In this blog post, we’ll demonstrate how to leverage market research to create a retail pricing strategy that works for your business.
Creating a strategic pricing strategy is key to the success of any retail business. Market research allows businesses to understand the competitive pricing landscape and determine what customers are willing to pay for their products. With the right market research tools, businesses can develop competitive pricing strategies that help them stand out from the competition and increase profits.
Table of Contents:
- What is retail pricing?
- The importance of creating a winning retail pricing strategy
- 12 retail pricing strategies
- Using data to determine the right price for your products
- Examples of successful retail pricing strategies
- Pricing research with quantilope
What is retail pricing?
Put simply, retail pricing is the price that a customer pays for a product or service in a retail store or online marketplace. While it sounds simple in theory, retail companies go through a strategic pricing process to determine how much they can charge for items in order to generate - and hopefully maximize, profits. These strategies apply to both online and physical stores, with many businesses using a combination of both to sell their products. As they narrow down their final price, retailers will need to consider a number of factors, such as production costs, competitor pricing, sales algorithms, and product type...for each product they're selling!
Retailers often employ different strategies when setting prices for different products. These can include markups, markdowns, low prices, high prices, discount pricing, charm pricing, and so on. Some businesses will even set different prices for similar products to encourage customers to purchase a variety of items for varying needs, based on perceived value (i.e. more high-end bath soap vs. basic kitchen soap). Other retailers might use algorithms or competitor pricing data to help make decisions about setting prices.
Regardless of the process, retailers need to understand how best to set prices in order to achieve their desired objectives and remain profitable in their category for the success of their business.
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The importance of creating a winning retail pricing strategy
It’s important for any retail business to have a strong pricing strategy in order to maintain a competitive advantage - though again, it can be one of the most difficult retail tasks to manage.
Retailers who take time to survey their audience put themselves in a much better position to increase sales by way of meeting consumer expectations. Through research and data analysis, retailers can ensure that their prices are fairly set and aligned with their competitors. They also can better control their profit margins, set product prices according to industry trends, and build customer loyalty.
The difference between retailers who focus on data-backed retail pricing strategies and those who 'wing it' is what sets apart an industry leader from one who struggles to keep up.
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12 retail pricing strategies
Below are some common retail pricing strategies that retailers can explore through market research:
Penetration pricing:
Penetration pricing is a strategy where a retailer intentionally sets an initially low price point for their product in order to gain market share quickly. The goal is to price the product just below that of competitors’ products, so customers will be more likely to purchase your product over theirs.
This type of pricing strategy can be beneficial for businesses with high production costs and low-profit margins - that’s because if successful, the increased market share will offset or lower those initial high production costs. Brand new companies to a market, established companies with new offerings, or companies with price-elastic products are common candidates for penetration pricing. This strategy helps a brand grow affinity amongst its purchasers, in hopes that if pricing is ever increased, these consumers will continue to purchase regardless.
Discount pricing:
Similar to penetration pricing, discount pricing involves price setting that’s lower than the normal market rate in order to attract buyers. Where it differs from penetration pricing is in its longevity; discount pricing is typically short-term and involves the markdown of once higher-priced items (rather than entering the market at a low rate initially). It is a very effective strategy for businesses that are looking to get rid of old inventory or attract new customers through a sale price. Discounting can help businesses establish a competitive advantage against competitors and give them a better chance at gaining market share in the long run.
Those leveraging discount pricing should be conscious of its overuse, which can train customers to expect lower prices, making it difficult to return to regular prices later on. It's also important to ensure that discounts are deep enough to be attractive to customers but not so deep that they erode profit margins.
Price Skimming
On the contrary to penetration pricing and discount pricing, price skimming is a strategy where businesses initially charge a high price for a new product or service and then gradually lower the price over time. This approach is often used for innovative or unique products that have limited competition. The goal of price skimming is to capture early adopters who are willing to pay a premium for the latest and greatest, and then gradually make the product more accessible to a wider market as competition increases and the product matures.
Price skimming can be an effective way to maximize profits in the early stages of a product's life cycle, but it can also discourage price-sensitive customers from making a purchase.
Buy One Get One Free Pricing (BOGO)
Buy one get one free (BOGO) pricing is a promotional strategy where customers receive a second product for free when they purchase one at full price. This approach can be an effective way to stimulate sales and clear out old or excessive inventory.
BOGO offers can lead to positive perceptions among customers who are looking for a good deal or who want to stock up on a product. However, when using a BOGO approach, it's important to ensure that the perceived value of the offer is high enough to attract customers and that the profit margin on the combined sale is sufficient for business performance.
Channel-based pricing:
Channel-based pricing is when a retailer sets different prices for the same product depending on what channel it is sold through. For example, if a business sells a product through both brick-and-mortar stores and online stores/e-commerce sites (such as Amazon), it may opt to set different prices for each channel.
