Starting A Small Business: Retail Pricing Vs Product Costs

Here are some pricing strategies for deterimining the best retail price of your product

Pricing your Product

You are ready to open the doors of you new retail business but you have one big question left. How much should I sell my product for? The answer is not always an easy one. Pricing starts with a good pricing philosophy and ends with many practical considerations. These practical considerations include everything from who your customers are to how much your competition is charging. The key is to maximize your business profit for the amount of business resources you have. The following discusses some pricing strategies that might be helpful in making pricing determination.

A Pricing Philosophy

The best place to start in pricing your product is with a good pricing philosophy. Looking carefully at your marketing mix best develops this philosophy. Who are your customers? What type of product are you offering? What market niche do you fit and who is your competition? If your product is of high quality, your potential customer is someone who has lots of money and you have virtually no competition you can afford to price much higher than if you are selling a standardized product to a mass market with lots of competition. A high end pricing philosophy must have good reasons behind it. This is means usually a unique product, an elegant store atmosphere or exceptional customer service. A low end pricing philosophy might be supported in a product that has an emphasis on economy as a competitive advantage. This is probably the more common philosophy.

Each pricing philosophy has a different appeal or selling strength and each is effective in the proper context. Retail products usually have a target appeal or niche. Customers are usually segmented as economic consumers, status oriented consumers, and convenience oriented consumers. Your pricing should reflect your customer type. Competition can also determine your pricing philosophy. If you price too high will you customers leave you to buy somewhere else or do you have a monopoly on your product?

Know Your Costs

The next most important pricing consideration is to know your costs. This cannot be overstated. Many retailers find themselves in a situation where they may be pricing too low and loosing on every sale.

This is the most common reason for going out of business. Product costs consist of the price of the product and the associated (or overhead) costs to sell it. If you are buying your product from someone else you should know clearly the cost of your product but if you are making your own product make sure you look at all costs and don't miss anything.

The costs of selling a product are a little harder to determine. They include fixed overhead cost like rent and telephones and all the other business expenses that remain a part of doing business no matter how much product is sold. They also include the variable costs that can change as you sell more products. This means things like shipping or stocking fees that escalate as you sell more product. All these costs must be accurately factored in so that you know the true cost of your product is as accurately as possible. Never price below the cost of your product unless you have a good reason fro doing so.

Margin Pricing

If you have determined the costs of your product, the easiest way to set a price is with margin pricing.

This is simply taking the basic cost of the product and multiplying it times a set percentage to cover the overhead costs and profit margin you wish to make. If you buy your products for $ 1.00 and you know your fixed and variable costs are $ 0.50 and to want to make at least $ 0.40 on every unit sold, you can mark-up your product by a margin of 1.9 to determine the selling price. This is an easy way to price a product but does not take into consideration the more complex considerations of marketing mix. Things like customer demand, competition and the marketplace. More subtle pricing strategies can be used to maximize profit in these situations.

Premium Pricing

This strategy is used when your product is unique, your customer demand is very high or you have very few competitors. You can price your product as high as the market will pay and take advantage of the best pricing. Needless to say this is a good situation to be in and a very productive pricing strategy.

Economy Pricing

This is where you price your product at a low price to attract the maximum amount of sales. It should only be used when you are keeping your selling expense low and really know your true costs. It is used when you have very many competitors and pricing is the most important consideration for your customer.

Penetration Pricing

Penetration pricing is a little more complex pricing strategy. You may want to price your product very low when you first introduce it to gain market share and then raise the price as you get more customers.

Product Line Pricing or Optional pricing

Product line price is taking advantage of products that sell together. You may start your customer with a basic price on one simple item and then add upgraded more expensive items for a higher price. Being able to add options may increase your selling. This strategy appeals to the economical customer and also allows the customer with more money to upgrade their product by buying the extras.

Psychological Pricing

Physiological pricing is an appeal to the emotional part of the buying decision. For practical reasons you may wish to price your product at $ 99.99 instead of $ 100.00 so that it seems cheaper but the effective revenue is the same.

Captive Product Pricing

Captive market pricing is a variation on premium pricing where you effectively have no competition.

If your product is unique and has very high customer demand you may want to start with a very high price and lower it in time to get the most revenue from your product. This strategy is used very commonly on new electronic products when they are first introduced to the marketplace.

Other Types of Pricing

There are many other effective pricing strategies that are used less commonly when various conditions apply in the marketplace. These are strategies like bundle pricing, promotional pricing, geographic pricing and value pricing. They are all strategies that take advantage of a particular strategy to sell more products whether it be bundling a product with others, offering loss leaders to bring people into your store, taking advantage of geographically different customer product demands or any other appeal to product marketing.


As you can see product pricing is not always as easy as it seems. If you price your product too high for your market, sales can go down and if you price it too low, you may be selling lots of product but also giving up profit. Balance is the key and picking the most effective pricing strategy to match your philosophy is the secret. Remember you can always change strategies if you feel your current one is not working.

© Demand Media 2011