While reviewing our pricing strategies, I noticed that one product department at our brand was highly priced, while our entire product range was highly affordable and the brand actually promotes affordability as a value proposition. It resulted in very low contribution of this department to our sales, because the target customer that would pay such price is not our typical everyday customer who came to us for affordable products.
I asked my inventory controller why this is the case. She said: ” Yeah, we put a fixed markup on all products and these products have a high cost”
“Hmm, OK! This needs to change”, I said.
I already knew that pricing at a certain fixed markup or using keystone pricing (setting the price at double the cost) was a common practice in the market, but I believed this approach cannot be used as a general rule, and this situation was a perfect example why it is not the right approach.
Important Pricing Strategies Considerations
The following are things to consider when staring a retail business and choosing from the different product pricing strategies. It should be noted that you don’t have to stick to one strategy across all your product lines. As we will show below, some market scenarios will dictate certain strategies.
1. Supply & Demand
The first and most important factor to consider while setting pricing strategies is the supply & demand of the product. If the product you are selling is available everywhere in the market without differentiation of any kind (for e.g plain white cotton t-shirt), then the market will determine its price, and not its cost. That’s because every other player will try to compete on the same customer and will typically reduce the price to get the sale. In this case, you have no other option but to set the price at the current market price.
Insisting on selling the product at a 50% margin, while everyone else sells it at 30% & 20% will only result in the product sitting on the shelf till the end of the season, where you will have to clear it at 70% discount.
2. Entry Barriers
Everyone working in retail these days likes to blame Amazon for the ultra-competitive situation we are operating in right now. However; Amazon is not the problem. Technology has made it super easy for anyone to start a retail business from their living room ( I mean if I could do it, anyone else can too).
When I started doing e-commerce in 2008 the technology was there, but it was still not accessible for everyone. I remember there was a huge learning curve for me to get my shop up and running on Magento, and the endless troubleshooting of all the errors that came along the way.
Fast forward to 2020 and now you have multiple e-commerce platforms!
You no longer need to know the technicalities of setting up & maintaining a website in order to have an online shop. You just pay the monthly fees and have a running store, day & night.
I also had to invest a lot of time & money in buying the initial merchandise for my store. I had to look for factories, give them my templates, wait for them to manufacture and then stock on the products that might or might not sell.
Today, this is no longer the case.. thanks to drop-shipping. You just need to find a supplier from Ali-Express, put the product on your store, run some Facebook ads, get the order, send it to the supplier, who then sends it to your customer directly and you receive your cut.
All this has affected the price levels of goods & services worldwide, because there has never been a time when it was easier to start a retail business.
This is affecting the realized margins of all these businesses.
3. Category Roles
Not all product categories play the same role in your portfolio, and based on their different roles their pricing strategy will be determined.
Read Also: Category Management 8 Step Process
For example, when I source my products I always look for few items that can drive traffic to my store due to the fact of them either being basics or in high demand or not supplied by the competition.
For such products I actually don’t mind having a low margin, so that they would drive the customers through my doors. I then compensate on this margin from my other products which I hope to sell to those customers additionally.
Read Also: Loss Leader Pricing
4. Promotions & Markdowns
When you set your initial pricing strategy you can not assume that you will sell your entire stock at full price. Naturally you will sell a portion at full price and as the season goes by you will start discounting. Also throughout the year you will be running promotions to drive traffic.
Our online Markdown Planning Tool lets you determine your realized margins based on your markdown events, and lets you set your initial intake margin accordingly, so that your initial price would deliver your targeted profitability.
Read More: Intake Margin Setting
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Retailer & Founder of Retail Dogma, Inc.
Rasha has 12 years of retail & ecommerce experience. She has started an ecommerce business in 2008, and later worked at H&M, Bath & Body Works, Victoria’s Secret and Landmark Group. She’s currently working with an omni-channel retail start-up, and scaling its retail operations in UAE.
She has lived in 4 different countries, speaks 3 different languages and holds a master’s degree in Strategic Management & Marketing.