Is your pricing strategy effective?

This is a question retail business owners should ask often to ensure they're turning a profit on each piece of merchandise they sell. If you don't revisit the effectiveness of your pricing strategy you could be leaving money on the table. Or worse: Giving away free merchandise.

Although setting prices for merchandise may seem simple, it does take a lot of effort to choose the most optimal pricing structure for your business. Still, it's worth your time. After all, the profit from your merchandise is what keeps your business afloat.

Read on for the factors to consider when deciding the pricing strategy for your retail business.

What's your competitive edge?

Before determining your price, first, consider where you sit in the market. Do research on competitors in your location and decide whether you want to offer stock at a lower or higher price point than them.

For small retail stores, you might have trouble competing in price because it would hurt your income potential. However, setting prices lower than your competition does allow you to tap into a customer base that's looking for a good deal. If you have the desire to make affordability your competitive edge, negotiation with your distributors is key.

Make sure if you're choosing this pricing strategy that you can still cover your cost of goods and expenses while turning a profit; there's no use having the cheapest merchandise around if you can't stay in operation.

When your merchandise is priced higher than the competition your edge is quality and value. Make sure the higher price point for your products and services is valid. To market at a higher price, think of ways to sell exclusivity, exceptional customer service, or the additional amenities of your in-store experience.

The Mark-up

How can you identify the right price for your retail items? A mark-up price strategy is used by many small retail business owners to price their merchandise. A mark-up is the amount of money added to the cost of your goods in order to make a profit and cover your overhead. Your overhead is the cost of obtaining the goods and operational expenses. The mark-up usually is a percentage or flat rate added to each item.

According to Investopedia, small businesses typically mark up their products by 50%. How much you decide to mark-up your merchandise is entirely up to you. What's most important is that your mark-up always covers the cost of doing business. If you charge anything less, your business will be in the red.

The standard 50% mark-up is essentially doubling the cost of your goods. Here's how to calculate it and any other mark-up percentage that you choose.

[(cost of item) ÷ (100 - markup percentage)] × 100 = Retail Price

[(5.00) ÷ (100 - 50)] × 100 = Retail price

[(5.00 ÷ 50)] × 100 = $10

Again the 50% standard is only a benchmark. You can choose to increase or decrease your mark-up percentage based on your competitive strategy.

Other Pricing Considerations

When choosing your mark-up percentage think about whether it's high enough for you to offer deals and specials in the future. Offering promotions on merchandise that cut into your overhead costs will hurt your bottom line. Also, be very cautious when offering storewide sales. This type of discount is profitable for big-box stores. However, a small retail business will sacrifice a large amount of income if they decide to take part in this sort of blow-out sale.

Additionally, when setting pricing considers the merits of pricing psychology. Have you ever wondered why prices end at .99 or .95? The majority of retailers use odd numbers in their pricing because it's thought that customers are more likely to round down when they see one. For example, a customer who sees $6.99 associates the cost with $6.00 rather than $7.00.

Final Thought

Any change in variables including competition, the cost of goods, distribution costs, or operational expenses will affect the amount of money you should charge for your merchandise. For this reason, reviewing your pricing strategy and making adjustments throughout the year may be necessary to maintain a profitable business. 

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Editor's Note: This post was originally published on January 12, 2015, and has been updated for freshness, accuracy, and comprehensiveness.


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