How to Price Your Store Merchandise

It may appear simple, but there's more than meets the eye to effectively pricing your merchandise. Your pricing strategy should result in fair and appropriate prices.

Some retailers make pricing a highly strategic mission, not unlike mapping out a military invasion. Others fly by the seat of their pants, going with hunches and a “feel” for what prices will move their merchandise. Neither strategy is necessarily wrong. But make sure that whatever strategy you use lets you end up with prices that maximize your profit while keeping inventory moving.

How to establish a pricing strategy

To establish a pricing plan, you need to know your target market and your competition's prices. You then want to set prices that suit your market and match or beat your competitors, allowing you to turn a steady profit.

1. Know your target market

Who shops at your store and what do you know about them? Are you a dollar store or a high-end retailer? Knowing your target market is a primary factor in determining the type of items you sell, the clientele for those products, and the appropriate prices.

External factors will play into this decision, such as your location and the reputation of the business. Paint a realistic portrait of the clientele you anticipate, and build your image and marketing campaign accordingly. If you go “high end” and sell a few lower-priced items, people will look at them skeptically, thinking, “Something must be wrong with them.”

2. Be competitive

It's not often that you find yourself selling a product that is completely new to the marketplace. When that's the case, you must determine a price based on the sum of the parts and the labor involved. Most of the time, you can do what most retailers do: instead of reinventing the wheel, survey the competition for prices on similar items in your market.

The key here is to consider direct competition. If your business is in Boise, it shouldn't matter if the same coat sells for 50% more in New York City. However, if the shop a mile down the road has it for $200, you're going to have a hard time justifying a $300 price tag. Of course, you also need to consider the internet since people can go online and order from almost everywhere.

Once you've done your research, you need to determine whether or not you can sell an item for more than your competitor, and if so, why. Many smaller retailers find that since they cannot order in the same quantity as their big-box counterparts, they are forced to sell items for a higher price. However, they make up for the added cost with customer service, in-store perks, and various other amenities.

When calculating prices, you need to determine what you can provide that merits the higher price. Many local retailers find that regular, longtime customers will spend more for convenience and their trust that the store will handle any problems smoothly.

On the other side of the coin, ask yourself if you can sell at below the competition's price and still make a profit. Various strategies include selling in volume, drawing people in with a loss leader, or a break-even priced item where money is made on the accessories. This strategy depends heavily on your product and your proficiency at in-store marketing and sales.

More articles from AllBusiness.com:

• Are Your Prices Too Low? It’s Time to Rethink Your Pricing Strategy
• The Importance of a Good Return Policy
• The Price Is Right: 7 Ways to Determine Your Product’s Pricing Structure
• Smart Strategies for Pricing Products in Your E-Commerce Store

3. Understand fair pricing

Pricing is largely based on supply and demand, as with gas prices. This is where you need to determine what is “fair.” Certainly, following a natural disaster, you would be run out of town raising your prices on necessities. However, to some extent, it's a judgment call. Selling flowers that typically cost $8 a dozen for $15 the day before Mother's Day or Valentine's Day is considered good business by some—and price gouging by others.

Fair pricing allows you to build a good reputation and return customers. This doesn't mean that you should avoid marking up the newest fad. However, it does mean that greediness often comes back to bite you.

4. Turn a profit

Finally, you need to price in order to cover your operating costs, including your own salary. For many retailers, this is a matter of knowing their better-selling items and pricing to stay ahead of the curve.

Pricing also requires some level of consistency. The same people who gladly spend $200 on a comforter in one store will balk if you raise your comforter costs $100. Why? Customers come to expect a certain price range in your store, and unlike the airlines—where someone paying $300 for a seat may be sitting next to someone who paid $1,000—pricing needs to remain within your store's image and within the expectations of your regular customers.

RELATED: What Can You Do When a Customer Asks You to Lower Your Price?