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Pricing Strategies: PLEASE COPY into your notes
1.- Cost-Plus Pricing (Mark-up Pricing):
Markup pricing is a widely used strategy in retail and ecommerce businesses for determining prices by adding a percentage to the cost of a product. By carefully considering costs and market factors, businesses can use this method to set prices that cover costs and generate profit.
E.g. you buy a flash drive for $20 mark up to sell at $30. This is a 50% mark-up on cost. Profit margin is $10.
$30 - $20 = 10 divided by 20 = .5 = 50% Mark up cost
2.- Break-Even Pricing
In manufacturing, the break-even price is the price at which the cost to manufacture a product is equal to its sale price. Break-even pricing is often used as a competitive strategy to gain market share, but a break-even price strategy can lead to the perception that a product is of low quality.
3.- Retail Price (Keystone Pricing):
Many retailers benchmark their pricing decisions using keystone pricing, which is essentially doubling the cost of the product to set a healthy profit margin. However, in many instances, you’ll want to mark up your products higher or lower, depending on your specific situation.
Here's an easy formula to help you calculate your retail price:
Retail price = [(Cost of item) divided by (100 – markup percentage)] x 100
For example, you want to price a product that costs you $15 at a 45% markup instead of the usual 50%.
Here’s how you would calculate your retail price:
Retail price = [(15) divided by (100 - 45)] x 100
Retail price = [(15 divided by 55)] x 100 = 27
Therefore the $15 dollar product marked up by 45% would cost $27.
Pros: The keystone pricing strategy works as a quick-and easy rule of thumb that ensures and ample profit margin.
Cons: Depending on the availability and the demand for a particular product, it might be unreasonable for a retailer to markup a product that high.
4.- Manufacturer suggested retail price: What is MSRP?
As the name suggests, the MSRP ( manufacturer's suggested retail price) is the price a manufacturer recommends retailers use when selling a product. Manufacturers first started using MSRPs to help standardize different prices of products across multiple locations and retailers.Retailers often use the MSRP with highly standardized products (i.e., consumer electronics, cars and appliances).
Pros: As a retailer you can save time simply by using the MSRP when pricing products.
5.- Multiple pricing: The pros and cons of bundle pricing
We’ve all seen this pricing strategy in grocery stores, but it’s common for apparel as well, especially for socks, underwear, and t-shirts. With the multiple pricing strategy, retailers sell more than one product for a single price, a tactic alternatively known as a product bundle pricing.
For example, a study looking at the effect of bundling products found in the early days of Nintendo’s Game boy handheld console, it sold the most products when the devices where bundled with a game rather than individual products alone.
Pros: Retailers use this strategy to create a higher perceived value for a lower cost—which can ultimately lead to driving larger volume purchases.
Cons: When you bundle products up for a low cost, you’ll have trouble trying to sell them individually at a higher cost, creating confusion for consumers.
6.- Penetration pricing and discount pricing
It’s no secret that shoppers love sales, coupons, rebates, seasonal pricing, and other related markdowns. That’s why discounting is a top pricing method for retailers across all sectors.
There are several benefits to leaning on discount pricing. The more apparent ones include increasing foot traffic to your store, offloading unsold inventory, and attracting a more price-conscious group of customers. Cons: If used too often, it could give you a reputation of being a bargain retailer and could hinder consumers from purchasing your products for regular prices.
Pro's: Penetration pricing is also a marketing strategy that’s useful for new brands. Essentially, a lower price is temporarily used to introduce a new product in order to gain market share. The tradeoff of additional profit for customer awareness is one of many new brands that are willing to make in order to get their foot in the door.
7..- Loss-leading pricing: Increasing the average transactio/cart value ((Upselling)
We’ve all done this. We walk into a store lured by the promise of a discount on a hot-ticket product. But instead of walking away with only that product in hand, you ended up purchasing several others as well. If, so, you’ve gotten a taste of the loss leader pricing strategy. With this strategy, retailers attract customers with a desirable discounted product and then encourage shoppers to buy additional items.
A prime example of this strategy is a grocer that discounts the price on peanut butter and promotes complementary products like loaves of bread, jelly and jam, and honey. The grocer might offer a special bundle price to encourage customers to buy these complementary products together rather than simply selling a single jar of peanut butter. While the original item might be sold at a loss, the retailer benefits from the other products customers purchase while in-store.
Pros: This tactic can work wonders for retailers. Encouraging shoppers to buy multiple items in a single transaction not only boosts overall sales per customer but can cover any profit loss from cutting the price on the original product.
Cons: Similar to the effect of using discount pricing to often, when you overuse loss-leading prices, customers come to expect bargains and will be hesitant to pay the full retail price.
8.- Psychological pricing: Use charm pricing to sell more with odd numbers.
Studies have shown that when merchants spend money, they’re experiencing pain or loss. So, it’s up to retailers to help minimize this pain, which can increase the likelihood that customers will make a purchase.
In William Poundstone’s book Priceless, he picks apart eight studies on the use of charm prices (i.e. those ending in an odd number), and found that they increased sales by 24% on average when compared to their nearby, ‘rounded’ price points.
But how do you choose which odd number to use in your pricing strategy? The number 9 reigns supreme when it comes to many retail pricing strategies. Researchers at MIT and the University of Chicago ran an experiment on a standard women’s clothing item with the following prices $34, $39, and $44. Guess which one sold the most? The item at $39 even outsold its cheaper counterpart price of $34.
Pros: Charm pricing allows retailers to trigger impulse purchasing. Ending prices with an odd number gives shoppers the perception that they’re getting a deal-and that can be tough to resist.
Cons: When you’re selling luxury goods, lowering your price from a whole number like $1,000 to % 999.99 can actually hurt your brand’s perception. This pricing strategy can give luxury customers the impression that the products are defective or are market down for a similar reason.
9.- Competitive pricing: Beating out the competition
As the name of pricing strategy suggests, comparative pricing refers to using competitor pricing data as a benchmark and consciously pricing your products below or on par with theirs. Outpricing your competitors can influence price-conscious customers to purchase your products over similar ones.
Pros: This strategy can be effective if you can negotiate with your suppliers to obtain a lower cost per unit while cutting costs and actively promoting your special pricing.
Cons: This can be difficult to sustain when you’re a smaller retailer. Lower prices mean lower profit margins, and so you’ll have to sell higher volume than competitors. And, depending on the products you’re selling, customers may not always reach for the lowest-priced item on a shelf.
10.- Premium pricing: (Luxury Pricing)
Here, you take the pricing strategy from above and go to the other end of the spectrum. Brands benchmark their competition but consciously price products above theirs and brand themselves as more luxurious, prestigious, or exclusive.
For example, a premium price works in Starbucks’ favor when people pick them over a lower-priced competitor likeTim Horton's or McDonalds.
Pros: This pricing strategy can work its “halo effect” on your business and products. Consumers perceive that your products are better quality and more premium due to the higher price compared to competitors.
Cons: This pricing strategy can be difficult to implement, depending on your stores’ physical locations and target customers. If customers are price-sensitive and have several other options to purchase similar products, the strategy won’t be effective. This is why it’s crucial to understand your target customers and do market research.
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