Pricing is one of the most important factors in retail today, especially with the rapid development in technology and accessibility seen in recent times. Indeed, with the unprecedented ability consumers have to compare prices to get the best deal, optimal pricing can often make or break a business.
A brand’s image, production costs, or business objectives can heavily impact a retailer’s pricing strategy, but these are all internal factors. For successful and adaptable pricing, retailers have to also consider external factors like consumer behavior and buying power, regulations, competition, and the various channels involved in the production. Sound retail pricing focuses on a combination of internal and external factors to create the best overall strategy.
Identifying and adapting to what competitors are doing is one of the main factors when it comes to building a pricing strategy. How you want to stand out to consumers in light of various options can often decide the volume and types of buyers you attract. Having a large number of competitors raises the incentive for retailers to carve out a pricing strategy, with many often pricing below competition to offer the best prices to customers. However, prestige pricing could be an option for retailers offering value elsewhere, such as excellent customer service or exclusivity. Regardless of strategy, competition has a significant impact on optimal pricing.
Consumer Buying Power
Knowing how buyers react to price changes is another key consideration for retailers; if the average consumer has more money to spend, raising prices could be a sound strategy in many circumstances. Similarly, if there is a market disruption that discourages consumers from spending (such as the 2008 Financial Crisis), retailers have to scramble to find a strategy that would encourage buyers. Oftentimes, this leads to widespread market changes which impact the entire retail industry, which leads us to the next external factor.
If the economy is booming and buyers are readily engaging in the market, that can give retailers the freedom to develop a pricing strategy without fear of losses. It could even allow them to increase their prices or alter their brand, as a healthy market typically means more eager consumers. On the other hand, a market under recession might require retailers to slash their prices to stay competitive. If it worsens to the point of crisis, such as in 2008, governments often step in to regulate the market and promote participation.
The effect of the 2007-2008 financial crisis on purchasing power is still felt today and taught us that a loss of confidence in the market isn’t very easy to restore. Governments scrambled to soften to blow; the US Federal Reserve bought out many governments and market securities and lowered interest rates to near-zero to maintain money supply. This policy combined with other regulatory actions helped stabilize the market. For retailers, these types of regulations, while often necessary, could heavily dictate the prices they can set. Considering the impact of current and potential policies is often vital to stay afloat.
As a retailer expands, so could their various channels across the supply chain or distribution. For multi-channel retailers (e.g. business with physical and online stores), there are several challenges when it comes to pricing. Should a retailer equalize their prices across multiple channels? How should they compare to the prices of their competitors? Simply put, managing an online store is different from a conventional brick-and-mortar one, so pricing strategies could often vary across channels. However, the question of fairness also plays a part, suggesting that retailers that are perceived as “unfair” in their pricing could negatively impact profits.
Internal and external factors can both have massive impacts on a retailer’s market success and should always be considered when drawing up a pricing strategy. Optimal pricing is challenging, with no single solution, but addressing external factors like competition and consumer behavior could be the key for a healthy business strategy. At the same time, creating a “market-proof” pricing model could keep a retailer ticking when faced with disruptions or regulations.