Retail Pricing Strategies: Which Is the Best for Your Small Business?

A business owner you probably already know what a nightmare pricing your products can be. There are new books and dissertations on the topic every year. Pricing strategy crosses multiple disciplines, including psychology, economics, and marketing. Moreover, pricing is, of course, an integral part of your business and profits; a small mistake can affect business on a large scale (though electronic shelf labels make this a whole lot easier to fix than traditional price labels). Before telling you too much of what you already know, there are a few basic and useful principles to keep in mind. Even better, your retail point of sale system can help with a lot of this. Here’s a look at a few strategies (with some pretty cool real-world examples) that can push your business to another level.

4 Retail Pricing Strategies for Businesses

• The Decoy Effect
• The Contrast Principle
• Anchoring Retail Pricing Strategy
• Some Easy Retail Pricing Strategies

The Decoy Effect

One of the oldest retail pricing strategies in the book, most of us probably encounter an example of the decoy effect on a daily basis. Used effectively, this tactic can result in a serious bump in sales. Generally, this model includes three prices:

1. The cheapest option offers a far inferior product at an inflated price.
2. Instead, the middle choice is the sweet spot and should feature the product that you’d like to move. Priced just slightly higher than the first option, this choice will look like a steal.
3. Therefore, the highest price can be much higher, reinforcing that middle choice as a great deal. Plus, there are always people who will go for the most expensive choice no matter what. Just make sure the product still delivers for the price.

Retailers across the board employ this strategy. Apple’s iPod Touch is a classic example used by many marketing strategists. The three products have different storage spaces but their prices were not proportional. The middle option strategically seemed like a great deal and unsurprisingly accounted for the vast majority of their sales. Apple has since changed their iPod pricing to just two options and has instead used it on their iPad, seen below.

The Contrast Principle

Very much related to the decoy effect, this pricing strategy also typically offers products in threes. Psychologically, this principle is exemplified by a fascinating experiment involving our perception of temperature. Researchers had participants put their left hand in cold water and their right in hot water. After a minute they removed their hands and put each in lukewarm water. The left hand felt warm and their right felt cold. The experiment shows that we make evaluations and judgments based on comparisons.

This can easily be translated to a pricing strategy. Use options to sway a customer in the direction that you want them to go. The Economist famously used this strategy with their subscription offers. There were originally only two options: the online and the print subscriptions, priced at $59 and $125 respectively. The majority of consumers chose the cheaper, online option. But when they offered a third choice of a print and online subscription for the same price as print alone, the majority flipped to this more expensive option.

Like Apple, the Economist has made some changes to their pricing but many other subscription-based services have followed suit. Pictured below are the subscription options for the New York Times. They added another layer of strategy by pricing their cheaper options by the month and their premium package by the week. 

Anchoring Retail Pricing Strategy

A similar, but slightly more subtle approach, anchoring helps the customer focus heavily on the first bit of information they see. The adage goes that the easiest way to sell a $2,000 watch is to place it next to one that costs $10,000. In other words, if you put premium items near standard options, the standard options suddenly seem like more of a deal. A bottle of 25-year Macallan placed near the $80 bottle of Oban suddenly makes the latter seem a lot more reasonable. This strategy focuses a lot more on simple price-based product placement rather than more advanced techniques like the examples discussed above. If you own a liquor store, give it a try and rearrange some products.

In a humorous example, Cheetos started a bit of trend when they launched a luxury store which featured some pretty serious swag, ranging from onesies and bronzer to gold cufflinks and a $20,000 pair of cheetah inspired earrings. Those certainly make a delicious $3 bag of Flamin’ Hot Cheetos seem a lot more reasonable.

Some Easy Retail Pricing Strategies

There are also a handful of quick changes you can make to your retail pricing strategies. Whatever you choose, just make sure that markdowns don’t hurt your bottom line:

1. The “Rule of 9s” – We’ve all noticed that most prices end in a 9, and often in 99. Well, this absolutely works. We read left to right so that first number that crosses our eyes is the one we focus on. We all fall for it. Every. Single. Day. That Spotify Premium membership ($9.99) is such a steal, right? It’s not even ten bucks!
2. Avoid those $$$ signs – Studies have shown that customers spend more money when they are not confronted with dollar signs in front of prices. You’ve probably seen this here and there; more and more coffee shops and restaurants are implementing this simple strategy.
3. Use a smaller font – For higher end products you don’t want the focus to be on the price. Shrink that font a couple points and see your sales grow.
4. Offer free stuff – Psychologically, “free” means no risk. Plus, it’s exciting. A free cappuccino with a $15 pound of coffee costs you fifty cents but equates to $4-5 for the customer. Small offers like this can make the customer experience more memorable as well.
5. The “10 for 10 deal” – Highlight cheaper products that can be bought in bulk. Even if there isn’t a discount for buying more, the idea of a bunch of stuff for $10 sounds enticing.
6. Customer Limits – Limiting the number of products that can be bought adds a level of scarcity and exclusivity that we all love. At times, this strategy can be used to prevent items from being resold on the grey market (see Tickle Me Elmos and PS4s), but more often it’s intended to make an item seem cooler than it actually is.

Try It Out For Yourself!

Pricing can be endlessly interesting and complicated but most business owners don’t have time to worry about it too much. These simple strategies can help any business improve sales and get those couple extra dollars from each customer. Try to implement one of these strategies with one or multiple of your products and see what happens. And check out how Korona can help you with all of this with a free trial. And don’t worry, no decoy effects from us.

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