This article is part of a larger series on Retail Management.
A pricing strategy can help you adhere to industry standards, simplify your pricing process, and stay competitive in the ever-changing retail landscape. This article looks at 18 common pricing strategies and the types of businesses that most use them, as well as helpful tips and examples. While it is simplest to use a single strategy, most businesses find that a mix of different pricing strategies works best to bring in customers, encourage sales, and yield profits.
1. Keystone Pricing
What It Is: A standard 100% markup, or doubling a product’s wholesale cost, to get the selling price
Commonly Used By: Retailers and ecommerce sellers
Applied: Cost x 2 = Selling Price
Keystone pricing is the default pricing strategy across both retail and ecommerce due to its simple application and ability to yield profits. Generally, retailers and ecommerce sellers use keystone pricing as a base markup on most goods, then apply higher markups or discounted pricing to certain items based on demand, volume, and competition.
2. Manufacturer’s Suggested Retail Price (MSRP)
What It Is: The price product manufacturers set for their goods
Commonly Used By: Retailers and ecommerce sellers
Applied: Price is pre-set by the manufacturer
The MSRP pricing strategy is another popular strategy for retailers, specifically for those that purchase goods rather than making them themselves. In general, you will find that MSRP prices are equal to Keystone prices in most scenarios. While in some cases, retailers are able to make adjustments to the MSRP price, some manufacturers and brands will not allow you to change their MSRP prices at all. Be sure that you know the pricing terms before you start working with a manufacturer so you don’t run into legal issues.
The downside of using MSRP as your pricing strategy is that you’ll have the same prices as your competitors. So, you’ll have to differentiate your store in other ways—for example, offering free shipping for ecommerce sellers and exceptional in-store promotions for retailers.
3. Psychological Pricing
What It Is: Pricing that encourages shoppers to think items are priced lower than they are or that they are getting a good deal
Commonly Used By: Retailers, ecommerce sellers, big box stores, and discount chains
Applied: Removing marginal cents and dollars to create more appealing sticker prices
Have you ever walked into a store or viewed an infomercial and noticed that all of the prices end in 99 cents? That is psychological pricing at work.
A store may price a product at $199 instead of $200 or $4.99 instead of $5. With psychological pricing, the theory is that customers put a greater emphasis on the first digit of a product price, so $199 seems like a much better value than $200, even though the actual price difference is minimal.
By providing customers with a sense that they are getting a bargain or paying less than they are, psychological pricing is a great way to mitigate the psychological pain of loss that customers experience when they part with their money. With this sense of loss lessened, customers have more incentive to make purchases, and walk away with a sense that they got a good deal.
Psychological pricing is also a great “bang for your buck” pricing strategy, where only a few cents can inspire customers to make much larger purchases. For example, at my boutique, we decided to re-price our jeans from $70 to $69.99. Immediately, we saw a massive uptick in denim purchases, simply due to the 1-cent price change.
Many retailers choose to mark all their goods with 99-cent endings. Some, however, will reserve the power of psychological pricing exclusively for their sale pieces to incentivize faster turnover of old merchandise. Other common prices that retailers use to make a more appealing sticker price are 95 cents, 89 cents, and 69 cents.
Steer clear of using psychological pricing techniques if you sell high-value items, as it might decrease the perceived worth.
4. Value-based Pricing
What It Is: A customer-focused pricing strategy in which businesses base their pricing on perceived value or how much the customer believes a product is worth
Commonly Used By: Specialty stores and the luxury market
Applied: Gaining a very good picture of your customers and their demand and pricing based on this knowledge
The value-based pricing strategy works best for companies selling merchandise with high brand recognition, luxury goods, and unique products that have exclusive features that set them above the competition. It does not work well for businesses that sell commoditized goods or products that lack exclusive features, such as grocery or convenience retailers.
For example, say, you own a shop that sells vintage luxury handbags. The value of your products is not represented by doubling the production cost price or by any MSRP. In this case, you would want to use a value-based pricing system accounting for designer labels and exclusivity that reflects how much your customers think the bags are worth.
