A Comprehensive Guide to Retail Pricing Strategies: Choosing the Right Approach for Your Business

Charging the right price for products is a make-or-break decision for retailers. On one hand, there is pressure to cover costs and on the other, there are constraints from the marketing angle. While costs can be determined, evaluating the qualitative and qualitative impact of factors like brand positioning, consumer behaviour, and competition on prices presents the difficult side. This blog presents a comprehensive guide to retail pricing strategies aimed at helping retailers choose the approach that best serves their business interests.

Why getting to the right price bracket is so critical

Resonance

When a business comes into existence, it is natural that it has already established what products and services it is going to offer and to whom. For example, Apple or Walmart already knows what they stand for as brands, who their target segments are, what values should be present in their offerings, etc. This applies to businesses of all sizes. For instance, a small grocery store may very well know the market it serves. It is unlikely to offer values which its target segment may not be interested in and thus, will be willing to pay a higher price for the same. In essence, you do not produce something or make something available for sale and then set a price for it. You should know the ideal or intended price bracket beforehand based on the factor of resonance. This changes the entire value chain paradigm. Existing brands and businesses also eventually have to tow this line.

Achieving Cost Recovery and Desired Profitability

Cost recovery and earning the desired profit levels are the topmost prerogatives in pricing. At least, that is the general rule of thumb. Cost recovery comes earlier because it provides the basic justification. Two common pricing strategies here are cost-plus and mark-up pricing. However, there might be situations when cost recovery and profitability might be put aside in view of bigger business and marketing objectives. In other words, achieving these two fundamental objectives is delayed. Such situations are discussed in the points ahead.

Market Stature

Setting prices at levels lower than the prevailing market or competition standards is a very common strategy adopted by business enterprises for different growth and expansion objectives like entering new markets, launching competitive products, or increasing market share. Finding the right price point to achieve these objectives is critical. This also calls for insights into competitive retail pricing strategies prevalent in a market. Cost recovery and profitability concerns are addressed after the primary objectives are achieved. Sometimes maintaining market share may also necessitate changes in pricing and finding the right price point. In today’s retail business environment, pricing is a dynamic decision-making activity.

Adjusting to Value Offered

Knowing the value of values offered helps determine the right price for products and services. This value could be real, perceived, or both. For example, a table salt brand with the lowest sodium content in a market could charge higher than other competing brands that are not offering this value. This strategy helps maximise profits and price change may not be warranted as long as there is no competition. It must be taken into consideration that unique value propositions often come at higher costs. The premium prices set must also generate the desired level of demand. The same principle applies the other way around when there is nothing unique about offerings.

Contemporary Retail Pricing Strategies

Advanced retail pricing techniques

Dynamic Pricing

Dynamic pricing in retail involves real-time alterations in prices based on a myriad of factors. These factors include ongoing demand, depletion rate of stock levels, competitors’ response, market trends, consumer behaviour, immediate economic and political implications, etc. Dynamic pricing allows businesses to optimise revenue and profits based on market conditions. Businesses that are known to use this strategy include airlines, ride-hailing services, eCommerce marketplaces, hotels and other hospitality-based enterprises. Cost recovery is duly taken into consideration. Dynamic pricing is also often seen as a temporary form of premium pricing. In high demand situations, prices shoot up but under normal or below normal demand situations, prices do not go down below certain levels. For brick-and-mortar retailers, dynamic pricing is useful to compete with online sellers of products which are available in both online and offline markets.

Personalized Pricing

Personalised pricing is one of the new kids in the block of retail pricing approaches. It is also a kind of dynamic pricing but with more focus and intensity on individual customers. In personalised pricing, prices are set based on the characteristics of individual customers’ interaction with a brand and the products concerned. For example, a frequent flyer is likely to be charged more than occasional users of flights. The former tends to care less for discounts while offers and discounts may incentivise the latter. Factors that count in personalised pricing include frequency and quantum of purchase, nature of consumption, spending patterns, brand consciousness, desire for premium solutions, willingness to pay, time taken to make purchase decisions, brand loyalty, etc.

