12 Retail pricing strategies that guarantee your business success

Stepping into the world of online retail is like diving into a vast ocean – full of opportunities but also fiercely competitive.

To truly stand out, you need more than just great products; you need the right retail pricing strategies to catch your customers’ attention and keep them coming back.

These methods go beyond just adding a price tag to your product or service. It’s about creating a narrative that convinces people that what you offer is worth every cent.

After all, a First Insight study revealed that the quality of a product or service is a major factor that influences buyers’ decisions.

If you’re not delivering value, they’ll simply move on to a retailer who will.

So, the right approach doesn’t only define how customers perceive your brand; it also drives demand and boosts your bottom line.

Are you ready to learn more?

This guide provides key insights into tactics that can take your retail business to the next level.

12 best retail pricing approaches with notable examples

Now we’re here: finding the right pricing strategy that fits your brand.

However, it can be as tricky as finding the perfect pair of glass shoes.

So, to help you choose the right approach for your online brand, here are twelve top methods to consider. 

As we explain each tactic, note its examples, benefits, and potential pitfalls to see if it aligns with your brand’s core values.

1. Competitive pricing

Competitive pricing is all about setting your prices in relation to your competitors. It’s like peeking over the fence to see what your neighbors are doing. Then, you can price your products slightly lower (or higher). Also, this method is very effective in sectors where items are similar and price is the main differentiator.

Walmart is a great example. This retail giant consistently offers low prices on thousands of products, attracting price-sensitive shoppers. Consequently, it gained a significant market share and became a go-to destination for budget-conscious consumers. 

This approach doesn’t only drive customer loyalty but also forces rivals to lower their prices to stay competitive. 

Pros

• It’s an excellent method to grab more customers in a crowded market.
• It boosts short-term sales.

Cons

• This approach could mean slimmer profit margins for the business.
• It may limit the customer base to those seeking discounts.

2. Value-based pricing

Value-based pricing focuses on what customers believe a product is worth rather than its production costs. Remember Gucci and Birkin Bags? You can charge more for a designer handbag because it makes people feel stylish and exclusive. 

This pricing strategy isn’t limited to the fashion industry, as customers can have varied perceptions of smartphones, vehicles, healthcare, and other things.

Tesla, the electric car company known for its innovative technology and sustainability, prices its vehicles higher than traditional gas-powered cars. This premium pricing reflects the unique value Tesla offers, such as cutting-edge features, extended range, and a strong brand reputation. 

These features have made this company an EV (Electric Vehicle) market leader. Interestingly, customers are willing to pay more for quality and innovation.

Pros

• This approach allows for higher price points on luxury items.
• It encourages innovation to meet target market needs.
• Value-based pricing enhances brand value.

Cons 

• It can be difficult to justify added value for commodity products.
• It requires a unique or special product for effectiveness.
• Perceived value is subjective to consumer preference. 

3. Price skimming

This method involves setting a high initial price and lowering it over time as competition and market saturation increase.

Consider the foldable smartphone market in its early days. The launch of the first foldable devices came with hefty price tags.

As more OEMs (Original Equipment Manufacturers) and brands entered the market, prices began to drop.

However, some companies still command high price margins due to customers’ perception and loyalty.

For instance, Sony employed this tactic with its PlayStation gaming consoles.

The initial price of each PS iteration is often higher, as it targets hardcore gamers willing to pay a premium for the latest and greatest gaming technology and experience.

As the product life cycle progresses, Sony gradually reduces prices to attract a wider audience.

Pros 

• Generation of high short-term profits with new, innovative products.
• It supports a prestigious brand image and attracts early adopters.
• It provides an exclusive experience for loyal customers.

Cons

• This approach is less effective in crowded markets without standout features.
• It can quickly attract competition and lead to market saturation.
• Rapid price drops may harm early adopters’ perception and brand image.

4. Discount pricing

Discount pricing utilizes sales, coupons, and markdowns to attract customers. It’s a crowd-pleaser because everyone loves a good deal.