To implement a value-based pricing strategy, you have to analyze three things:
- Your Customers: Conduct surveys, research locally, and understand your target market so that you can learn their value system and price accordingly.
- Your Total Addressable Market: Research industry trends and national consumer patterns to understand the value-based price that the greater population is willing to pay for your products.
- Competitors: Look to your competitors to see how they are pricing their products. Successful businesses in your industry can help you understand the pricing that is helping them prosper.
5. Discount Pricing
What It Is: A strategy of regularly selling goods at prices under competitors’ Keystone or MSRP prices
Commonly Used By: Retailers, ecommerce seller, big box stores, and discount chains
Applied: Take the MSPR/Keystone price and apply a percent discount
Discount pricing drives entire business models—think Dollar Store, Big Lots, and Home Goods. It is best for volume-driven businesses that can garner lower prices from suppliers due to volume purchasing.
Be sure customers know they are getting a deal by clearly displaying your discount or even including the undiscounted MSPR/Keystone price on the tag, showing customers exactly how much they are saving.
For the small retailer, an overall discount pricing strategy can leave you with razor-thin profits that easily dip into losses. But, occasionally discounting prices via sales, markdowns, seasonal specials, and coupons are excellent tools for small businesses to move through old products. When used selectively and strategically, small businesses can use discount pricing strategies to kick-start drooping sales, unload stale stock, and take advantage of seasonal shopping trends.
To ensure that you don’t sacrifice your bottom line, run your numbers and determine whether a discount will leave you with healthy margins before applying this strategy.
6. Loss-leader Pricing
What It Is: When you select certain products to sell at little profit or even at a loss
Commonly Used By: Retail, ecommerce sellers, convenience stores, big box stores, and discount chains
Applied: Choose an item that creates interest and drop its price to sell at a loss
Loss-leader pricing is when you sell one or a few great products at extremely low prices in hopes that the deal will draw customers in and then get them shopping among your profitable goods. For example, Costco, a popular wholesale members club, sells their chicken for $2.99/pound. Costco has stated that this pricing actually causes them to lose money, but that their chicken is a loss leader that inspires people to sign up for memberships and shop the rest of their store.
Take a note out of Costco’s book and place your loss leaders in the back of your store. This will force shoppers to go through your entire space and be exposed to lots of products before they can get to the deal.
While loss-leader pricing is a great strategy for grocers and other stores where people make multi-item purchases, it can be a risky pricing strategy for small businesses. This strategy relies on the fact that the profits you lose from your loss leader will be made up by profits of other items. This is difficult to ensure if you don’t sell many items per ticket or if your margins on other goods are small. Be sure that you run the numbers and know your typical units per ticker (UPT) before introducing a loss leader to your pricing strategies.
Units per ticket (UPT): A popular retail metric that tells you the average number of items in each transaction over a certain period of time. You can calculate your UPT using the formula below.
UPT = total units sold / total transactions
7. Anchor Pricing
What It Is: A discount pricing strategy is where you make a product seem less expensive by displaying your price alongside a higher anchor price
Commonly Used By: Discount chains
Applied: Display competing prices alongside your price
There are two primary ways that you can implement an anchor pricing strategy. This first is when you display a regular or MSRP price and your lower price on the same tag. Stores like Marshalls, TJ Maxx, and other discount, consignment, or antique stores use this pricing strategy storewide.
Another anchoring strategy that you can use is to display multiple models of the same product together so that the cheaper model seems like a good deal. For example, if you have ever had to choose a new phone or computer, all the models are typically displayed together with the most expensive model acting as the anchor price. In effect, when a customer chooses one of the less expensive models they feel as though they are getting a good deal compared to the anchor price.
Anchor pricing can work well for small sellers. It’s especially useful if you sell in a niche that has a lot of competition, but not so much that you have to substantially lower your prices to deep discount levels. Often, a standard storewide 5% to 10% anchor pricing discount is enough to create a memorable sense of value that brings shoppers back for more.
