Pricing is an important sales-driving force, and you want to be sure that you price your products appropriately, mainly to launch. Pricing is an essential aspect of establishing a business. This ensures that you’re offering your customers the best possible price out there, giving them even more reasons to buy from you. Sometimes, you’ll need to raise your prices, and sometimes, you’ll have to lower them, but if you remain competitive and reasonable, you’re doing good.
Here are five methods to use to price your product correctly. You can use either one of these methods, provided it relates to which part of the sales funnel you’re in.
Method 1: Using Keystone Pricing
Keystone pricing allows for a simple markup formula. It’s a pricing strategy that retailers commonly used as an easy rule of thumb. With this pricing, a retailer decides the retail price by doubling the wholesale cost. This is the cost they paid for the product. Using keystone pricing could sometimes lead to the product being priced too low, too high, or just right.
Products with a slow turnover, significant shipping and handling cost, or are unique in some way can benefit from keystone pricing. In these scenarios, the retailer uses a higher markup formula to increase the retail price for in-demand products. Products that are highly commoditized and their alternatives can be found easily are harder to pull off using keystone pricing.
Essentially, use keystone pricing as a rule of thumb to gauge how much a product should be priced. That said, check on the product’s demand in the market before you mark it up higher than the average rule of thumb.
Method 2: Economy Pricing
Economy pricing works ideally for products with low production costs and high-volume sales. This pricing strategy is used to price products lower than the market average, focusing on gaining revenue based on sales volume. Commodity goods such as groceries benefit from this pricing method, especially when the company doesn’t have a big brand to support its marketing. This type of business model is dependent on selling a high volume of products consistently to new customers. Economy pricing can be calculated as such:
Production cost X profit margin = price
Economy pricing is highly beneficial to keep customer acquisition costs low, and it’s ideal for an environment where customers are price-sensitive. The other good thing about economy pricing is that it’s easy to implement.
The downside of economy pricing is that you need a steady flow of customers consistently to achieve the sales volume to obtain a profit. The other thing about using economy pricing is that products in this pricing category aren’t usually seen as high-quality.
Method 3: Multiple Pricing
Multiple pricing is usually used in grocery stores and apparel stores with products such as t-shirts, socks, and underwear. This multiple-pricing method enables retailers to sell more than just one product for a single price. Multiple-pricing is also known as product-bundle pricing.
Product bundle pricing is also seen in other industries such as games, beauty, and sports. For instance, facial wash and moisturizer are bundled with a carry-on bag to keep your skincare. Or, an electric guitar is bundled with an amplifier.
The good thing with this strategy is that it creates a higher perceived value at a lower cost. This leads to a larger volume of purchases. Retailers using this pricing strategy also benefit from selling items separately for more profit. For instance, if you sell basketball shoes together with a basketball jersey for $60, you can sell these items separately for $30 and $25 each, and that’s another win for your sales.
On the other hand, product-bundle pricing can also reduce profits. The idea of bundle pricing is to increase sales volume, and if it doesn’t, you’ll be coming up short on profits.
Method 4: Manufacturer-Suggested Retail Price
This pricing method, aptly called MSRP, is the price that’s recommended by the manufacturer for retailers to use to sell their product. MSRP was first used to maintain and standardize the different prices of products across different locations and retailers. This pricing strategy is often used with highly standardized products, such as consumer appliances and electronics.
The benefit of using this pricing strategy for a retailer is that they can save time just by using the MSRP, or using it as a benchmark to price their products. The downside of this pricing strategy is that it doesn’t allow retailers to compete based on price. Retailers in the industry using MSRPs usually sell their products for the same price as other retailers.
The other thing about using MSRPs is that retailers need to consider profit margins and cost carefully. For instance, your business may incur additional costs that the manufacturer didn’t take into account, such as regional taxes and international shipping.
Method 5: Retail Pricing
When choosing the right price for your product, the main strategy retailers usually use is keystone pricing as a benchmark, doubling the cost to set a healthy profit margin. But then, increasing or decreasing the price depends on a variety of factors, too.
When you want to calculate your retail pricing, here’s a formula you can use:
Retail price = [cost of item ÷ (100 – markup percentage)] x 100
For instance, if you have to price a product for $15, with a 45% markup instead of a 50% markup, you calculate your retail price as such:
Retail price = [15 ÷ (100 – 45)] x 100
Retail price = [15 ÷ 55] x 100 = $27
The above is a simple markup formula most retailers use, but this pricing strategy doesn’t work for every retailer, every product, or every business. Each product and retailer combo is unique, with its own disadvantages and advantages.
The good thing about pricing methods is you can try a combination of a few, and see which works best for the retail environment you’re in. For a healthy business, it’s always good to relook into your prices depending on the season and environment and change them from time to time, offering discounts, bundles, and offers to keep customers coming back for more.
If you’re looking to establish and incorporate your business, check out https://taxfyle.com/business-incorporation-services to get the best services and assistance in getting the right documents and paperwork, minus the headache.