This is proven by a Statista survey, which revealed that over 80% of US shoppers have used an online coupon at least once before making a purchase.

Pros 

• This approach attracts more traffic to your retail store.
• It helps clear out old or out-of-season inventory.

Cons 

• Frequent use of this strategy may make your brand look like a bargain retailer.
• It can deter consumers from buying at regular prices.

5. Penetration pricing

This approach involves launching a new product at a low price to quickly gain market share and then gradually increasing it over time. It offers an irresistible introductory price to a target market to build brand awareness and draw potential customers.

For example, Gillette effectively used this approach with its Mach3 razors.

The company initially sold the razors at a low price to attract a large customer base, making it easy for new users to try the product.

Once customers were hooked, Gillette profited from the sale of disposable blades, which were necessary for continued use.

Pros 

• This tactic helps you stand out in a crowded marketplace.

Cons

• It can make it harder to raise prices later without risking customers losing interest.
• Short-term price reductions can sacrifice profit and revenue.

6. Keystone pricing

Keystone pricing is a simple approach that doubles the wholesale cost to set the retail price.

For example, if a product costs $15 wholesale, you’d sell it for $30. This method is beneficial for brands in geographical locations where there’s demand for such products but with limited access to them.

Pros

• It’s a simple and effective way to ensure a good profit margin.
• Many small retailers find it a reliable method for products with stable demand.

Cons 

• Doubling the markup might be risky if customer demand and product availability vary.
• It doesn’t work for all products.

7. Manufacturer suggested retail price (MSRP)

MSRP is the price recommended by the manufacturer for retailers to charge. It standardizes prices across locations, especially for high-ticket items like electronics.

Pros: 

• Buyers see consistent prices, so there are no surprises.
• It simplifies pricing for easier comparison.

Cons:

• Retailers can’t compete on price since everyone charges the same.
• This approach doesn’t factor in shipping or taxes, which can affect a brand’s profitability.

8. Dynamic pricing

Have you ever noticed how certain Airlines’ fares spike during the summer?

That’s what dynamic pricing brings to the table. It adjusts prices based on demand, competition, and supply.

Thus, businesses can stay competitive and maximize revenue by constantly adapting to market conditions.

Uber is a classic example of a company that has transformed the transportation industry with its dynamic pricing approach.

During peak hours, it raises prices to encourage more drivers to hit the road, balancing supply and demand. 

This also ensures that customers can find a ride when needed and helps the company maximize its revenue during these high-demand periods.

Pros

• This approach automates pricing at scale, using machine learning to optimize.
• It adjusts prices based on current market conditions, thus maximizing profits.

Cons

• It can be costly for small businesses due to software and research expenses.
• Frequent changes can upset customers and affect revenue.

9. Multiple pricing

Also known as product bundling, this method involves selling several items at a single price.

Think of it as a 2-in-1(or more) package deal.

For example, if you sell cosmetics, you offer a bundle of face cream, serum, and cleanser at a lower price than if customers bought each item separately.

Pros

• This approach increases profits and sales volume.

Cons: 

• Without proper sales volume, profits may fall short.

10. Loss-leader pricing

This tactic involves selling a popular item at a loss to attract customers to the store.

The idea is to lure shoppers with a great deal on a sought-after product and then encourage them to buy other items at regular prices. 

For instance, a smartphone brand might offer a discount on their mobile devices to bring in customers and hope they also buy phone cases, charging cables, and other full-priced items. This strategy increases overall sales by driving more foot traffic and leveraging the initial loss for potential gains across other products.

Notably, Microsoft’s Xbox One utilized this strategy by selling its console at a low margin, sometimes even at a loss.

The idea was to attract gamers to the platform, knowing they would likely spend more on video games and subscriptions to Xbox Live. 

Thus, the platform focused on building a large user base by offering the console at a lower price, with the expectation they’ll profit from other purchases within the ecosystem.

Pros 

• It boosts sales by encouraging customers to buy more items at once. 
• It promotes underperformers by attracting attention to products that need a sales boost.