8. Competitive Pricing
What It Is: A pricing strategy in which you use competitors’ pricing to set the price of your same or similar products
Commonly Used By: Convenience stores, big box chain stores, discount stores, gas stations
Applied: Investigate your competition and sell at a competitive price
Competitor pricing ensures that you are pricing your goods fairly and competitively. You can also use this strategy to set yourself a step ahead by making your prices lower than the competition. Or, if you feel your product is better than your competition’s and you want to create the illusion of higher value, you could use their prices as benchmarks for your slightly higher-priced product.
For example, say that you know Walmart sells the same pool floaties that you carry for $10.99. You own a specialty pool store, so rather than pricing your floaties lower than Walmart’s to compete, you price them slightly higher because your brand implies higher value than Walmart and you want to create an illusion of higher quality.
In general, competitive pricing is most successful for products that have reached equilibrium or a stagnant or stable price. Batteries are a great example of a product that has reached equilibrium because they are widely available in many brands, so to set yourself ahead, you would use your competitors’ prices as a benchmark for your own pricing.
9. Penetration Pricing
What It Is: Pricing a product at a very low price to pull people in, and raising the price over time
Commonly Used By: Retailers with membership options, discount stores, and big box retailers
Applied: Define a key product and drop its price below market, get people hooked, and then raise it
Penetration pricing is great for promoting new products or products that you have to buy on a subscription or membership basis. The idea is that the low price will penetrate the market and get customers to make an initial purchase, and, once hooked, customers will then continue purchasing the item even as its price increases.
Examples of penetration pricing include offering a free month upon sign-up, selling a new product at a steep price to drum up hype, or offering a limited-time deal—anything that you can do to get people to try your product or brand so you can start building customer loyalty.
For example, Fabletics, a fitness clothing membership retailer, offers new customers two bottoms for $24 and 80% off everything when they sign up. This is a deal that really gets people excited and willing to sign up for the $50 monthly subscription. The catch? The deals that reeled you in are only available for your first purchase, and after that, prices are back to their normal rates.
10. Bundle Pricing
What It Is: When retailers sell several products together for less than it would be to buy them separately
Commonly Used By: Discount retailers, beauty supply, office supply, and grocers
Applied: Pair complementary products and price them below their total individual costs
Bundle pricing is a pricing strategy in which retailers sell multiple items together at a lower price than if purchased individually. This type of pricing typically has two objectives: giving customers a sense that they are getting a bargain and selling more products. The idea here is that retailers are able to sell more items and increase the transaction sizes while customers walk away feeling like they got a deal.
Bundle pricing is primarily implemented by discount retailers or businesses that sell a lot of complementary products, like beauty or craft stores. It is also sometimes used around the holidays to promote gift baskets.
11. Project-based Pricing
What It Is: When you charge a flat fee for a specific service
Commonly Used By: Service industries
Applied: Price your services on a project, not hourly, basis
Project-based pricing is a service pricing strategy in which you set your pricing based on the service/project provided, not based on an hourly rate. This is a great way for service-based businesses to create security in the minds of their customers because it allows them to know the price upfront.
Some businesses will set a time limit on the project-based price and then upcharge or set an hourly rate for the amount of time the project exceeds.
This strategy works best for businesses that provide services with set parameters and few potential variables, and should not be used for more creative projects. For example, nail salons charge a set price for manicures and pedicures or a tire shop offers the same price for wheel removal. Home improvement projects, on the other hand, have more variability, so hourly pricing may be better suited here.
12. Hourly Pricing
What It Is: When your price is based on an hourly rate that correlates to the length of a project
Commonly Used By: Service industries that offer creative or highly variable services
Applied: Set rates for each project type
This pricing strategy is the flip side of project-based pricing and typically used for projects with more creative elements or less controllable or consistent parameters. While among customers, this pricing strategy tends not to be as favorable as project-based pricing, it makes sense for most service-based industries.
For example, consider if a company charged a flat “landscaping” fee for their landscaping projects. This pricing structure would not make sense, as there are countless types of landscaping endeavors and innumerable-sized yards and gardens. In this case, the company would have been better off using an hourly pricing strategy, so it could charge accordingly for the variability of landscaping work and make a fair profit based on the labor and time.
