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For years the retail industry set pricing using a practice know as Keystoning. It entailed nothing more than doubling the cost of the merchandise to determine the selling price. For example, if a merchant bought an item for $5.00, then he would keystone it and sell it for $10.00.
I don't know the exact origin of the word, and it really doesn't matter, but this simple rule of the doubling is now dead. One simple formula is no longer right for all situations. The marketplace is too competitive and demanding. Each piece of merchandise must be evaluated for the maximum possible mark–ups.
Our goal to pricing is simple: Sell the maximum amount of merchandise at the highest possible price while maintaining the image and mission of the business. Understand there are no set formulas that work in every situation.
Following is a list of factors that you should consider before determining the price of what you sell.
What the other guy is charging is still the number one reason in determining a selling price. You must know what your competition is charging for the same merchandise. A business never knowingly wants to sell the exact same item for a higher price.
However, there are some exceptions where you can add additional mark–up, if you add additional value (such as service or convenience). For example, a convenience store can charge more for certain items than a supermarket. People don't go to a convenience store for price.
As simple as is this sounds, customers still resent paying a higher price regardless of the rational. That's why convenience stores will competitively price their basic items such as bread and milk because they want customers to feel they can shop in the store with confidence. No one wants to be taken advantage of.
Every business has a range of what their customers will pay for specific items. A department store might sell men's shirts for as low as $15 on promotion and as high as $150 for their top–end shirt. A specialty store in Beverly Hills might have a low of $150 per shirt and a high of $500 for a custom made shirt. Make sure both you and your customers understand what the price range for your goods is and why.
Does the item look like it is worth what you are charging for it? Maybe it could be even worth more. A little common sense goes a long way — not just your common sense but those of your customers and employees as well.
Consider surveying your customers and staff. Ask what they think your product or service is worth. Ask them what they would pay for the merchandise. This can be just an informal poll of asking their opinion. They will appreciate being asked and you will have done some market research.
Keep in mind what the market will bear, i.e. supply and demand. When Beanie Babies were hot, some collectors were paying $1,000 for a $7 item. It was more than a supply and demand issue because there are plenty of Beanie Baby styles that are scarce today, but no one is paying much more than list price. Beanie Babies became a fad that added value to the item. Also, a guarantee adds value, as do personal instructions on how use a product. A store's reputation and packaging add value. I am willing to pay extra to give a gift from Tiffany's with their beautiful packaging rather then going to a warehouse type environment.
If the business has a warehouse look, customers expect warehouse prices. However, if the business has a professional or elegant look, then you can charge more. As a matter of fact, if you don't charge more, you will not be believable.
This point is very similar to the setting. Your brand which has nothing to do with quality or reliability can help determine your product's selling price. Your brand can add extra margins. The Rolex name commands a higher price. The Disney name adds dollars to the price, as does the Nordstrom name. This is brand equity. I like the popular definition of brand equity as the amount of extra money that someone is willing to pay for the exact same merchandise. We pay extra money for Coca–Cola® — we could buy another cola drink for less. We even pay extra for bottled water with a popular brand name like Evian™.
This is last, and as far as I am concerned, the least important of all of the factors. What difference does it make what you paid for the item if the market can sell the item for more?
Do you think large computer software manufacturers base their prices on just their costs? No, they base their prices on what the market will pay for something in that category. These companies didn't become giants by basing everything on just costs. Do any of us really care what the cost of an item is when we are shopping? Do we even believe the salesperson when they tell us that they are selling us something below cost? I want the business to make money but I still want to pay a competitive price. Don't let the cost be your only guide.
Lastly, remember there are no formulas. Each piece of merchandise must be evaluated using these considerations. This is not an exact science and it's not about perfection. We all make mistakes. Price adjustments will always have to be made as competition changes. A fair price today can be price gouging tomorrow. All it takes is a competitor to deep discount an item you both carry. That is why we must stay flexible. We live in a free–market economy and if we price our merchandise based on these guidelines, we will not only be pricing our merchandise fairly for our customers, but also generating fair profits for ourselves. That's how businesses succeed.