Beyond Discounts: The Strategy And Tactics of Pricing Fashion
In its most essential sense, a price is a sum of money a customer pays for your product and a pricing strategy is a model or a method used to establish that price. A price that maximizes profits and business value while taking into account consumer and market demand.
If only pricing, especially fashion products, was as simple as that. In this post you’ll learn all the strategies and tactics of pricing fashion products and brands, especially if you’re selling directly to consumers (DTC).
Pricing fashion tells a much larger story than how much something costs. It shapes your perceived value and your brand image and can determine the difference between perceived as cheap and low quality, and perceived as unique, aspirational and worth the investment. Clothing has always served as means for classifying people according to class, occupation, religion, lifestyle, and subcultures. All of them are often defined by their clothing, which simultaneously separates and unites groups across different lifestyles. We simply cannot separate clothing from the self and identity because what we wear is a public display of our self. Price often becomes another cue of our identity and self-worth.
Pricing also carries practical effects on your bottom line. In fact, according to HBR , 1% increase in price results in an 11.1% increase in operating profit, which compares to 1% improvements in variable cost, volume, and fixed cost only resulting in profit increases of 7.8%, 3.3%, and 2.3%. Which means that it’s often a better idea to rise prices than to save on operation or production costs.
It pays to set your pricing just right. But, too many entrepreneurs and fashion brands skim over pricing. The often look at the product costs (COGS), google few competitors’ prices and set their prices somewhere in between. While you must consider COGS and competition in designing your price, the best pricing strategy takes into account your revenue and profit goals, marketing objectives, target audience and customer personas, brand positioning, brand perception, product life cycle, consumer demand curve and macro market and economic trends.
Cost-Plus Pricing Strategy
A cost-plus pricing strategy focuses solely on the cost of producing your product (COGS) and adding a mark-up (how much profit you’d like to make). Also known as the mark-up pricing strategy.
Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This includes the cost of the materials and labor directly used to create the item. It excludes indirect expenses, such as distribution costs and marketing costs.
Your mark-up will obviously differ between wholesale (selling to other stores) and direct-to-consumer (your own store) channels. But according to The Retail Owners Institute, there is a simple formula to get you started, simply multiply by 2.5 for the wholesale price and then by 2 for the retail price.
Here’s our simple price calculator to get you started:
Remember: Product margin is the markup on your product above COGS and gross margin is the profit for the business as a whole, after considering cost of operations, marketing, etc.
Many business owners stop here, assuming that recovering their costs and using industry-accepted profit margins is enough, essentially leaving money on the table. But your cost-plus price is just the beginning or the minimum price you should be charging. Your goal is to develop a pricing strategy that places your brand and its products in a certain perceived position relative to your competition.
Here is price landscape research I did for a men’s t-shirts brand looking to redesign their prices and position themselves in the luxury t-shirts market. As you can see it’s not enough to know how much your product costs, but who are other brands you want to be associated with through comparable prices. Your audience is used to paying a range of prices for comparable products and it’s important to understand who are the people you’re targeting. Someone who used to pay $50 for a t-shirt probably won’t normally buy a $125 one without considerable investment in marketing, convincing, and educating on your value.
Competition Pricing Strategy
Competition pricing or competitor-based pricing focuses primarily on the pricing decisions of known competitors to set the accepted market price or a range of prices. You can choose to price your products slightly above your competitors, at the same level, or slightly below their price, according to your comparable brand proposition and business goals.
Ask yourself, are you looking to maximize profits or maximize sales? Are you looking to establish yourself in the luxury market? What is the lifetime value of your customer? What is the purchase frequency? What is your product’s comparable value? For example, in my research above, you could decide that your polo shirt is similar in design to Lacoste and can appeal to a similar audience but offers recycled bottles fibers and quick drying material that will be important to eco-conscious customers, allowing you to price your brand slightly higher than Lacoste.
The biggest pet peeve to the competition-based strategy is assuming that your competitor’s pricing strategy is well developed and that your pricing structure and business goals are similar to theirs. Basing your price solely on your competition deems you to constantly be following the market instead of leading it through pricing and innovation.
Value-Based Pricing Strategy
Value-based pricing strategy is when you price your products regardless of your competition but based on what your target audience is willing to pay. Even if you can charge more or less than the accepted market price range, you decide to base your prices solely on your customer interest and demand fluctuation data. If executed correctly value-based pricing can boost your perception as fair and good value for money. But, in order to succeed, you must understand your many different buyer personas and be able to apply sophisticated data mining and research tools, and be able to set different prices for each of your personas. This is the reason why true value-based pricing is only possible for large established businesses with rich customer data and sophisticated real-time pricing tools. Most businesses resort to using low prices as the primary value signal and engage in price wars and repeated discounting to project great value.