13. Premium Pricing
What It Is: When you price a product or products artificially high to create favorable perceptions among buyers based only on the price
Commonly Used By: Luxury retailers, specialty shops, antique goods, and tourist shops
Applied: Understand your market and product market; price products higher than the actual value, based on market valuation
Premium pricing is when retailers artificially inflate prices to create a sense of value among customers. This is a practice commonly used by luxury retailers to help them demonstrate the value of their goods to shoppers. In other words, the price of the good creates its perceived value, increases its demand, and, in turn, justifies its price.
Retailers that sell established brands or are established brands themselves can use premium pricing on all their products. However, it is also a popular strategy to select only one or a few goods to set at a premium. The products with premium pricing will raise your entire brand’s perceived value and make customers willing to pay more all-around.
For example, at my store, we carried a few different lines of basics. One of them, despite not having better quality, was a well-known brand, so we priced items from that line at a premium. This, in turn, allowed us to also price our other basic lines at a higher price point because the quality was very similar and the premium-priced goods increased the perceived value of all the basics in my store.
If you are considering using premium pricing, here is a list of the types of products that use the premium pricing strategy most effectively:
- Luxury goods
- Limited-time offers
- Limited-quantity products
- Products with patents or that cannot be replicated
- Artisan or handmade goods
14. Skimming Pricing
What It Is: When businesses start with a high initial price and then lower the price over time to attract cost-sensitive customers
Commonly Used By: Subscription-based businesses, retailers with membership options, new products
Applied: Set an initial rate and then drop the rate by 10%–25% over time
Skimming pricing is a strategy used by businesses that require recurring payments (subscriptions and memberships) where businesses set a high initial price and then drop it over time, typically by 10% to 25%.
The skimming strategy is great for fostering loyalty as it rewards longevity with better prices and can even help with the initial signup by creating an incentive to “earn” the better rate. For example, a kombucha stand at my local farmers market charges $20 for your first bottle. However, if you bring your bottle back and get a refill, the price drops to $15. This not only makes people more willing to pay the high initial price, but it also promotes their return.
Price skimming helps you to maximize profit margin when introducing a new product while also incentivizing initial purchase and continued loyalty.
It is also a great way to recuperate costs if you developed a new product. However, you should monitor your sales data continuously. You do not want to deter customers or give your brand a reputation of being overpriced. Use cues from your sales data to figure out when demand is decreasing or stagnant—that’s the time to start skimming that price.
15. Freemium Pricing
What It Is: When a retailer offers a free service that can be enhanced or upgraded with paid-for, premium services
Commonly Used By: Subscription-based businesses, retailers with membership options
Applied: Create a free level to your membership options and then create add-ons for paid services
On the flip-side of price skimming, there is freemium pricing. This is when a business will offer a free base plan or membership tier as well as paid add-on services that customers can purchase to enhance their experience or move up membership tiers. By offering a free option at the forefront, the freemium pricing structure helps businesses reel in customers and get them interested in their products or services. You may be familiar with this pricing model from streaming services like YouTube or Spotify.
In both of these companies’ freemium pricing structures, there is a free service where you can play music or videos without charge. But, to listen to the entertainment without advertisements or breaks, you have to join their monthly subscription. I don’t know about you, but after a few weeks of listening to ads, I signed myself up for the premium memberships and have been a paying subscriber ever since.
Another form of freemium pricing is offering a free trial. The free initial product again gets customers interested in your business overall and will make them more likely to sign up for your paid service in the long run.
Generally, you use freemium pricing on services and products that are low cost and need to be sold in high volumes. A popularly cited stat says that there is between a 1% and 10% conversion rate from free trials to paid services through freemium pricing. If you are thinking about using this pricing structure, be sure that your product’s overhead costs and your marketing budgets are low so you don’t end up digging yourself into an unprofitable situation.
Additionally, run your numbers and be sure that the 1%–10% conversions will be able to support you and all of your overhead costs.