This type of pricing strategy creates a competitive advantage by allowing businesses to set prices based on market conditions and customer demand for each channel. It’s also effective in maintaining healthy profit margins by pricing products higher through channels that require more expensive resources (i.e. store staffing, building electricity, or shipping costs).
Keystone pricing:
Keystone pricing is when a retailer sets the price of their product twice as high as the cost of their wholesale price/production creating a 100% markup. This type of pricing strategy is often used by businesses that need to meet a certain level of earnings in order to remain profitable. It can also be used to price items in order to remain competitive with similar products on the market - even if the business doesn't require that high of a price.
This pricing strategy can even be strategically paired with discount pricing down the road, if profit margins allow.
Charm pricing:
Charm pricing (also sometimes referred to as the left digit effect) is a strategy where retailers use “charm” or uneven numbers like $9.99 or $49.95 to set their prices. For example, many items at Traders Joe's are priced ending in .89 cents to create the perception of affordability and value.
This type of pricing has been proven effective at increasing sales, as customers are more likely to purchase something if it appears to be a better deal than it actually is ($9.99 vs. $10). It can also be used to create a competitive advantage, as businesses can set their prices just slightly lower than those of their competitors to win the sale; which leads us to competitive pricing...
Competitive Pricing
Competitive pricing is a pricing strategy where a company sets its prices based on what its competitors are charging for similar products or services. This approach is often used in markets where there is little differentiation between products, and consumers are price-sensitive. The goal of competitive pricing is to attract customers by offering prices that are comparable to or lower than those of the competition while still maintaining a reasonable profit margin.
This strategy can be effective in markets where price is a major factor for consumers, but it can also lead to price wars that erode profit margins for all players in the market. To be successful with competitive pricing, companies need to have a good understanding of their costs, their competitors' prices, and overall market dynamics.
Everyday Low Pricing (EDLP)
Everyday low pricing (EDLP) is a pricing strategy where businesses offer consistently low prices on their products or services, rather than relying on frequent sales or discounts. This approach is often used by large retailers like Walmart and aims to create customer loyalty by providing predictable and affordable prices. EDLP can help to simplify pricing strategies and reduce the need for constant price adjustments.
However, this pricing strategy can also require tight cost controls and efficient operations to maintain profitability with consistently low prices. EDLP may not be as effective at attracting customers who are looking for the excitement/value of limited sales and discounts.
High-Low Pricing
High-low pricing is a strategy where businesses regularly alternate between periods of high prices and periods of low prices (often in the form of sales or promotions). This approach aims to attract two different types of customers: those who are willing to pay full price and those who are price-sensitive and wait for discounts. High-low pricing can create a sense of urgency and excitement around sales events, which can drive significant sales volume. Many large retailers use this pricing strategy, such as Macy's, Nordstrom, Adidas, and Target. Smartphone retailers also commonly use this approach, adjusting their pricing around the release of new models.
The important thing to keep in mind with high-low pricing is that it can be challenging to manage inventory and pricing strategies effectively. Additionally, some customers may become frustrated with the constant price fluctuations and prefer the predictability of EDLP.
Captive Pricing
Captive pricing is a strategy where businesses charge a low price for a base product (like a printer) but then charge a higher price for necessary consumables (like ink cartridges). This approach is often used for products that require ongoing purchases of related items (think: refillable razor blades, electric toothbrush replacements, wall plug-in home scents, or coffee makers with specialized pods like Nespresso and Keurig). The goal of captive pricing is to lock customers into a system where they are dependent on that company for future purchases.
Captive pricing can be a profitable strategy, but it can also lead to customer frustration if prices begin to be perceived as too high.
Loss Leader Pricing
As a final example of pricing strategies, loss leader pricing is used when businesses sell a product or service at a price below its cost to attract customers to their store. The goal with this pricing approach is actually not to make a profit on the loss leader itself, but to encourage customers to purchase other, more profitable items while they are in the store. Loss leader pricing can be an effective way to drive traffic and increase overall sales, but it's important to choose loss leaders carefully.
The ideal loss leader is a popular product that will attract a large number of customers and encourage them to purchase additional items. With this strategy, it's important to ensure that the losses on the loss leader are offset by the increased profits from other sales.
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Using data to determine the right price for your products
When it comes to retail, the goal of setting prices is, ultimately, to maximize profit. This requires a deep understanding of the costs of production, market conditions, and consumer demand. That’s where data-driven research comes in - to make well-informed pricing decisions that are likely to drive revenue.
Here's a simplified structure of what a pricing research process might look like:
Understand your costs:
The first step in creating an effective pricing strategy is to understand your costs. This means taking into account the cost of goods, labor, and overhead expenses. Knowing this will provide a basis for how much you need to charge and which pricing strategy to leverage in order to turn a profit or ensure your business is sustainable.
