In the contemporary competitive retail landscape, one of the biggest challenges retailers face is setting the right price for their products or services. With so many factors to consider, from market demand to customer expectations, getting pricing right is the high note to touch. Set it too high, and you risk turning potential customers away; set it too low, and you may miss out on profits or even devalue your brand. This is why retailers must carefully evaluate a range of considerations that impact the final price tag, ensuring that it reflects both the product’s value and market conditions.
This article explores what retailers must consider when pricing their products or services.
We will discover
11 Important Things to Consider When Pricing Your Retail Products or Services
Cost of Goods Sold (COGS)
The Cost of Goods Sold plays a major role in retail pricing strategy since it directly impacts the profitability of a business.
When setting prices, retailers must ensure they cover COGS, which includes all costs involved in producing or purchasing the products they sell. If the price is too low compared to COGS, the business will lose money, and if it is too high, customers will look elsewhere. Retailers need to calculate the right price to balance COGS with market demand, ensuring the price remains competitive while still yielding profit.
A solid retail pricing strategy considers COGS to help determine appropriate price points that reflect both the cost of the product and its perceived value. This understanding allows businesses to make data-driven decisions, manage expenses, and avoid underpricing or overpricing, ensuring sustainable growth.
Purchasing Power of the Customers
This fact directly influences how much customers are willing and able to pay for products.
If a retailer sets prices too high for their target market, customers may struggle to afford the products or simply choose competitors offering better deals. On the other hand, pricing too low can lead to reduced profitability.
Understanding the purchasing power of customers helps retailers set competitive prices that match their market’s ability to spend. That will ensure they attract the right buyers while maximising revenue.
Retailers must also consider how factors like income levels, economic conditions, and spending habits affect purchasing decisions. A good retail pricing strategy accounts for these aspects, adjusting prices to balance customer expectations and profitability.
Market Demand
This means it is necessary to determine how much customers are willing to pay for a product at any given time.
When demand for a product is high, retailers can price products higher since customers are more likely to buy even at a premium price. However, lowering prices will help attract customers and clear inventory when demand is low.
This is where retailers need to stay aware of these demand fluctuations and adjust prices accordingly to stay competitive. If prices are too high when demand is low, sales will suffer. On the other hand, pricing too low when demand is high could lead to missed profit opportunities.
If they are willing to go with a wise pricing strategy, they need to consider market demand and ensure that the pricing aligns with current trends, customer interest, and competitor prices in the first place.
Competition
Competition is a fact that helps determine how much customers are willing to pay.
If competitors offer similar products at lower prices, retailers might struggle to attract customers without adjusting their pricing. Retailers in today’s world need to monitor their competitors closely to avoid overpricing and losing sales.
However, simply copying competitors’ prices is not always the best move, as it may limit profitability. Instead, a good retail pricing strategy focuses on understanding the value of your product compared to competitors.
Retailers should also consider unique selling points and customer loyalty when setting prices. Pricing too high in a competitive market can drive customers away, but pricing too low might undermine brand value or cause a loss in profit.
Profit Margin
This directly impacts how much money a business earns after covering all costs. If the profit margin is too low, retailers will find it difficult to stay profitable even if they make a lot of sales.
This is the main reason they need to find a balance between setting a price that attracts customers and ensuring they make enough profit to cover expenses, such as labour, rent, and inventory costs.
A well-thought-out retail pricing strategy requires considering profit margin by calculating the difference between the product cost and the selling price.
Brand Positioning
When a brand is positioned as a luxury or high-quality product, customers expect higher prices and are willing to pay more. On the other hand, if the brand focuses on affordability or mass appeal, the prices should reflect that to remain competitive. Retailers need to align their pricing with their brand’s image to avoid confusing customers or damaging the brand’s reputation.
When setting up prices, retailers need to ensure that prices reflect both the quality and the unique selling points of the brand, helping businesses attract the right audience while maintaining profitability. Brand positioning directly influences how much customers are willing to spend and helps set the tone for all pricing decisions.
Perceived Value
The latter is an essential factor in retail pricing strategy because it influences how customers view the worth of a product. If customers believe a product offers more benefits, quality, or uniqueness than similar items, they may be willing to pay a higher price.
The main point is retailers need to align their prices with this perception to avoid underpricing or overpricing.
For example, if a product is marketed as premium or high-quality, customers will expect it to have a higher price.
This is why retailers need a pricing strategy to ensure that the price reflects the perceived value, whether through packaging, brand reputation, or product features. Understanding and influencing perceived value is the best way to attract customers and build brand loyalty while remaining competitive in the market.
Seasonality
This particular fact affects demand for certain products at different times of the year.
For example, winter clothing tends to sell more in colder months, and holiday decorations peak in the weeks leading up to the festive seasons.
This means retailers must adjust their prices based on these seasonal trends to optimise sales. When demand is high during peak seasons, retailers can price products higher, knowing customers will pay more. However, offering discounts or promotions can help clear excess inventory during off-peak times.
Understanding seasonality helps retailers price products effectively and respond to market changes, keeping customers satisfied and sales strong.
Psychological Pricing
The latter is a key element of retail pricing strategy because it influences how customers perceive prices and make purchasing decisions. Retailers usually use techniques like pricing products at $9.99 instead of $10, which makes the item seem like a better deal even though the difference is just one cent.
It is true it is a small thing. However, this small change can significantly affect customer behaviour.
Retailers also use strategies like bundle pricing to create the illusion of savings or premium pricing to suggest higher quality. These tactics affect customers’ emotions and perceptions, making them more likely to purchase.
Shipping and Handling Costs
When retailers set prices without accounting for shipping fees, it can lead to unexpected costs for the customer, causing frustration or even abandoned purchases.
If shipping costs are high, retailers might need to adjust the product’s price or offer free shipping to stay competitive. On the other hand, charging too much for shipping can turn potential buyers away, even if the product itself is priced well.
This is why retailers should include shipping and handling costs in their retail pricing strategy to ensure that all costs are covered while maintaining a competitive edge. Customers tend to compare total costs, so factoring in these fees is essential for a smooth shopping experience and to keep sales steady.
A transparent and efficient pricing strategy makes sure customers do not feel blindsided by hidden costs.
Pricing Transparency
Pricing transparency is essential in a retail pricing strategy as it builds trust between the retailer and the customer. When retailers clearly display product prices and any additional fees, customers feel more confident in their purchasing decisions. Hidden fees or unclear pricing can lead to frustration, and customers might decide to shop elsewhere.
A transparent approach allows retailers to communicate the entire cost upfront, preventing unpleasant surprises at checkout. Moreover, when customers understand precisely what they are paying for, they are more likely to feel satisfied and return for future purchases.
A transparent retail pricing strategy not only enhances customer satisfaction but also helps build a positive reputation for the brand. This approach can differentiate a retailer from competitors, encouraging loyalty and repeat business.
Transparency also makes it easier for customers to compare products and prices, increasing the chances of a sale.
Facilitating Automated Price Adjustments Using Robust ERP
If your retail business is currently facing challenges in the pricing aspect, the best thing you could do is opt for ERP software. A robust ERP can help retailers optimise their pricing strategy by providing real-time data on inventory levels, costs, and market trends. It enables automated price adjustments, supports dynamic pricing, and integrates sales data for accurate profit margin analysis, ensuring competitive pricing while maximising profitability and improving decision-making efficiency. However, you need to purchase it from a reputed supplier if you value the reliability of your tools.
