4 tips for setting correct price points
May 18, 2016
When setting correct price points, think like Goldilocks. Not too high. Not too low. Just right.
If you are a new business owner or have been in business awhile, make sure you do a thorough review of your pricing structure at least once a year. The rising cost of goods and services should mean you are raising your prices too. Even a 1% increase could result in a big change in your bottom line. Let’s look at how you set the correct price points.
Pricing Too Low
Norm Brodsky in an Inc. magazine article writes, “People have a natural tendency to undercharge when they’re first starting out in business.” He claims that the uncertainty of succeeding causes new business owners to undercharge.
Peter Sandeen in an article titled, “Guide to Smart Pricing: What Are You Really Worth?” mentions a number of problems that occur when you don’t set correct price points. Here are 3 hazards of pricing too low:
- You lower your product’s and your shop’s perceived value.
- You can attract the wrong clientele who won’t pay higher prices.
- This starts a pattern of competing on price alone.
Sandeen explained, “…when you’re thinking of how much you should charge, don’t look for the lowest price you can live with. Rather, look for the optimal balance between price and number of sales.” Thinking you will build a solid clientele based on the concept of offering the lowest price, only sets you up for failure. Someone can always out price you.
Pricing Too High
We all are aware of the damage that can be done when price points are set too high. The following are just a few of the problems that can occur:
- Reduced sales volume.
- Negative perception when the product value doesn’t equal the price.
- Limited clientele based on cost.
- Longer time on the sales floor as you wait for the right buyer.
Known as “prestige pricing,” higher prices are a possibility if you take into consideration your location, the exclusivity of your merchandise and the economic status of potential shoppers near you. Add exceptional customer service and you might be able to pull it off. It is difficult to achieve however. Your entire store branding has to scream “luxury.”
Pricing Just Right
Pricing Solutions, encourages business owners to “stop making reactive pricing decisions.” They say, “It’s essential you understand your company’s value proposition.” A value proposition is merely what you have to offer and how it sets you apart from the other consignment stores in your area. Here are 3 methods for pricing:
- Mark-up Pricing – Adding a pre-set profit margin or percentage to the cost of the merchandise.
- Competitive Pricing – Pricing is strictly based on other shops in your area and then adding a perceived value to merchandise.
- Psychological Pricing – A form of this is Odd Pricing… setting the price to end in an odd number (i.e. $8.99) therefore the consumer believes it is a better value.
Sandeen writes, “You have to know what makes your products worth buying in your customer’s eyes…To find the right pricing for your products and services, you have to consider how much your target customers value the different reasons for buying from you.”
Brodsky adds, “The goal is to find the right price, meaning a price that (1) reflects the true market value of whatever you’re providing, (2) allows you to earn enough gross profit to build and maintain a healthy business, and (3) doesn’t leave you vulnerable to competitors.”
Consignment / Resale Pricing Suggestions:
1.) When you have an item new with tags, pricing should be around 75% of the original retail.
2.) When original price is unknown, items are usually priced at 25 to 35% of the retail value. The correct price points may vary according to the brand, quality and current popularity.
3.) Check e-bay and Amazon
4.) Check online consignment shops such as The RealReal and ThredUp
5.) Visit competitors
6.) Check the classified section in your local paper
7.) Don’t let the consignor sway you. Everyone values their items higher than they may be worth.
8.) Remember the resale golden rule. If you wouldn’t pay that much for it, don’t price it that high.
9.) Competitive pricing based on having the lowest price only works if you’re selling the exact same item as your competition. Since consignment and resale rarely have the same item twice, steer clear of pricing just to have the lowest price possible.
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