strategies. 

You can try different pricing models for your retail products 

Experts have also come up with some clever ways to market pricing and make it appeal to customers’ emotions and instincts. 

Psychological pricing is an option

Professor Haipeng ChenUniversity of Kentucky, Endowed Chair in Market. His belief was that good pricing doesn’t just depend on hard and cold calculations. It also depends on how customers feel. There are many psychological pricing techniques retailers could use, including:

• Discounts stacked:Instead of 40% off, get 20% off and an additional 25% off. These discounts look even bigger when stacked. You can sell more without paying any additional fees.
• Bonus packs:Offer 30 percent extra at the $8.99/lb regular price. “You win thrice. The consumer buys more. A discount of 25% on a purchase is better than an increase in price by thirty percent. And it actually costs you less,” said Professor Chen.
• Price Ending at 99c “A $16.99 price tag will allow you to sell more products and earn more profit than a $16.99 one. For some people, $16.99 is more appealing than $16.99 because 16 is less stressful on their eyes/minds than 17. Some consumers see $16.99 as better than $18. Others realize that 18 is more expensive. So rotate between the two to appeal to different customers,” he adds.

Professor Chen also suggests ‘hiding your treasure’, by showing smaller discounts first to lure consumers into your store, and once they are in, offer them bigger discounts. He said that this increases consumers’ total spending.

Encourage charitable donations

Andrew Forman CEO of Brands suggests that instead of offering a steep discount (30/40/50%), brands can use an incentive such as 20 percent savings plus 20 percent for a charitable cause. GivzA platform which allows brands to turn discounts into donations. 

“We’ve seen this improve conversion more than 55 percent compared to 30 or 40 percent off offers. And consumers feel great about their purchase and the brand they purchased from, leading to higher retention and loyalty in the long-term,” said Forman.

Evaluation of pricing success

Evaluation of the success rates for different pricing strategies can be difficult.  Many factors are involved. These are five ways that you can approach measuring.

Track sales volume and COGs

“We evaluate the quantity of the item sold along with the money on hand from each item,” said Futrell. “This helps us to evaluate what items are bringing in the most money for us, versus what items are selling the most. For example, we sell hundreds of small bracelets every month which is our top seller, however they are not our biggest money maker because their price point is so low.” 

Convert rates and retention are important. 

Thomas Jepsen CEO, Passion PlansHouse plans company HOUSE DESIGNS suggests retailers examine their retention and conversion rates as a way to assess your pricing strategy.  “Start setting up systems that look at how frequently customers are returning. Look at your product pages on your website and see what the conversion rate is over time as you’re trying out different strategies,” he said.

Compare the locations of sale

You can also measure the price performance of your products by conducting a controlled experiment. “One method would entail selecting a subset of selling locations and leaving the prices alone,” said Josh Pollack, of the Parker Avery Group. “If the hold-out stores are similar enough to the remaining stores, the difference between the performance of the price-changed items in the two sets of stores is due to the pricing activity,” he said.

Compare similar products

To evaluate price strategies more effectively, you can measure how items perform in the same range. Pollack says this is particularly useful in cases where a comparison of locations is not appropriate.  This allows you to use statistical methods to determine the sales patterns of price-changed and unredeemed items within the product category.  

You can check the gross margin as well as order size 

“The key metrics in retail are gross margin, conversion rate, average order size, and customer lifetime value. These metrics will show you if your pricing strategy is working well or not,” said Darren Litt, the co-founder of Hiya HealthMultivitamins are created by, for kids. Tap into your POSData to help understand these metrics. 

Be confident when pricing 

Pick a pricing strategy that best fits your business from the expert’s suggestions above. And don’t be shy about experimenting with different approaches, as you learn more about what works and what doesn’t for your retail store.  One of our experts can explain how Small Biz Sense may simplify the pricing process.