Cons

• Customer expectations may shift, making them hesitant to pay full price later.
• There’s a potential revenue risk if discounts don’t increase the average order size.

11. Psychological pricing

Psychological or charm pricing entails setting prices to influence consumer behavior. Many retailers use this strategy to make prices appear more attractive.

For instance, they can tag an item $4.99 instead of $5 to make it seem like a better deal.

Amazon effectively uses this tactic to influence purchasing decisions. This company uses price anchoring, displaying a higher original price alongside a discounted price, making the deal appear more attractive.

This strategy plays on the perception of value, encouraging customers to feel like they’re getting a bargain. 

Pros: 

• Ending prices with odd numbers or decimals often makes shoppers feel they’re getting a better deal.

Cons:

• This approach can hurt future sales as customers might resist paying higher prices later.

12. Freemium pricing

This approach cleverly combines “Free” and “Premium” to attract customers.

The idea is simple: a business offers a basic service for free to lure users and entice them to upgrade to premium features for an enhanced experience. 

This method is an excellent way to introduce customers to your product.

However, a report by First Page Sage noted that only a small percentage (2% to 6%) will convert to paying customers.

Slack effectively uses this method by offering a free version of its team collaboration tool with basic features and limited storage. This free option is ideal for startups looking to improve communication without upfront costs. 

As these teams expand, Slack encourages them to upgrade to a paid subscription that unlocks more advanced features, additional storage, and enhanced support. 

Pros 

• It attracts a large user base quickly.
• Offers a low-risk way for customers to try your product.
• It encourages brand loyalty.

Cons 

• This strategy has a low conversion rate from free to paid.
• Free users can strain resources.
• This approach requires constant value updates to convert users.

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What is price strategy?

A pricing strategy is a plan that online businesses use to determine the price they’ll charge for their goods or services.

This approach isn’t just about having a price tag and hoping for customers to show up; it’s about understanding the market and staying ahead of competitors.

In today’s market, having the correct approach can be a vital ingredient that attracts customers to your brand.

Furthermore, it involves considering who your target audience is and how much they are willing to pay. This helps you to position your brand effectively in the market and know how soon you’ll likely breakeven and turn a profit.

5 factors that can influence online retail pricing strategy

Pricing a product in an online retail space is like working on a giant jigsaw puzzle.

Several pieces – data, market trends, customer behavior, and strategy – must connect in order to stand out and turn a long-term profit.

Granted, the digital landscape, despite its opportunities, presents unique challenges. Online retailers may feel trapped between keeping loyal customers and managing dwindling profits.

As such, pricing becomes a delicate dance that can lead to more sales or deep losses. 

To avoid the latter, let’s explore key factors that can affect retail pricing strategies and how to navigate them successfully.

1. Cost structures and profit margins

With global online retail sales expected to reach $6.8 trillion by 2028, staying competitive while maintaining healthy profit margins is crucial.

So, before you set that price, consider the costs involved. 

These can include costs of raw materials, production, and labor.

If you venture online, your costs increase as you pay for website maintenance, digital marketing, and logistics.

So, covering all bases regarding cost ensures your pricing model is sustainable.

2. Perception value and brand positioning

Perception matters in online shopping. This factor focuses on what customers believe a product is worth rather than its actual cost.

Luxury brands often leverage this factor, selling not just the product itself but an experience, a status symbol, or an identity.

Consider the case of high-fashion brands like Birkin or Gucci. The materials used in their luxury handbags might not justify their five-figure price tag, but the brand’s reputation, exclusivity, or customer loyalty do.

As such, the target audience is ready to pay a premium for the perceived value.

3. Supply and demand dynamics

Supply and demand economics remain relevant in formulating an effective pricing strategy.

When demand is high, you can expect increased prices, thereby maximizing profits.

If demand dips, you should adjust to maintain sales momentum. This concept is closely related to price elasticity, which measures consumers’ sensitivity to price changes.

Take the case of essential items like groceries or household supplies. They typically have inelastic demand, meaning we need them regardless of price fluctuations.

