Is the Price Right?

by Jennifer Raines

Courtesy of Handmade Business

Having a well-thought-out pricing strategy is fundamental to the success of your retail business. It drastically affects the sales of your merchandise, the satisfaction of your customers, and the health and profitability of your business.

There are two major concerns when it comes to pricing: ensuring you are actually making a profit and knowing where you stand compared with your competition. Pricing items too high frequently scares customers away, while pricing products too low might cause shoppers to question the value of what they are buying.

Finding an optimal price point for each item can be a daunting task. Ultimately, you’ll have to decide whether you want higher prices for your products and a lower volume sold or lower prices for your products and a higher volume sold, and which direction will enable you to achieve profitability. Assigning a retail price can seem simple, but it is as challenging as determining the right items to sell in your shop. The right items at the wrong prices will not sell!

To start, know your numbers. It is extremely important for you to know what markup you need to apply to your product selection to make a decent profit. Remember to include hidden expenses by considering these questions: Is your shop rent higher than the norm? Are you in a location where it is more expensive to receive shipments? Do the cost of living standards in your area dictate a higher-than-average pay scale? Also, consider your geography. What is the median income of your potential customers? Are you located in a tourist economy that can handle a higher margin? All of these things (and more) need to be evaluated and taken into account when considering your base markup.

Retail Price Elements

Pricing decisions involve three retail price elements: wholesale cost, markup, and the resulting retail price. Determining the right price demands that you understand these retail price elements and identify the markup that works best for your business. When you begin making pricing decisions, consider the following:
The wholesale cost of the item is generally called cost of goods, which includes the actual cost of the item and any related transportation costs. It’s important to remember the true cost of an item is not the price you pay for it; rather, it includes the costs involved from the moment you pay for it until it gets to your customer. Every step in a process adds to the cost.

Markup includes operating expenses, expected retail reductions, and profit. Markup is the difference between the retail price and the cost of goods sold. Within one store, markup may be different for many items.

The retail price consists of the wholesale cost of the item and the markup assigned to the item.
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There are many commonly accepted retail pricing strategies. Here are six of the most popular.

1. Keystone Pricing

The most common pricing strategy by far is keystone pricing, which retailers use as an easy rule of thumb. It is essentially doubling the cost of the product to arrive at a 50% markup. However, due to rising costs, basic keystone pricing doesn’t work in many instances. To account for rising shipping and overhead costs, some small retailers are using a ''keystone plus'' approach.

Painting of Books

Spiritiles by Houston Llew have an MSRP of $129.

At my shop, Quirks of Art, we use keystone plus 20%. When new merchandise arrives, we multiply the wholesale cost times 1.2 to equal our basic markup. Generally, we eyeball the item and may adjust the pricing a bit up or down from there. It’s not very scientific and we can get away with it since we are a small, very hands-on operation. No doubt, our pricing strategy is more of an art that requires an experimental attitude coupled with an intuitive feel for what we think our customers will pay for any given piece.

2. Manufacturer’s Suggested Retail Price (MSRP)

As the name suggests, this is the price the maker recommends, or specifies, that you as a retailer use to sell their products. The reason many artists started doing this was to help standardize prices and reduce undercutting of prices, which only harms the brand. As a retailer, this takes you out of the decision-making process, which can be a good thing in some cases. Houston Llew Spiritiles of Atlanta effectively employs this strategy.

3. Discount Pricing

It is no secret consumers love sales, markdowns, and coupons. There are a few scenarios in which retailers might consider this strategy. The more obvious ones are to increase foot traffic, sell off older inventory, and attract price-sensitive customers. Beware--if used too often, it will give you a reputation of being a bargain retailer and will hinder customers from purchasing your products at your everyday prices.

4. Loss-Leading Pricing

This is based on the idea of luring in customers with a product they want at a lower than normal price, with the hopes they will purchase additional full-priced merchandise while in the store. This tactic can work wonders in the right situation, especially when you consider additional purchases a consumer might make, resulting in a boost in overall sales per customer. If you use something as a loss leader, realize it is adding a cost to your business and that cost needs to be regained somewhere else or your business is going to have profitability issues. Keep in mind though when you have a range of products, you can sometimes risk lowering prices for one as long as you also sell products with a higher markup. Similar to the effect of using discount pricing too often, when you overdo loss-leading prices, people will become trained to expect bargains from you.

5. Psychological Pricing

We all know retail is simply a numbers game. Surprising things can happen when merchants take advantage of the different ways customers perceive their pricing. Traditionally, merchants will do this by ending the price with .99, sometimes called ''penny pricing.'' Researchers at MIT studied the phenomenon and determined this strategy triggers impulse purchasing through perception of a bargain. However, when you’re selling high-end items, stepping down your price from a whole number like $1,000 to $999.99 will actually hurt the perception of what you’re selling. Anchor Pricing is another psychological tactic where you intentionally place a higher priced item next to a cheaper one to draw customers’ attention to it. Another way you can take advantage of this principle is to list both a sale price and the original price to establish the amount of savings a consumer perceives to gain from making the purchase.

6. Competition-Based Pricing

As the name of this pricing strategy suggests, it simply refers to using competitor pricing as a benchmark and consciously pricing products below or above them based on how you want your business to be perceived.

Value Versus Cost

When pondering the pricing strategy for your shop, also consider the ''value'' of your products. Value is very different than cost. Cost is the monetary sum paid for the product, while value is more subjective--it is what the customer feels the product is worth. Your job is to discover the optimum value of your product and price it accordingly.

In the handmade industry, a little education can go a long way. Consumers often don’t know enough about every given medium to appreciate it. Give would-be buyers information that will add value in their minds and allow you to increase the price of the items. Whenever possible, add value by including a brief bio about the artist and their work. It makes it much more personal, and the purchaser will know they are purchasing a unique, one-of-a-kind piece.

There is no simple, black-and-white approach to pricing. It is a constantly moving target. At the end of the day, the ideal price for any product or service is one that is acceptable to both buyer and seller. From the buyer’s standpoint, the right price is whatever they are willing to pay, given their choices in the marketplace. From the retailer’s perspective, the main concern is to price products to maximize both sales and profits, while providing enough margin to cover marketing and overhead expenses.
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Pricing is not an exact science. It never has been and never will be. Your job is to find the sweet spot: the price point where you have the opportunity to make the most money.