If you’re selling products, understanding the right way to price your goods is key to the success of your business. There’s a variety of strategies you can use in pricing your products, including underpricing certain items to lure customers to your store in hopes that they’ll pick up a few costlier items too. Finding the right pricing strategy for your shop is largely a matter of trial and error, but by following a few business precepts you can take a lot of the error out of the process.
Prices are something that you absolutely have to get right when running a business. By charging too much you can lose market share and create a negative image for your store. By charging too little, you can make your business unprofitable. Finding the sweet spot for prices is imperative.
The cost of buying or manufacturing the products you sell will likely play a major role in their cost, but there are a number of other factors that come into play. Deciding on the appropriate markup for your goods will require you to consider cost of manufacture, market prices, competitive prices and overall business strategy.
When you begin to decide on prices for your small business’ goods, you’ll need to start by thinking of an overall pricing strategy for your store. The item you sell for $1 at your store may be sold for 50 cents at another store or $2 at yet another location. Prices vary based on a number of factors, including pricing strategy.
When choosing a pricing strategy, you’ll need to decide whether your store will be a high-end, mid-grade or low-end business. High-end shops charge a premium because they cater to customers who want specialize products, targeted customer service, an exclusive atmosphere or extremely high quality goods. Mid-grade businesses have average prices for their goods and derive their profits from having a convenient location or good customer service or competitive hours or a wide variety of goods. Low-end businesses eschew amenities and selection and focus on providing customers with the cheapest possible goods.
When picking your pricing strategy, you’ll need to be realistic about the clientele your store can attract, your local market and your options. Be careful before going the high-end route in an economically distressed area, as you may not have the customer base you need to justify high-priced items. Conversely, a low-end store may not do well in an affluent area where people are looking for a great shopping experience or hard-to-find speciality items instead of bargains. Be sure that your pricing strategy fits the facts on the ground as you run your business.
When picking your pricing strategy, you’ll need to stick with it as customers can become confused and frustrated if their favorite high-end shop selling specialized electronic equipment becomes a bargain basement electronics hodge-podge overnight.
Once you’ve decided on your pricing strategy, you’ll need to determine your markup for your products. The markup is the rate above cost at which you sell products.
One easy way to research what your mark up should be is to look up the manufacturer’s suggested retail price, or MSRP. For example, if you buy a chair for $50 and the MSRP is $150, you’ll know that the manufacturer suggests a markup of 200 percent of your cost. You can vary the markup according to your pricing strategy and other factors, but the MSRP is a useful starting point to help you begin figuring out how much you should charge for your products.
The local market for goods is another important factor in determining what your prices should be. If your prices are significantly higher than those of your competitors, and you don’t compensate with a wider selection, a more upscale environment, exceptional customer service, etc., you may lose customers to the stores with more competitive prices.
There are a variety of options you can use to research the local market. Your suppliers can be a valuable source of information, as chances are that they also supply to your competitors. Your suppliers can help clue you in on what other retailers are selling product similar to yours for. If you have sufficient flexibility in your pricing strategy, you may be able to beat your competitors on the price of some goods.
Trade publications and market research firms can also be helpful. These publications can be a bit pricey, but they provide a wealth of information about markets and pricing. If you’re looking for some good online research, check out Hoover’s Inc., which does well-respected market research.
While you want to earn a good profit for your business, you may want to price some goods at a slim or no markup in order to entice customers to your store. By low-balling an item that’s not been selling well, or even a more popular item, you can draw bargain-hunters to your store who may also buy other products with a higher mark up. This strategy typically is only recommended for stores that have a variety of products to choose from, as it tends not to be very profitable for specialty stores.
When setting prices, it also helps to look at past performance of products to determine appropriate prices. If you have months or years of sales figures to go over, you may be able to determine which products sell well. If a product has strong sales, you may want to raise prices to get more profits from a popular product. For weaker sellers, a price cut may spur sales.
By considering costs, pricing strategy, the market and other factors, you can devise prices for your store that will help keep you competitive with other stores in the area and help you make the profits you need for your business to be a worthwhile endeavor.