On the flip side, Birkin bags or high-end electronics exhibit elastic demand, meaning consumers are very sensitive to their prices.

As such, they begin to consider the opportunity cost of such goods.

4. The highly competitive retail landscape

Except you exist in a monopoly – where you control the price, demand, and supply – scouting your competitors is essential to your brand’s health.

Do you want to set prices above or below your competitor brands?

This requires finesse on your part. 

If you price your items too high, you risk losing price-sensitive customers.

Is it too low? You might undervalue your offerings. And the worst-case scenario?

Price wars from your competitors.

So, as you want your brand to stand out, you should balance staying attractive to consumers and maintaining profitability.

5. Consumer behavior

Finally, understanding consumer behavior helps to fine-tune your retail pricing approach. You should consider how customers perceive prices or specific psychological triggers that influence their purchasing decisions.

It’s not always about whether a product’s price is too high or low but the overall shopping experience.

Therefore, have a well-designed, user-friendly website that clearly displays prices and provides a smooth checkout process. This can encourage customers to complete their purchases rather than abandon their carts.

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Unique challenges of online retail pricing methods and potential solutions

Price isn’t just a number—it’s a powerful tool that can make or break your success.

But let’s face it, finding that perfect price tag can feel like navigating a maze. 

Here’s the good news: countless businesses before you have faced these same challenges and have succeeded.

With the right approach, you can too. Imagine turning pricing from a headache into a strategic advantage that propels your business forward. 

Let’s explore the key challenges of retail pricing strategy and figure out actionable solutions to help you stay ahead.

1. Striking the balance between price and perception

The main challenge you’ll first encounter is aligning your pricing strategy with your brand’s positioning.

How you price your products sends a powerful message about your brand. A higher price point suggests premium quality.

On the flip side, a lower price indicates a bargain or even an inferior product. Finding the right balance is crucial.

💡Solution: Before labeling that item with a few dollars, first define your brand’s value proposition clearly.

Ask yourself: what makes my product or service unique from the rest? Once you’ve answered that, your pricing should reflect that value.

Don’t hesitate to set a higher price point if you’re going for a luxury brand persona.

But ensure you justify it with superior quality, exceptional customer service, or exclusive features. Remember, brand positioning and price consistency are vital to building long-term customer loyalty.

2. Pricing for different consumers

In the diverse landscape of online retail, not all customers are the same.

Some are loyal repeat buyers, while others may be one-time shoppers. Setting prices for different consumer segments can be difficult, but it can also be an opportunity to maximize profitability.

💡Solution: Try implementing tiered pricing strategies that cater to different customer segments. Consider offering loyalty programs or membership discounts to reward repeat customers.

For the one-timers, try offering limited-time promotions or discounts on their first purchase.

This may spur them to check out your offerings later.

3. Competing against other retailers

Keeping an eye on your competitor’s pricing strategies is crucial yet daunting. Engaging in price wars can erode your profit margins and hurt your brand in the long run.

So, what can solve this issue?

💡Solution: Rather than focusing on ways to undercut your competitors, differentiate your brand by offering additional perks. This can be in the form of efficient customer service, speedy delivery, or unique product features. 

You can also employ competitive pricing. Here, you monitor your competitor’s prices on specific SKUs (Stock Keeping Units) and adjust your pricing strategically to remain competitive without sacrificing profitability.

Remember, the goal is to balance competitive pricing and preserving your brand’s value proposition. Engaging in a race to the lowest price doesn’t benefit any retailer.

So, focus on building long-term customer loyalty through value-driven strategies.

4. Adapting to market dynamics

The retail market is subject to regular price fluctuations. Prices can vary based on demand, seasonality, and consumer behavior.

Failing to adjust your pricing strategy in response to these changes can lead to lost opportunities or lower profit margins.

💡Solution: Embrace dynamic pricing to stay afloat in the ever-changing market. This approach ensures you adapt to factors beyond your control and deliver optimal prices that benefit you and the consumer. For instance, consider increasing the price during peak demand periods or offering a discount to clear out excess inventory during slow seasons.

