Product Pricing Methods: 4 Ways To Be Strategic About Pricing

  •    TJ runs Refine Digital, a content marketing firm that helps technology executives share their expertise.

There are a variety of well-known pricing methods. Getting to the ideal retail price can be complicated, but it does not have to be that way.

Let's start with a brief refresher of margins and markup. Margin is what a retailer makes on a sale. It can be expressed as a percentage or in dollar amount. Markup represents the difference between what you paid for the product and what you sold it for. In the age of Amazon, it is not uncommon to hear business owners say things like “my margins are just too thin on this product," but the goal of this post is to hear more owners saying “I have a great margin on this product."

Keystone Pricing Is The Easiest Method

The term “keystone pricing" is believed to have originated in 1896, when the jewelry trade magazine, Keystone, suggested store owners keep retail prices at double the wholesale price.

If you simply double the price you paid a vendor for the product, this provides a consistent starting point for your retail price. This is not to say that you can price every product this way, or keep all products at this price forever, but it gets you started with a baseline pricing formula. Over time, other factors will come into play, such as, competitive products, retail competitors, how long you have had the product in inventory and more. But for now, have a baseline formula like Keystone pricing as your first step.

Major Product Pricing Methods

There are many different pricing strategies, but Competitive Pricing, Cost-plus Pricing, Markup Pricing and Demand Pricing are four common methods for small business owners to use. An important point to remember no matter which pricing method you choose: Recent research shows that the Millennial and Gen Z consumers are willing to pay more for a product from a local small business, if the customer experience is above average.

1. Competitive Pricing

If you are in the business of selling readily-available products, then pricing that is similar to your competitors can be an option. It is always a good idea to distinguish your business on something other than a competitive price, in case you cannot maintain the volume a vendor requires, or if costs spike suddenly.

2. Cost-Plus Pricing

In terms of small businesses, Cost-plus Pricing is often used when the manufacturer or creator of a product also sells at retail. Cost-plus is adding the materials, labor and overhead to a set profit margin to determine the final or total cost of the product.

3. Markup Pricing

Markup Pricing can be considered a variation on Competitive Pricing. This method is when a set percentage, the markup, is added to the wholesale product cost. It may vary by product or category.

4. Demand Pricing

Demand pricing is a more risky and complicated method sometimes known as customer-based pricing. In this method, a retailer is using his or her knowledge of consumer demand and perceived value to create the maximum price that someone might be willing to pay.

These product pricing methods should help you determine which one will work best for your business. Keystone Pricing definitely ranks as one of the easiest and fastest methods. Just remember that giving attention to providing the best customer service can make any pricing strategy more effective.