Setting your prices is one of the hardest parts of running your own retail business. Prices too high discourage customers; lower prices can mean you're unable to make a profit.
So how do you set the right balance with your prices? In this article, we'll go over eight strategies that can help you hit your revenue targets.
8 Tips to Help New Retailers Set their Prices
There are a number of different strategies when it comes to setting your prices: some retailers use MSRP (manufacturers suggested retail price) while others use a standard markup of X percent. You can look at Shopify.com's pricing strategies for more information. Whichever strategies you employ, you should consider incorporating some of these steps into your pricing:
Figure out an accurate per unit cost.
In order to make money on your products, you need to know how much they really cost. Your per unit cost should include shipping and handling costs, taxes, delivery expenses, and other add-ons.
Figure out your overhead costs.
How much do you pay in rent, electricity, employee salary, insurance expenses, and all the other expenses that come with running a business? Include these costs, building them into your prices.
Give yourself some wiggle room.
You may have to lower your prices in the future, or you may choose to markdown items when you put them on sale. Build in a little wiggle room so that your prices have room to drop before you're taking a loss. (See "A New Retailer's Guide to Markdowns, Sales, and Discounts").
Don't spread to your costs evenly across the prices of all your goods.
Say you run a sporting goods store, but clothes are actually the biggest sellers. If you give these bestsellers a slightly larger markup, it will help you meet your budget. That way, if you don't sell enough other merchandise, you'll still make ends meet.
Know the competition.
Some retailers offer a price-matching program, which allows their customers to match the price of any competitor. Whether or not you offer this, make sure you know how much your competitors are charging for the same goods. Price your goods to be competitive, without shooting yourself in the foot.
Market your sales and use them to attract customers.
Grocery stores are great at marketing their sales. You see that the local store has apples for 70 cents per pound and you walk inside. But here's the thing: only a few items at the store are on sale. The storeowners know that they'll get their profit from other items. Customers get a deal on apples, but pay a markup for their oatmeal and bread. This strategy only works if you're marketing your business well and promoting your sales.
Use multiple pricing.
You've flipped through the Sunday paper and seen an advertisement reading something like, "Buy two pairs of shoes, get a third pair free!" Multiple pricing encourages consumers to spend more. A person who only needs a pair of shoes is suddenly willing to shell out for two.
Consider psychological effects.
People love getting a deal. Prices that use a multiple pricing system (see above) give consumers the pleasure of thinking they're scoring a great deal. That can be a successful motivating factor. In addition, remember that silly tricks like charging 99 cents rather than $1 can be effective and simple ways to encourage more purchases.
There's going to be some trial and error — especially for first-time business owners. Be ready to change your strategy, lower or raise prices, and have the financial security in place that will allow you to get through a few lean months.
For risk management advice about shielding your business from financial risk, make sure to check out our Articles and eBooks.