Perform pricing research:
Once you understand your own costs, it’s time to survey the market for competitor pricing and consumers’ pricing expectations.
Before launching a product, retailers can use pricing research to get an idea of the demand for their products at various price points, what consumers are willing to pay for a certain product, what features of a product may warrant a higher price, and so on.
Retailers can also research similar products that already exist in other industries to get a better idea of where the current market is and what pricing strategies seem to work best.
Test your pricing strategies:
Once you have a better understanding of your costs and the market environment, you can begin to test out different pricing strategies. This could include experimenting with discount pricing, keystone pricing, charm pricing, and more. By testing different price points, you can gain valuable insight into what works best for your business, as one size won’t fit all.
As you test different prices or various pricing strategies, it’s important to monitor results in real-time and make adjustments as needed. This may mean changing product prices or using a different strategy based on feedback from customers. Continuous, iterative research will help businesses find the right pricing strategy that maintains a competitive advantage and leads to sustained profitability.
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Examples of successful retail pricing strategies
Pricing strategies are rarely one-size-fits-all. What works for one brand might fall flat for another. The key is to align your pricing with your overall business goals, brand image (i.e. discount or high value), and target audience. Below are a few examples of brands that have found success with their unique approaches to pricing:
Walmart's everyday low pricing (EDLP)
Walmart is arguably the leader of EDLP. Their commitment to consistently low prices on a vast range of products has been a cornerstone of their mass retail success. This strategy works for Walmart thanks to:
- Massive scale and efficiency: Walmart's enormous size and highly efficient supply chain allow them to negotiate the lowest possible prices from suppliers and pass those savings on to customers.
- Price transparency: Walmart is upfront about its low prices, using slogans like "Always Low Prices" and "Save Money. Live Better." This builds trust with customers and reinforces their price leadership position.
- Broad appeal: EDLP attracts a wide range of customers, from budget-conscious shoppers to those simply seeking convenience and value.
This consistent focus on low prices has enabled Walmart to become the world's largest retailer and maintain its dominance in the competitive retail landscape.
Costco's loss-leader pricing
If you're a member of Costco (and even if you're not), you're likely familiar with their $1.50 hot dog and soda combination offer. This is a great example of loss-leader pricing. Costco could probably charge a lot more for this food and beverage combo (in fact, they may even be losing money on the sale), but the low price creates a positive brand perception which keeps consumers coming back. Loss-leader pricing works for Costco thanks to:
- Brand image: The $1.50 combo has grown to be somewhat of an icon to the store, where even the extremely low price doesn't raise questions of quality but rather invokes a sense of familiarity and customer appreciation.
- High sales volume: As the largest membership warehouse in the world, Costco easily sells millions of these combos annually. The sheer volume helps offset any loss per unit.
- Impulse purchasing: The food court at Costco is strategically placed near the entrance/exit of the store, making it hard to miss. Shoppers will fuel their shopping trip with a combo deal, or grab one on the way out – almost as a reward for shopping at Costco.
The $1.50 hot dog and soda combo can be considered a marketing expense for Costco. It's an investment in attracting customers, building loyalty, and ultimately driving even higher sales across the entire store.
Nike's channel-based pricing
Nike utilizes channel-based pricing to reach different customer segments and maximize revenue for its popular sneakers, such as:
- Nike (direct): Nike.com and Nike retail stores often feature the latest releases, limited editions, and collaborations at the highest prices. This caters to 'sneakerheads' and loyal fans willing to pay a premium for exclusivity and the newest styles.
- Authorized retailers: Nike partners with major retailers like Foot Locker, Finish Line, and Dick's Sporting Goods, offering a wider selection of sneakers at slightly lower prices or with the store's promotional deals. This expands Nike's reach and captures more price-sensitive customers.
- Outlet stores: Nike Factory Outlets offer lower prices on older models and overstock inventory. This allows them to clear out inventory (aka, discount pricing) while still appealing to budget-conscious shoppers.
- Online marketplaces: Nike also sells its products on platforms like Amazon, often at competitive prices to capture customers who prioritize convenience and a wide selection (or who want to use an Amazon gift card toward their purchase).
By strategically managing inventory and prices across these channels, Nike can maintain its premium brand image while also catering to various budgets and shopping preferences.
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Pricing research with quantilope
quantilope makes it easy for retailers to gain valuable insights when setting prices for products.
Through automated, advanced pricing research methods such as Van Westendorp and Choice-Based Conjoint analysis, brands have access to real-time customer data that can be sliced and diced by any other survey variable (such as demographics, psychographics, and more). This data will paint a detailed picture of your consumer and their pricing preferences, increasing your confidence when it comes time to set prices. Getting the price right means less unsold inventory, increased sales volume, and a better bottom line.
To learn more about pricing research with quantilope, get in touch below!
