How Can You Pick a Pricing Strategy That Will Be Right for Your Business


Cost-, Competitor-, and Customer-Based Pricing for your retail business.

It’s often difficult to figure out the price point for an item. Selecting the strategy is not any less difficult, but picking the best one can really change your company.

Although there are many different types of pricing strategies, they can all be arranged under three different C umbrellas: cost, customer or competitor.


Cost-Based Pricing

Also-known-as the inside-out strategy, this method is based on the price of goods. You initially begin from inside your company and then go into the big market, with a price that echos your product’s worth. This is a logical and great method for having a prosperous business since the cost to make it is covered. However, often times, it’s more expensive than expected, and it’s not market oriented, so the voices of consumers are not being heard.

First, you need to figure out how much money it took to make the product. For example, suppose a hat costs you $10, and then printing it costs you $5, now you’re up to $15. On top of that, you need to add the expenses from the actual packaging material, the label, and the tags, and so now you’re up to maybe $17.

One way to figure out the amount of money that you’ll make after production, is through Keystone pricing, which is a kind of cost-based pricing strategy where you take your price out the door and multiply it by two. Therefore, going back to our previous example, if you were to multiply the production cost by, let’s say, two, then you would be using Keystone pricing. Thus, the total cost would be $34, with a profit that that is equal to the cost of production.

Basing the price on the cost is the most common pricing strategy, but not the most ideal if you have expensive goods. For example, maybe you’re making something that costs $30 but because you were only making a few of them, you’d have to price the product at $60. However, the competitors’ product is $40, so in that case, you most likely won’t be selling too many.

If you’re a traditional business with a firm foundation, and in a market with little competition, then this method is the one for you. You know your exact expenses and just want a steady profit. This isn’t for you though, if you’re in a highly competitive market since this method is very cut and dry with little flexibility for modifications.

Customer- and Competitor-Based Pricing

In these cases, it’s outside-in strategy. In other words, the market dictates the price. Here, you focus on customer perception, care about what customers want and look after your rival businesses. Value is also very important.

You need to determine how many related items with a similar, for example, design or material, cost in the market. Then price it around how the market will traditionally bear for it. Suppose that style of hat usually costs $45. If you were to purchase a hat out the door at $25, and sold it for $45, which is what the market will bear, then it’s obviously not keystone pricing, but it does give you the opportunity to sell products. As a result, that’s going to be your balance. You’re going to want to figure out what you want to sell, and their price points.

Using that same model, suppose a hat did cost you $25, and the rival businesses are selling it for $45. If you want to distinguish yourself from others and make more revenue, then you can steal their users by decreasing the price, and thus selling much more. It’s not an ideal thing to do, since you have to sacrifice your product margins. It is, however, a good way to increase your sales by undercutting your rivals, while simultaneously getting your brand out there quickly.

In other words, price it at what the market will bear. If you want to sell more volume, discount it based on what the market is already bearing for goods that are related. Thus, you remove the competition by offering customers similar or better quality, so that people really get that value. You could also price your products higher so that you aren’t competing, but you’ll need to bring something unique and different to the table around your marketing and the way your products are made. If you want to price it at around the same price, then you are competing with the others.

Use customer-based pricing if your company prefers to have a grip on the competition. On the other hand, if your business is in a very cutthroat market, then the latter is better for you.

How to Make Your Choice

Now that you know the three most effective approaches to pricing, all you need to figure out is which one would be the most beneficial to you. Take into account your industry, the goals of your company in regards to profits as well as why your customers keep coming back to you. Also, don’t be afraid to mix and match pricing strategies. Although it’s a difficult thing to figure out, hopefully, you will have benefited in one way or another from the information you’ve learned in this article.

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