16. High-low Pricing
What It Is: When a company starts by pricing all their goods at a high price and then discounts that price to make sales
Commonly Used By: Discount stores
Applied: Start with a price slightly over the product’s value and then drop the price incrementally until sold
High-low pricing is a strategy in which retailers start by pricing their items at or above the MSPR value, and then discounting that price gradually. For high-low pricing, the business relies on discount purchases and does not expect to make sales from full-priced items. It uses discounts, sales, and clearance to bring their products down to lower prices while still maintaining the perception that their goods are worth the higher price tag.
Consumers love high-low pricing—it gives them a sense of a deal and creates the impression that their goods are of a higher value and quality than what they paid. I know that when I leave a store with a sweater or other product that I got at 50% off, I feel pretty good and believe the sweater to be worth its initial price. The high-low pricing will also incentivize shoppers to return to your business and continue checking in with you for deals.
When using a high-low pricing strategy, be careful not to dilute your overall brand value or how shoppers perceive the value of your products. Too many sales and discounts will result in shoppers perceiving your sale prices as the actual value.
17. Dynamic Pricing
What It Is: When companies use prices that are flexible and change based on the current market demands
Commonly Used By: Hospitality, tourism, transportation, entertainment, and utilities
Applied: Understand your industry and its peaks and valleys in demand; price higher during peaks and lower during valleys.
Dynamic pricing is when a business changes its pricing based on the seasons or other demand-shift indicators (weather, day of the week, political climate, etc.). It takes into account things like competitor pricing, supply and demand, and other external market factors in setting its prices. This pricing strategy works best for services in the hospitality and transportation industry and essential goods like gas and electricity.
This strategy can help companies maximize their profits in industries with a lot of ebbs and flows in terms of traffic and demand. For example, a resort might charge $300 for a room during the peak season and $220 for the same room during the offseason. This type of pricing helps the business owners capitalize on busy times when demand is high, and use lower prices to incentivize offseason purchases.
Be sure that your dropped prices will still generate enough revenue to cover your costs or that profits acquired during peak prices will cover profits lost from low prices.
18. Cost-plus Pricing
What It Is: When you apply a standard markup percentage to all of your merchandise
Commonly Used By: Wholesalers, manufacturers, artisans, and private label sellers
Applied: Cost + (Cost x Markup Percent) = Sale Price
In cost-plus pricing, the amount by which you mark up your products is equal to the amount of profit you think your products should bring. So, if you believe your products should bring you a 15% profit, you mark your price up by 15%.
This strategy is a popular method for companies with large volumes of goods and is known for its ease of implementation. By applying a consistent profit percentage to every product, you avoid having to price each of your products individually. Additionally, this strategy does not base its prices on its competition or consumer demands—it’s just a flat markup.
Cost-plus pricing is not consumer-focused, so it works well for companies that sell labor-intense products or mass amounts of similar products. Here, we will look at how wholesalers, manufacturers, artisans, and craftsmen typically use cost-plus pricing:
- Wholesalers: Wholesalers usually add a flat percentage markup to all goods that pass through their hands. A common wholesale or middleman markup on most consumer goods is 15%, but of course, that can vary depending on your industry.
- Manufacturers: Manufacturers use different cost-plus prices depending on the buyer. A manufacturer might sell bulk goods to wholesalers at a cost-plus of 100%, just like a keystone markup, but then also sell single units directly to consumers on its website at a cost-plus of 300%. This way, it makes more money per unit on smaller sales.
- Artisans and Craftsmen: Labor is the cornerstone of artisanal and craft works, so the cost-plus price represents the value of the labor and the good. For example, if you had a wooden chest built by an artisan, the cost-plus markup might be 70%. The base price represents materials and hours, with a 70% markup that represents the value of the labor and finished product.
With nearly 20 pricing strategies to choose from, there are a lot of options when it comes to pricing your products. The best thing you can do to sell through your products and maximize your profits is to use a mix of pricing strategies based on what works for each individual item you sell. Whatever you choose, be sure to continuously monitor their success and ability to generate sales and profits, so you can make adjustments and continue to maximize your retail business.