How To Use Market Research To Create a Retail Pricing Strategy

Creating a retail pricing strategy is key to the success of any retail business - and any retail pricing strategy needs to be tested with market research. Market research allows businesses to understand the competitive pricing landscape and determine what customers are willing to pay for their products. With the right market research tools, businesses can develop competitive pricing strategies that help them stand out from the competition and increase profits - the ultimate retail dream. 

In this blog post, we’ll demonstrate how to leverage market research to create a retail pricing strategy that works for your business. Let's get to it! 

Table of Contents: 

• What is retail pricing? 
• The importance of creating a winning pricing strategy
• Common retail pricing strategies
• Using data to determine the right price for your products 
• Pricing research with quantilope

What is retail pricing?

Put simply, retail pricing is the act of setting prices for products offered to customers - though it's anything but simple. Retail companies go through a pricing process to determine how much they can charge for items in order to generate - and hopefully maximize, profits. These strategies apply to both online and physical stores, with many businesses using a combination of both to sell their products. As they narrow down their final price, retailers will need to consider a number of factors, such as production costs, competitor pricing, sales algorithms, and product type... and keep in mind they do this for all their products! 

Retailers often employ different strategies when setting prices for different products. These can include markups, markdowns, low prices, high prices, discount pricing, charm pricing, and more. Some businesses will even set different prices for similar products to encourage customers to purchase a variety of items for varying needs, based on perceived value (i.e. more high-end bath soap vs. basic kitchen soap). Other retailers might use algorithms or competitor pricing data to help make decisions about setting prices. Regardless of their process, retailers need to understand how best to set prices in order to achieve their desired objectives and remain profitable in their category for the success of their business.

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The importance of creating a winning pricing strategy

It’s important for any retail business to have a strong pricing strategy in order to maintain a competitive advantage - though again, it can be one of the most difficult retail tasks to manage.

Retailers who take time to survey their audience put themselves in a much better position to increase sales by way of meeting consumer expectations. Through research and data analysis, retailers can ensure that their prices are fairly set and aligned with their competitors. They also can better control their profit margins, set product prices according to industry trends, and build customer loyalty...win-win-win!

The difference between retailers who focus on retail pricing strategies and those who don’t is what sets apart an industry leader and one who struggles just to keep up.

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Common retail pricing strategies

Below are some common retail pricing strategies that retailers can explore through market research:

Penetration pricing:

Penetration pricing is a strategy where a retailer intentionally sets an initially low price point for their product in order to gain market share quickly. The goal is to price the product just below that of competitors’ products, so customers will be more likely to purchase your product over theirs.

This type of pricing strategy can be beneficial for businesses with high production costs and low-profit margins - that’s because if successful, the increased market share will offset or lower those high production costs. Brand new companies to a market, established companies with new offerings, or companies with price-elastic products are common candidates for penetration pricing. This strategy helps a brand grow affinity amongst its purchasers, in hopes that if pricing is ever increased, these consumers will continue to purchase regardless.

Discount pricing:

Discount pricing involves price setting that’s lower than the normal market rate for that product in order to attract buyers. It is a very effective strategy for businesses that are looking to get rid of old inventory or attract new customers through a ‘sale price’, meaning that it’s typically a temporary price. Discounting can also help businesses establish a competitive advantage against competitors and give them a better chance at gaining market share in the long run.

Discount pricing differs from penetration pricing in that it’s typically short-term and involves the markdown of once higher-priced items (rather than entering the market at a low rate initially).

Channel-based pricing:

Channel-based pricing is when a retailer sets different prices for the same product depending on what channel it is sold through. For example, if a business sells a product through both brick-and-mortar stores and an online store/e-commerce (such as Amazon), it may set different prices for each channel.

This type of pricing strategy creates a competitive advantage by allowing businesses to set prices based on market conditions and customer demand for each channel, which might differ drastically. It’s also effective in maintaining healthy profit margins by pricing products higher through channels that require more expensive resources (i.e. store staffing, building electricity, or shipping costs).

Keystone pricing:

Keystone pricing is when a retailer sets the price of their product twice as high as the cost of their wholesale price/production. This type of pricing strategy is often used by businesses that need to meet a certain level of earnings in order to remain profitable. It can also be used to price items in order to remain competitive with similar products on the market - even if they don’t require that high of a price.

This pricing strategy can even be paired with discount pricing down the road if profit margins allow.

Charm pricing:

A final example of a pricing strategy is what’s called charm pricing - a strategy where retailers use “charm” numbers like $9.99 or $49.95 to set their prices. This type of pricing has been proven effective at increasing sales, as customers are more likely to purchase something if it appears to be a better deal than it actually is by using an odd number ($9.99 vs. $10). It can also be used to create a competitive advantage, as businesses can set their prices slightly lower than those of their competitors. This strategy can also be used in conjunction with some of the other methods previously mentioned.

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Using data to determine the right price for your products

When it comes to retail, the goal of setting prices is, ultimately, to maximize profit. This requires a deep understanding of the costs of production, market conditions, and consumer demand. That’s where data-driven research comes in - to make well-informed pricing decisions that are likely to drive revenue.

Here's a simplified structure of what a pricing research process might look like: 

Understand your costs:

The first step in creating an effective pricing strategy is to understand your costs. This means taking into account the cost of goods, labor, and overhead expenses. Knowing this will provide a basis for how much you need to charge in order to turn a profit (and which pricing strategies are most appropriate to get there).

Perform pricing research:

Once you understand your own costs, it’s time to survey the market for competitor pricing and consumers’ pricing expectations.

Before launching a product, retailers can use pricing research to get an idea of the demand for their products at various price points, what consumers are willing to pay for a certain product, what features of a product may warrant a higher price, and so on.

Retailers can also research similar products that already exist in other industries to get a better idea of where the current market is and what pricing strategies seem to work best.

Test your pricing strategies:

Once you have a better understanding of your costs and the market environment, you can begin to test out different pricing strategies. This could include experimenting with discount pricing, keystone pricing, charm pricing, and more. By testing different price points, you can gain valuable insight into what works best for your business, as one size won’t fit all.

As you test different prices or various pricing strategies, it’s important to monitor results in real-time and make adjustments as needed. This may mean changing product prices or using a different strategy based on feedback from customers. Continuous, iterative research will help businesses find the right pricing strategy that maintains a competitive advantage and leads to sustained profitability.

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Pricing research with quantilope

quantilope makes it easy for retailers to gain valuable insights when setting prices for products.

Through automated, advanced pricing research methods such as Van Westendorp and Choice-Based Conjoint analysis, brands have access to real-time customer data that can be sliced and diced by any other survey variable (such as demographics, psychographics, and more). This data will paint a detailed picture of your consumer and their pricing preferences, increasing your confidence when it comes time to set prices. Getting the price right means less unsold inventory, increased sales volume, and a better bottom line.

Don't wait - prioritize pricing research today to level up the success of your retail business.