However, exercise caution regarding discounts and promotions. While they are vital to driving sales, over-reliance on them can erode your brand’s perceived value.

So, use them sparingly and strategically.

5. Pricing across different channels

We live in an omnichannel retail environment.

While you may enjoy your online presence, your customers still expect a seamless experience across various platforms– via your website, social media networks, or physical store.

Yet, maintaining consistent pricing across these channels (considering unique costs) is exhausting.

💡Solution: You can develop a cohesive omnichannel pricing strategy that considers costs and customer expectations across channels. While you try to maintain consistency, there may be instances where differentiated pricing makes sense. You can decide to offer exclusive discounts online or in-store promotions to drive traffic to a specific channel.

Also, watch out for your buyers’ behavior across these different channels.

If your in-store shoppers enjoy buying bundled products, you can tailor your pricing approach to reflect that preference.

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6 helpful tips on how to best price products 

As you dive into the world of online retail, mastering the art of pricing can make all the difference.

Therefore, let’s consider some insightful tips that will help you set prices that not only attract buyers but also set you on a path to profitability.

1. Understand your pricing goals

Clarifying your brand’s goals is crucial before pricing your offerings.

Do you want to capture a larger market share, build a loyal customer base, or maximize your profits?

Having crystal-clear objectives can guide your retail pricing strategies.

For instance, if you aim to increase your market presence and attract more customers, you can set prices lower than your competitors.

On the other hand, if your goal is to record profits quickly, you can price your goods higher.

2. Include all costs

To price your product accurately, you should factor in all associated costs. This includes the production cost and additional expenses like labor, materials, storage, marketing, and transportation.

Here’s a practical approach: list all these costs and total them up.

For instance, if you’re selling handmade jewelry, account for the cost of materials (like beads and wire) and labor (your time and effort). Don’t forget about the extra costs, such as packaging and shipping. 

Also, you can use a spreadsheet or innovative AI tools to track these expenses to see how much you’re spending. This will also ensure that your selling price covers these costs and leaves room for profit.

3. Understand your customers’ budget

Knowing your customers and their budget is crucial in setting the right price.

So, conduct thorough market research to determine what your target audience spends on similar products. This can be done via surveys, interviews, or analyzing market trends.

For example, if you’re selling premium skincare products, consider if your clients are willing to pay more for luxury ingredients or prefer affordable options. This will help you set a price that aligns with their expectations.

4. Analyze competitors’ pricing

As you check what your consumers will likely spend, consider your competitor’s price offerings. This helps you gauge the market rate and position your product competitively.

For example, if you notice that most competitors price homemade soaps between $10 and $15, you can set your price within that range to build market relevance.

A side note: don’t just copy competitors’ prices. Consider what makes your product unique and charge a higher price to justify the quality.

5. Track sales and adjust prices

Once your product is on the market, you should monitor sales performance. This can help you decide if your pricing is too low (you sell out too quickly) or too high (slow sales).

Track your sales data regularly and adjust prices accordingly to find the optimal price point.

6. Plan for promotions

Finally, plan for promotions and discounts in advance.

When setting your initial price, consider how discounts impact your profit margins.

For instance, if you plan to offer a 20% discount during a holiday sale, ensure that your pricing strategy still allows for a profit.

If not, consider adjusting the discounted prices.

Master the art of retail pricing and get funded with Stenn

Retail pricing strategy is more than just a tool; it’s your online business’s heartbeat. With suitable approaches, you can set yourself apart from the competition, drive sales, and fuel long-term growth. 

But remember, pricing isn’t a one-time process that fits all scenarios. It requires regular attention and adjustment to stay in sync with market shifts and evolving customer expectations.

Therefore, it’s essential to continuously refine your approach to reflect changes and opportunities.

As your online business flourishes and you experience a surge in demand, managing cashflow and scaling efficiently becomes crucial. This is where strategic revenue-based financing comes into play.

With a financial partner like Stenn, you can unlock the capital you need to scale effortlessly and seize new market opportunities without financial constraints.

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