Inefficient pricing is one of the greatest missteps that an emerging brand can make when crafting retail pricing strategies. It isolates consumers who would otherwise be trying your product for the first time, and can hurt your bottom-line retail sales early on. While determining your margins and setting a price based on the profits you hope to make is an attractive option, it is not a realistic one. Ensuring that both you and your customers are happy means deciding on a pricing strategy before bringing your product to market.
Before forming a strategy, first look at the different channels you are selling through. Are there big differences between locations? Are consumers in some of your channels of sale radically different from those in other venues? If so, it’s a good idea to consider channel pricing, a tactic that involves looking at the retail sales data from each location individually, and then tailoring your approach towards the characteristics of that location’s consumers.
Consumers who run into a gas station at 8:30 in the morning are usually very different from the customer shopping at 3 P.M. at the local grocery store. After determining whether or not this tactic is a good fit for your product, move into the strategizing phase of your retail execution strategy, and choose from the plethora of options available.
One popular pricing strategy, known as price skimming involves setting an artificially high price in order to procure high profits in lieu of quick growth. By setting the price of the product high, it’s possible to capture the sales of early adopters, who tend to be influenced less by price than the average consumer. This is the group who stand outside in line on release day waiting for the doors to open so that they can run in and be the first to buy a new product.
The strategy which sits at the opposite end of the spectrum from price skimming is called penetration pricing. With penetration pricing, the price is set low intentionally, sacrificing profits in order to quickly grab a larger share of the market. The reason this strategy work is because once consumer loyalty has been established, businesses can slowly raise their prices to regain the profits that they initially missed out on.
Another way that this strategy is utilized—especially by the razor industry—is by utilizing low prices to influence consumers to buy other high profit products. When a consumer buys a cheap razor handle, they are committing to the brand, and the business recoups the costs on the sale of blades. This strategy is also very popular with printer manufacturers, who make most of their profits off of the sale of ink and accessories. If your product offers any peripherals or accessories, utilizing penetration pricing is a great way to get consumers to buy into other products you offer.
Pricing based on the estimated or perceived value of the product to the consumer, value-based pricing is a strategy often used by companies creating products with low production costs. For those industries such as fashion and CPG where emotions often drive purchases, or industries where there are essential add-ons to a primary product, such as the printer industry, value based pricing can increase profits while maintaining the same volume of sales the product would otherwise have.
Pricing has an enormous effect on the performance of a new product in the market, and deciding on what strategy will work best should be one of the first steps managers and business owners take before negotiating with retailers and following through with a retail execution strategy.
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