How to Price for Profit – Business Guide

By | Last Updated: 29th May 2019 | This post may contain Affiliate Links

It doesn’t matter if you’re selling door to door, from a retail location or online, pricing your product or service is one of the most nerve-wracking and exciting elements of being in business. It can be suggested that pricing is both an art and a science, this is where you need to apply logical to result in a fruitful conclusion.

For some aiming for the high end of the market and pricing their product high can conjure connotations of prestige and exclusivity, however with a higher price tag attached the volume of sales will usually be low. At the other end of the spectrum, pricing your product or service too low, may result in more sales but you could lose money if your profit doesn’t cover your expenditure.

Nine times out of ten, most businesses use a standard benchmark of 50% or 100% markup when pricing their products or services. The markup obviously depends on several factors which include how much a business has originally bought the item for, what their competitors are charging and how much is their target audience willing to pay.

For example, if you know it costs £10 to buy a shirt on the wholesale market, you would sell it for £20 on the retail market, that’s 100% markup. Some businesses are clever and state the RRP (Recommended Retail Price) or MSRP (Manufacturer Suggested Retail Price) on the label as well as their own price. Equally this tactic is also used by sales people who want to make their clients think they’re getting a better deal than they are.

A sales pitch with this approach can be incredibly effective:

Sales Person: “Sir, this computer’s RRP is £900 pounds, but I’m selling it too you for only £600! That’s a £300-pound saving!”

In this instance, the computer will have only cost £300 wholesale, 100% marked up to £600 and RRP’d to £900. Sometimes you have to “play” on the human basic instinct of greed, and if a “bargain” is presented in the correct manner, a lot of selling can be achieved through triggering this emotion. It’s worth mentioning that this trick can be used on anybody, so many top sales people attempt to utilise it as much as possible.

Generally, this method works great on an own branded product or a product which has no RRP, for products with an RRP, it’s usually better to stick to the suggested price as manufacturers sometimes don’t like retailers or sales people under cutting each other, thus de-valuing their product and brand. The RRP was introduced so retailers had a standardised price, and that price was the same across multiple locations and retailers.

Pricing Models Explained

It doesn’t matter if you’re selling door-to-door, at a retail outlet, b2b or online, fundamentally understanding each pricing model can only help you gain more sales in the future. Sometimes a product or service has trouble being sold for various reasons, however if you can combat these problems head on, you’re half way on your way to potentially making a lot of money.

Multiple Pricing

Multiple Pricing is pretty common in supermarkets and clothing stores, especially for underwear and socks. The concept has been created from retailers and merchants who sell more than one product for a single price, this tactic may also be known as “product bundling” in certain parts of the world.

A great example of multiple pricing is game consoles which are “bundled” with an additional game rather than individual prices alone, it not only makes the product more appealing to customers, it triggers an urgency in purchasing, particularly if the product is new or a limited time-frame is placed on the deal.

Discount Pricing

Customers all around the world love a bargain, there’s no denying that! Whether that’s traditional sales, coupons, seasonal pricing or other promotions, discount pricing can certainly be a great tactic in a vast majority of industries. Generally it’s great for attracting a large amount of foot fall to a store, or getting rid of out-of-season inventory.

From business people I have spoken to, it can be a clever ploy to offer a percentage of a discount rather than a stated number, for example if you’re selling a t-shirt and it’s priced at £10, the reducing the t-shirt by £2.00 doesn’t sound that appealing.

UK Coins

However, if you said “this weekend we’re giving all of our customers a special one off deal, this product has a fantastic 20% discount!’. As you can see the second tactic is much more appealing to a potential customer, this gives the impression you’re offering them a ‘better’ deal when in fact you’re simply offering the same deal but packaged differently.

It’s worth remembered that if discount pricing is used often it may give your business a reputation as a ‘bargain’ retailer, this results in customers always waiting for the “discount price” rather than paying for the regular full price. I was once told a great piece of advice when selling ‘affordable’ products, my boss simply said, ‘you’re turning into a busy fool’. He noticed I was gaining lots of sales but wasn’t generating large profits as the margins were lower and tighter, whereby if I sold more expensive products the profit margins were bigger for much less work.

Loss-Lending Pricing

Generally the implementation of the loss lending pricing structure is an attempt to lure customers in with a product or service they want at a lower price than competitors can offer it for. The idea is, that when a customer purchases the “loss lending” product, they also purchase additional products so the overall sales per customer is more than an individual sale on its own.

Below Competition Pricing

The concept of below competition pricing is exactly as it’s title suggests, usually you monitor a competitors pricing and use it as a benchmark. From there you consistently price your goods slightly cheaper to lure their customers from them to you.

Above Competition Pricing

Above competition pricing is the exact opposite of below competition pricing, the theory is you price yourself higher than the competition so you position yourself as being more prestigious, exclusive or luxurious than your competitors. This can give the impression that your products or services are of better quality and premium due to the amount of money they will be paying.

Secrets of Displaying Prices

In your business, promotional literature or online, have you ever pondered how your pricing structure effects your target market? Customers by nature like to keep their shopping experience as easy as possible, whether that’s buying milk or a new office printer from a sales rep.

The idea that “minimalist pricing” can actually help your sales is a concept which shouldn’t be overlooked. I did an experiment a few years ago where I showed the same three prices in three different structures, for example:

A)  £1,200.00
B)  £1,200
C)  £1200

Out of the three examples shown above, the prices in both A and B seemed far more expensive to consumers than the price shown in C. From initial viewing, it appears that the customers associate the larger structures of A and B including decimal points to correlate to a larger amount they would have to spend.

The smaller structure of C with no decimal point aligns itself as the “cheaper” option of the three. This is clearly a psychological trigger which is consciously or subconsciously coming into play, if so, it may be equally as good to experiment with “odd number” pricing scheme to see if there is any noticeable impact. In one business, I used to work for, prices ending in the number 9 were deemed so effective they outsold even lower prices for the same product.

I have also seen this result when ending a products price with .95, these two methods are shown below:

A) £29 instead of £30
B) £29.95 instead of £30

In theory, the price shown in A should out perform the price in B, because it follows the same small pricing structure as three examples of £1,200 shown earlier.

Depending on the natural of the business, how much the product or service is, B may in fact out perform A as it still ends in two odd numbers, however for smaller purchases I would suggest that the pricing structure of A would out perform B in an extensive testing environment.

The Secondary Sales

After you have sold a product or service many businesses make a grave error in overlooking the secondary sale, where new revenue may come from renewals, add-ons and up-sells. It’s easy to think the sale is over once the initial sale is completed and move along to your next customer, however a unique after-sales customer support strategy could prove to be extremely lucrative.

Professional Marketing Expert with extensive experience within traditional and digital marketing, business and e-commerce. Also proficient with several coding languages, web development and more. Equally this is re-enforced through over ten years of experience plus a UK university degree - educational accomplishments include being awarded prestigious accolades such as Best Dissertation Award and Citation Awards.