Pricing can make or break a retail store. As a music retail business owner, setting prices should be a careful process based on research and sound strategy. Prices should be high enough to keep you profitable and low enough to keep you competitive in the market. If you’re striving to optimize your pricing strategies for your music merchandise retail business, this article will help you understand what factors should influence pricing decisions and how to find the ideal prices to maximize sales and profitability.
Understanding Market Dynamics
No music store exists in a vacuum. It’s important to understand the overarching music merchandise market landscape to effectively compete. You’ll want to do research on both brick-and-mortar stores and online retailers to see what kinds of instruments and other merch are being offered, what products are most popular, and what stores are experiencing the most success at any given time.
As you gather and analyze data, seek to understand customer purchasing habits. Ask yourself why certain products are selling, and who is buying them. Are parents buying certain instruments for their children so they can take private lessons or take classes in school? Are adults buying instruments so they can learn to play them themselves? Do customers in these groups require certain accessories like tuning devices? How price-sensitive are customers in these respective categories? Understanding these trends will help you predict what products will sell the best at your store, and how much you should charge for them.
Cost-Based Pricing
Perhaps the most important consideration for how much you’ll charge for a product is how much it costs to produce it. As a music merchandise retailer, you probably purchase your inventory from manufacturers or other suppliers. You’ll need to consider their prices, which may include labor, manufacturing, shipping, and other expenses. You’ll also need to consider the overhead expenses of your store. How much do you pay for rent, utilities, and employee labor? Your prices should take these expenses into account so your revenue can cover these expenses while still generating a profit.
One strategy used by some retailers to determine price is “cost-plus pricing”, also known as “markup pricing.” This entails calculating the total cost to produce a product and adding a predetermined percentage to the cost to calculate price. Perhaps your cost for a certain product is $20 and you want the price to be 50% higher than the cost to produce the product. You would add $20 to 50% of 20, or 10, so your total price would be $30. This strategy would give you a constant profit margin for a variety of different products with different costs.
As you set prices, be mindful of your profit margins. In general a 5% profit margin is considered low, a 10% profit margin is considered healthy, and 20% profit margin is considered high. However, industries vary and many profitable businesses have margins that are lower or higher than this range. You can think of your profit margin as the money you accept for the work you’re putting into your business after all of your expenses. Business owners work hard, so if prices stay reasonable, the profit made is often well-deserved.
Value-Based Pricing Strategies
The ideal price for a product that will maximize sales and profit may be more about customer demand than about how much it costs to produce. As you strategically set prices, consider how valuable customers consider products and services to be. This strategy is known as value-based pricing and can be executed in various ways. You can conduct research to determine the value your products create for customers and how much they are willing to pay. You could also compare your products to a close competitor and find the added value of features you offer that other products don’t. By determining the added value of your features, you can increase your price compared to a competitor. Try to find unique value propositions and differentiation factors that can make your products better than those of your competitors.
Competitive Pricing Analysis
In addition to cost of production and perception of value, competitor pricing is an essential factor in how you price your products. If two different stores with similar brand reputations offer products of the same quality and one is priced cheaper than the other, consumers will tend to choose the cheaper option. If your products are more expensive than a competitor, then they need to be of a higher quality. If they are of the same quality, it would benefit you to undercut your competitor’s pricing. If your products are the same price and same quality, work on developing a strong brand image and brand reputation, which may convince customers to choose your store.
As you shift your prices to compete with other stores and vendors, don’t forget to keep an eye on your margins. If you aren’t making a profit, it won’t matter what you or your competitors are charging. Be flexible in adjusting your pricing over time based on market trends, competitor price changes, and fluctuating customer demand.
Dynamic Pricing Tactics
Dynamic pricing is the practice of shifting prices rapidly based on factors like sales volume or product supply. Dynamic pricing is often performed by digital software which has been given specific parameters and is closely monitored by employees. Because dynamic pricing quickly accounts for a variety of factors, it can lead to higher profits.
While dynamic pricing is more common for e-commerce websites like Amazon, it can also be implemented in brick and mortar stores with new technologies like electronic shelf labels. The prices on these labels can be easily adjusted, either by software that performs dynamic pricing or manually. This prevents store owners from needing to print out and post paper price labels.
Psychological Pricing Techniques
Some pricing techniques have been shown to psychologically influence customers to make purchases. Examples include charm pricing, prestige pricing, or bundle pricing. Charm pricing is ending a price in an odd number, most commonly a 9 or a 5, to influence a customer to purchase. It has been shown to prompt greater sales. A common theory is that a price of $8.99, for example, appears to be significantly less than $9.00, even though it is only one cent less. Prestige pricing is typically used for luxury products. A vendor will purposefully sell a product at a high price point to give customers the impression of high quality. Bundle pricing refers to bundling more than one product together for a discounted price compared to the price of each of the individual items. This can motivate a greater purchase by offering the customer a greater value for their money.
All three of these strategies work because of the psychological effect they have on the customer. They will be more effective with some customers and less effective with others, but testing them at your store will help you determine which are most effective for your target market.
Promotional Pricing Strategies
Promotions are a great way to galvanize your customer base to make purchases. There are many ways to design and execute promotional strategies – you could discount your entire store, part of your store, or a certain product, for example. You can distribute coupons or implement limited-time offers.
While sales and discounts can lead to more purchases, they should be used sparingly. We’ve all been to shops that constantly advertise large sales throughout their store. This can dilute a brand’s image. If a store is perceived as a “discount store” it will also be perceived as lower quality than some of its competitors. Some customers won’t mind this, while others may avoid the store for an option they consider to be higher quality.
Pricing Strategy Execution and Monitoring
In this blog, we’ve discussed a variety of pricing strategies. Each has its strengths and weaknesses, and will be more appropriate for certain stores than for others. You may choose to implement a combination of these strategies. Though your pricing strategy may evolve over time, you should establish guidelines to maintain consistency and more easily train your employees how to manage pricing. Following set guidelines will allow you to more easily communicate the reasons for pricing to customers and help you provide them with a consistent experience.
Pay attention to key metrics and feedback from customers. This information will help you make course corrections in your pricing strategy as necessary.
Finding the Right Price
When it comes to setting prices, it’s important to take a wide view and consider a variety of factors. Look at what competitors are pricing and decide how you can most effectively compete given the quality of products you’re able to offer. You can consider strategies like cost-based pricing, value-based pricing, competitive pricing, or dynamic pricing. Consider psychological pricing techniques and utilizing promotions to increase sales. Once you’ve weighed your options and designed a pricing strategy that works for your business, establish policies and guidelines and train your employees accordingly. That said, continually be willing to learn. It’s important to continue to test what pricing strategies are most effective to refine your approach. Over time, you’ll learn what strategy works best for your business and become a pricing expert.
Learn more about Music Shop 360’s all-in-one POS software and how it can help you with inventory management for your music store. Request a demo today!