“Come on down! You’re the next contestant on the Price Is Right.” For more than three decades Bob Barker has inspired TV viewers to guess the prices on everything from dishes to bedroom sets. What made the game show so intriguing was that it kept its viewers wondering just how accurately the contestants could guess the prices on items when prices vary widely from retailer to retailer.
The second biggest decision you’ll make as a retailer after which products to carry will be what prices you give them. In an article published in the National Public Accountant called Using ‘Smart’ Pricing to Increase Profits and Maximize Customer Satisfaction, “McKinsey & Co., in a study of 1,000 firms, found that a 1% increase in price – with constant sales – resulted in an average increase in profitability of 7.4%. The McKinsey study also showed that the effect of pricing on profitability was even stronger than that of increasing sales volume or reducing costs.”
Pricing is more complicated than simply picking a margin you’re happy with and applying it universally to all your products. Your pricing should reflect not only the quality of the items themselves, but also your brand image, and the needs of your target audience.
So how do you find the right pricing strategy for your business? Here are eight pricing strategies you can implement right now that can positively influence your profits:
- Make Sure Pricing Aligns with Your Brand – A value-oriented big box retail chain will typically institute economy pricing that reflects its brand and its target customers. High-end specialty retailers will also have prices that reflect their unique products, as well as the patrons who are more willing to pay top dollar for them.If you implement premium pricing, setting certain products prices higher than the market price, be prepared to give reasons why those items demand a higher price. If something is handcrafted, made with higher quality materials, is sourced from renewable resources, or whatever the case may be, be prepared to let relay that information to your customers through advertising, as well your sales associates.
- Offer Competitive Pricing/Price Matching – Thanks to the Internet more consumers are doing their research online before stepping foot in your store. Competing with prices offered by online retailers can be especially challenging. Deciding how and when to implement discounts will depend on whether you want to illicit in your customers a sense of urgency or trust.Having more competitive pricing on your best-selling products can project value to your customers while discounting higher-end merchandise or impulse items will drive a sense of urgency to bring customers into your store. Offering price matching will encourage consumer loyalty by giving your customers incentive to shop at your store versus your competitor’s to get a lower price on a specific item.
- Discounts – Setting higher prices for impulse items and using a discounting strategy to periodically boost sales volume or creating loss leaders that increase foot traffic to your store are just a few pricing strategy examples. No matter which types of discounts you choose to employ – percentage based, dollar amount, or BOGO (buy one get one), having a reliable point of sale system (POS) is going to be essential. Your POS should give you the ability to track your slow movers and best sellers, identify sales trends using real-time data, and make mass updates in your price book which will save you hours of data entry time.
- Bundling – Bundling similar or related products together for purchase at a discounted price can be a great way to increase your average order revenue. Though the individual items may be slightly discounted, bundling increases the value of the entire sale by encouraging customers to buy more than what they may have originally intended.
- Price Lining – By creating price levels for similar products you can essentially establish product lines indicating the level of quality of those products in the minds of the consumers. Price lining creates both a visual and subconscious association in the mind of the consumer who is comparing similar products in two or more price categories. Whether stated outright or simply implied by their physical proximity to each other in the store, the consumer will classify these products into quality levels such as an economy, mid-level, and a premium line. Price lining can also be a very helpful tool in price anchoring.
- Anchoring – Price anchoring refers to a cognitive bias that occurs when people rely heavily on an initial piece of information to make decisions about subsequent options. Placing a considerably higher priced item next to one listed closer to market value creates an anchoring effect by which consumers are more likely to see the subsequent item as much more reasonably priced by comparison.
- Eliminate Price Pains – According to Smart Pricing Strategies for the Internet Age: A Primer, “behavior economists have discovered that the pain of losing something we own outweighs the joy of winning by as much as two to one. Thus, for example, the pain of losing $1000 that you currently have is about double the intensity of the joy you would experience getting $1000.” But not only are price pains emotional, science shows they are also physical.After a study of 26 participants who were given the option to buy products at various prices while undergoing an MRI, researchers at Carnegie Mellon, Stanford, and MIT found that “prices do not deter spending purely through thoughts of foregone pleasures, as assumed by standard economic theory, but also through immediate pain.” Offering layaway, incentivizing the use of a store credit card, advertising payment amounts vs the sticker price, or $0 money down offers are all pricing strategy examples that eliminate the pain of spending money.
- Psychological Pricing – Ending prices with the number 9, especially when it reduces the furthermost left digit by one creates the psychological effect of making the overall price of the product seem much cheaper even if the price is only discounted by one cent. In the study, Effects of $9 Price Endings on Retail Sales: Evidence from Field Experiments, “use of a $9 price ending increased demand in all three experiments. Second, the increase in demand was stronger for new items than for items that the retailer had sold in previous years.”
Eliminating commas and periods from pricing can also have a psychological influence on how consumers perceive prices. Comma N’ cents in pricing: The effects of auditory representation encoding on price magnitude perceptions in the Journal of Consumer Psychology explains how, “including commas (e.g. $1,599 vs $1599) and cents (e.g. $1599.85 vs $1599) in a price’s Arabic written form (i.e., how it is perceived visually) can change how the price is encoded and represented verbally in a consumer’s memory. In turn, the verbal encoding of a written price can influence assessments of the numerical magnitude of the price.” In other words, the longer it takes the consumer to say the price out loud (e.g. $1,500 – one thousand five hundred vs. $1500 – fifteen hundred), the larger the amount appears to be in the consumer’s mind. Simply removing the commas and cents can give the consumer the impression that the price is lower than what it actually is.
The pricing strategies you implement in your stores can have a dramatic impact on your sales. It is essential to have a point of sale system that accurately tracks your sales data so that you can see which strategies are working and which are not. The right price is always the price that gets your product sold.