Our Quickie Guide to Retail Pricing Strategy
Starting with an understanding of the costs associated with your preferred distribution channel sets you up with a pricing model that actually delivers your bottom line goals.
When you're in the business of building consumer product business, you get questions crossing operations, supply chain, financial modeling, incentive structures, sales forecasting, inventory management, growth models, innovation strategy, performance marketing, brand refinement... we could go on. But when it comes down to it, we're mostly all about the numbers over here. So we get a lot - a lot - of questions about pricing strategy.
As much as we're all about the beautiful brand building (oh, we sure are!), we also know that price is an absolute make-or-break for retail-focused brands. Consumer product businesses are always toeing the line between making consumers fall in love with them and ensuring they're convinced that product is worth its price point.
Whether you’re manufacturing quick-turn custom apparel or super swanky charcoal toothpaste, your pricing model is likely to be beyond simply taking the cost of goods and adding a markup. So with 2019 around the corner, we say it's high time to get a better model built with a super sharp idea of where your business is going.
- Dream up your distribution strategy. Are you looking at primarily selling through your own direct-to-consumer ecommerce channel? Is Amazon intended to be your golden goose? Are you a perfect fit for independent boutique retail? Or are you looking to be on the shelf at every CVS across America?
Most consumer product businesses work across a mix of distribution channels, but when you’re building pricing models, you should be building clarity into your intended long term – or at very least building an understanding of the range of associated costs by channel. Ideally, you are starting with a good sense of at least the intended primary channel, so that you can consider pricing with a realistic financial game plan in mind.
The primary distribution channels of focus for your brand and associated costs of doing business will be key in determining your optimal pricing structure.
- Check out the category in that channel. Now that you know where you’re aiming to play, the next step is to start understanding that specific shopper’s willingness to pay. Basically, the simplest (and most conveniently guerrilla-style) way to approach this problem is to hit the stores (or the web) and start mapping out that channel’s price mix.
If you’re talking mass market, head to a range of relevant mass retailers, from Walmart to Bed Bath & Beyond. If you’re talking more of a prestige distribution model, do a Whole Foods shop or investigate the mix at Anthropologie. Jump into Excel, make note of the range of products that you find in your category by store, making note of brand name, product name, product size/volume (if relevant) and price point.
(Don’t forget: make sure you’re identifying the true retail price, not a promotional or sale price, for purposes of building your competitive landscape map. Promotional considerations come later!)
- Build a competitive landscape map. Price is always a driver for consumer purchase decision-making, but it doesn’t sit alone. What is your brand’s key competitive differentiator, pricing aside? Are you competing on brand voice? Unique or patented formulation? Wide range of styles?
Design an X/Y axis with price along the X and your key competitive differentiator on the Y. Plot that competitive observational data you gathered in the stores and from the web, and examine the potential price gaps -- and opportunities -- in your category.
Pricing is, of course, part art and part science – so plot in two or three potential price points that seem to give you a competitive position within the landscape and get ready to run some numbers.
- Build out a comprehensive profit & loss forecast. Now the fun part!
Your pricing obviously isn’t about revenue minus product cost of goods alone. In addition to having different approaches to typical margin structure, retailers have a wide range of associated costs of doing business (from damage allowances to promotional support, listing fees to advertising allowances) -- typically, the larger the retailer, the more incremental costs of being on the shelf. Amazon has its own set of associated costs. Ecommerce -- while often perceived as the highest margin opportunity -- has its own as well.
Each channel also has different needs from an operational cost standpoint -- ecommerce, for instance, may call for more internal infrastructure and systems, whereas Amazon typically requires less account management than independent boutiques. Rather than leaving these as “to be determined”, building a strong pricing model calls for these things to be considered comprehensively.
Build out a model taking all those P&L line items into account, and assess it across your three potential price points. Is your bottom line where you want it to be? If not, play with the numbers and try a different approach.
From here, you can either try to figure out alternative cost of goods, consider volume discounts, examine more automated approaches to operating costs, or look at an alternative channel strategy altogether.
The thing is, in going through this exercise, you may discover that the channel you’d originally been considering isn’t achievable given your current cost structures.
Regardless, using distribution strategy to lead pricing strategy can give you better insight into your new product business model, inform your multi-year bottom line goals, and set you on the right path from day one -- rather than being in the incredibly frustrating position of having to figure out how to get your numbers to work after you’re already in market.
Image props: Pexels.