Pricing in Retail

What you’ll learn to do: Identify how pricing fits into the goals of a retail establishment

We will take our candy store scenario a little further in this section as we learn about the definition of value, some basic retail pricing strategies we are probably all familiar with, and how pricing is an integral part of the retail mix strategy.

Defining Value

“Value” is an overused and under-understood term in business today. Since we are wearing a retailer hat, we want to focus on value as it relates to our customers. For customers then, value is the perceived monetary worth of the combination of product, service, and utility provided.

The term “value proposition” is also a heavily-trafficked term used by business people today. Think of a value-proposition as an innovative feature intended to make a company or product attractive to customers. It can be best illustrated by a thought-scenario: You are shopping for media services to help you get the word out online about your new candy store. The first company comes to you with the following statement: “Trust me, our firm is number one and will give you the most for your money.” The second company comes to you with: “We can guarantee 200 clicks per day for every month of our contract.” Which value proposition would make you the most impressed?

For retailers, value can take on even more meaning. For example, there is a class of retail companies referred to as “value-price” retailers (generally discounted and/or inexpensive products). The largest home-shopping network uses value as part of their daily programming with a hook called “Today’s Special Value.” And when was the last time you were in a retail store and did not see some signage referring to “great value,” “best value,” or “value guarantee”? It is no wonder that our definition of “value” has become so murky.

Retail Pricing Strategies

As we stated earlier, there are a large number of retail pricing strategies and methods. We will discuss a number of them in this section.

One major common denominator that runs through all of the pricing decisions made by retailers is the concept of “markup”. Markup is simply the difference between the cost of the product to the retailer and the price at which the product is sold by the retailer divided again by the retail price. It is usually expressed as a percentage figure, so the calculation is made like this:

*Retail price minus cost price divided by retail price*

So if your item cost is $4.00 and you sell it for $10.00, you would calculate markup as:

($10.00 – $4.00 = $6.00) /$10.00 = .6 or 60%

Markup is a concept that every retailer understands and factors in consideration somewhere in every pricing strategy.

One of the most traditional retail pricing methods is called keystone pricing. Keystone pricing is simply the retailer doubling the cost amount to arrive at a 50% markup. For example, if an item costs a retailer $3.00 to buy, the retailer will set the price at $6.00.

Premium pricing is another retail pricing strategy. In this method, the retailer takes a larger markup on a product in order to establish higher perceived value for that product. For example, a new designer brand being introduced by a department store might see 70%- 80% markup levels initially (especially if the store has an exclusive arrangement with the vendor so no competitors have the same products).

Discount pricing is a prevalent retail pricing strategy. Retailers such as Kmart, Target, Wal-Mart and others pioneered this method, setting their sights on moderate-priced competitors and setting prices below them. Retailers can expect markups to drop below 20% and even lower depending on the product category. The latest wave of discount retailers have simplified the discount strategy even further by featuring entire stores with goods all priced at $1.00 or even 99 cents.

Psychological pricing refers to taking advantage of human perception to convince customers of a more attractive price. For example, instead of placing a price tag of $200 on an electronic product, a retailer may mark the item at $199. Or a dress shirt may be marked at $29.99 instead of $30.  Although it is a small difference in price, it is believed that people pay more attention to the first number in the price.

Another common retail pricing strategy is bundle pricing. This term refers to grouping multiple items and pricing them together. There are many variations of this strategy as well. “Twofor” pricing (2 for $10), “BOGO” (Buy One Get One Free), “Get 50% OFF the Second Item”, etc.

The last retail pricing strategy we will discuss in this section is tiered pricing. Tiered pricing is the practice of establishing set price-points within a product category and marking all the products in that category at those price-points. For example, men’s ties from different manufactures could be priced at $11, $12, $16, $18, $22 or $25 depending on their different costs. In a tiered pricing scenario, a retailer may offer these ties at $10, $15 and $20 to simplify their price structure.

Pricing and the Retail Mix

At the beginning of this module, we state that retail pricing strategy does not exist in a vacuum and is dependent and interrelated to other business factors. Retailers have used the “Six P’s of Retail” model to visualize how various combinations of these factors combine to form the right “mix” for the business. Each retailer works to create their own unique formula for success, but there needs to be consistency among these factors.

Product refers to the assortment of goods the retailer offers to their customers. Retailers try to align their product mix with the needs and wants of their target customers. They consider the quality level of goods carried, depth and breadth of assortment, brands versus private label, etc.

Promotion entails the marketing efforts to support sales of the retailer’s products. This factor of the retail mix is concerned with advertising, publicity, social media, cross-channel selling, etc.

Presentation is the retail mix factor concerned with the image of the retailer both in store and online. How professional is the look and feel of the customer experience? How do things like logos, color schemes, music and even aroma influence the customer’s perception of the retailer.

Personnel refers to the people employed by the retailer and the level of service they provide. From baristas in Starbucks to online customer service agents at Amazon.com, customers’ perception of the retailer will be impacted through their experience with the retailer’s people.

Place is the retail mix factor that includes store location, website appearance and functionality, accessibility, etc.

Pricing is one of the most important areas of the Six P’s. We have already examined several pricing strategies in this module as independent entities. As with the other Six P factors, there must be consistency across all of the dimensions to create and execute a successful retail business.

Your specialty candy store carrying truffles hand-made on site would probably do well with a premium price strategy for these unique edibles. Conversely, a mass-merchant retail chain located in a strip center carrying basic quality goods would probably not do very well with a premium price strategy.  A department store retailer located downtown carrying luxury designer goods would not wish to employ a discount-price strategy for their high-end customers. “Twofor” pricing would not be a successful pricing strategy for a retailer selling automobiles. To be successful, a retailer’s pricing strategy must be consistent with all of the factors of the retail mix model.