Name Your Price, How to Set Correct Pricing Strategies

Again this year, as I reviewed the catalogs arriving in my mailbox and shopped on my favorite websites, I was completely baffled by product prices that seemed completely irrational. They reminded me of a client where I observed similarly abstract prices. When I asked about the prices, she informed me that she simply doubled whatever a wholesaler charged her. While this approach led to some products being overpriced (and not selling) and others being real bargains, at least she had a “pricing policy”, something that I have found most clients do not have.

Over the years, I have developed a number of policies that I have recommended to clients that lead to improved sales:

  • Policy #1Prices must be based on the customer’s perceived value rather than a formula based on cost. As a buyer, set a retail price in your mind based on “perceived value” before asking cost. If the two do not reconcile, drop the item.
  • Policy #2Any product that is the same or similar (to the untrained eye of the consumer) to that carried by another catalog or major web merchant should be priced at, or below, the price of the competitor. Do your research on Amazon – your customers will!
  • Policy #3Adopt a set of “price points” and be consistent. Many merchants have found it productive to use price points that end in “9’s” or “95 cents” finding that an item is perceived by the consumer to have a lower price than when the price is increased to the next full dollar amount. For example $19.95; $49.95; $99.95, $199.95, etc.

Adopting such a pricing policy carries additional implications:

  • There will be pressure to find products that are unique and exclusive to preclude price comparisons and allow a higher price.
  • If the competitive price or “perceived value” price does not provide sufficient margin, the product will need to be dropped, sourced at lower cost, or the lower margin justified on other grounds. This will test the skill of your merchants.
  • If you cannot be price competitive, you need to strongly communicate to your customers other advantages of buying from you that justify paying more.
  • If you build “free shipping” into your prices, again you need to scream this benefit on your website and throughout your catalog so that it cannot be missed! Even then, you better refer to policies one and two above.

While the policies above may not entirely fit your company, I strongly suggest you adopt policies that do. Be consistent. Your sales and margin will benefit. Such policies will also make your merchants work harder to find products that sell well based on a competitive, value-based price, that still have sufficient margin to ensure profit.

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