Like dynamic pricing, personalised pricing also helps businesses increase sales and profits. However, it may also raise ethical concerns in the minds of customers in general. Not every customer may approve of the idea of being charged more for being a less frequent buyer or not being on an ‘exclusive’ list but from another perspective, it might also not be difficult to comprehend that brands and businesses are not offering exclusive discounts at a loss.

Data privacy is another important facet of personalised pricing. Companies have to be really careful about how they collect information and use it.

Value-Based Pricing

Value-based pricing is based on the perceived value or benefits of products and services to customers. This strategy is most commonly used by brands and businesses in categories like premium, luxury, and niche. Value-based pricing is a highly sensitive strategy and companies have to deliver and stand up to the expectations of their customers by every inch. The cornerstone of this strategy is based on perception which can be quite subjective. A detailed understanding of customer needs and expectations is of utmost importance here. Brands may have to even understand and implement what is not being said but expected. Premium pricing must be justified with values delivered. Brands like Rolex and Rolls Royce show traits of following the value-based pricing strategy.

Bundled Pricing

Bundled pricing is where two or more products/accessories are sold at a discounted price to encourage customers to buy more value at a lesser price. For instance, many retailers adopt this retail store pricing strategy where they offer smartphones with compatible chargers and/or other accessories in one package at discounted prices. The value for customers here is that they get to buy a complete user package at a lower price. Buying each of these items separately often costs more.

Bundled pricing offers many other benefits to retailers. It increases overall sales and average revenue per order/sale. Retailers are able to improve their inventory turnover and also sell slow-moving goods. It makes their stores more holistic shopping centres covering wider consumer needs and expectations. This also offers enhanced convenience to customers. Combo meals in fast-food restaurants serve as another good example of bundled pricing.

Subscription and Membership Models

Subscription-based pricing models are more common with service-oriented companies like Netflix, Amazon, and Spotify. It is not the same as membership offers doled out by many retail brands. In the subscription model, the payment is recurring irrespective of purchase or use. The benefits or access to services are open round the clock as long as the subscription is valid. In membership schemes, purchase is not mandatory and membership benefits apply only if there are any purchases. Subscriptions can be directly purchased or renewed by customers. Eligibility for exclusive brand memberships is generally automatically activated when purchases reach established limits. In standard subscription-based pricing models, the tariff plans are pre-decided. It cannot be ruled out that subscription-based pricing cannot be personalised. It can also borrow features of other pricing strategies like bundled pricing and value-based pricing. An example here would be access to freshly released content within OTTs.

Freemium Pricing

In freemium pricing, certain basic features are offered for free (like Canva) but accessing advanced features requires paying a fee at different levels of offerings. Gaming companies also use this tactic to earn additional revenue apart from in-app advertisements. Some of the big benefits of freemium pricing include:

• Easy user/customer acquisition due to free entry
• Access to a wider audience because of being in the digital space
• Potential for conversion (from free user to customer) after delivering quality experience and building trust and reliability over time
• Access to user data for product improvement (subject to permissions and regulatory adherence)

Although the concept of freemium pricing finds its origin in the digital and service sectors, the idea of freemium is not something new in traditional retailing. Free trials and samples stand out as bold examples here. With the entry of digital capabilities in traditional retailing, the scope of applying the concept of freemium in relevant ways is open for exploration.

Wrapping Up

In formulating retail pricing policies, the fundamentals of resonance, cost recovery, profitability, value consideration, and market stature cannot be ignored. These elements constitute the ground rules and must find their due places in any strategic framework of pricing. Also, choosing one from the commonly adopted retail pricing methods may not best serve the unique business interest of retailers. Different approaches work differently under different business circumstances. The solution is to go for a hybrid framework that is agile and flexible to market conditions and helps ensure a steady flow of revenue.

About Your Retail Coach:

Your Retail Coach (YRC) is a retail and eCommerce consulting enterprise with expertise in startups, growth, and management solutions. With a scaling international trail and more than ten years of experience in delivering value, YRC has worked with more than five hundred clients in 25+ industries with a success margin of 95%.

For expert retail pricing solutions or to speak to one of YRC’s retail consultants and Get advise for Retail Business Consulting : https://www.yourretailcoach.in/contact/

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