Penetration Pricing Strategy
Many entrepreneurs decide at this point that they are going to be the cheapest, they’re going to break the market and offer the coolest products at the lowest price. Or at least cheaper than the accepted market price range. Effectively choosing the penetration pricing strategy.
Penetration pricing strategy is when businesses launch new products or enter new markets with an extremely low price, with the goal of driving market share and revenue away from higher-priced competitors. But, the penetration pricing strategy isn’t sustainable long term as it brings significant loss in revenue and isn’t a good fit for businesses that are looking to build a brand, as such it’s typically applied for a short time.
This pricing method works best for new businesses looking to acquire large numbers of new customers in commoditized competitive markets. Or when your customer LTV (lifetime value) is high and justifies getting a new client at loss. However, most businesses choose penetration pricing hoping their new clients will stick around when you eventually have to raise prices when in reality it’s a gamble on your business future as you teaching your customers to choose based on price and not value, making them 50% less likely to come back.
Hope is not a strategy, and I never recommend penetration pricing unless you can sustain lower than average prices without sacrificing profits. In this case, look into the everyday low-price strategy (EDLP).
Everyday Low-Price Strategy (EDLP)
Everyday low-price strategy (EDLP) is different from penetration pricing. The everyday low-price strategy is based on cheap rates and their consistency, not promotions and sales. True EDLP retailers, such as Walmart, Costco, or Target, almost never offer discounts because they have already beaten the industry prices.
Your ability to offer everyday low prices assumes low COGS and robust supply chains to back it up. The strategy can be successful in categories where demand is fairly stable and where promotions aren’t effective such as necessities like groceries, household supplies, and gasoline. If the market price of staples changes drastically, you can still expect a similar steady stream of people buying them. The everyday low-price brand typically sells established products in saturated categories with many competitors and many similar substitutes. EDLP brands are usually large and enjoy the market reputation that allows them to compensate for the loss in profit margins with large volumes.
The main issue with EDLP is that it puts an explicit limit on your business opportunities and your marketing. Sure, you can save on your marketing expenses simply because you don’t need to run promotions or advertise but you can’t benefit from them either. In addition, choosing everyday low prices limits your potential audience to that of price-sensitive consumers, while in many segments price sensitivity has been steadily falling across many fashion, accessories, and home goods categories.
What is Price Sensitivity?
Price sensitivity or the elasticity of demand is the degree of which changes in price affects the sales of a product.
Try it yourself:
Price sensitivity or demand elasticity helps you understand how much your sales are expected to drop if you raise your price and how much sales will rise if you drop the price. If the result > 1, the product is considered sensitive to price changes and the demand elastic, meaning that your price can significantly affect demand. If the result is < 1, the product is considered inelastic, and your prices won’t have much effect on demand.
Many fashion brands and online stores operate under the assumption that fashion shoppers are always price sensitive but in recent years price sensitivity is gradually dropping in many retail categories. Growth in personal disposable income, particularly among Millennials, and elevated confidence created an environment where shoppers are becoming less sensitive to prices. However, then came COVID19 which created a major consumer life event disrupting everything we know so we’ll have to wait and see how price sensitivity changes in the upcoming year.
Skimming Pricing Strategy
At the other end of the price axis are the premium pricing strategies. The first would be, a skimming pricing strategy.
The literal meaning of skimming is collecting the cream from the milk and refers to launching a new product with a high price tag and then dropping the price over time. The goal is to skim the cream of early adopters and brand evangelists while enhancing your brand perception but also appealing down the line to more price-sensitive buyers. Tech products, video game consoles, and smartphones are typically priced using this strategy as they become less relevant over time. However, price skimming can be used in in launching hit fashion products, such as merchandise, or products with short life cycles to recover some of the sunk costs of production and promotion.
Skimming pricing strategy fits best businesses that understand that a premium price can develop a perception of quality for a brand or product, but it must come with a reason. You can’t simply charge high prices and expect them to do all the work as buyers expect a high value in return. Therefore, skimming pricing is most effective when the competition is limited, there are few substitutes, and your product is unique or truly innovative.
Premium Pricing Strategy
Premium pricing strategy also known as luxury pricing or prestige pricing is simply pricing a product above the accepted market price range, or above a specific competitor to present an image of high quality or value. Prestige pricing assumes that buyers are willing to pay a premium for a higher perceived value rather the actual production costs.
We’ve been trained over the years to equate price with value. When faced with two options, for a new pair of sneakers or a t-shirt, we automatically think that the more expensive option is better quality, made from better fabric, more beautifully designed, or made using more sophisticated production processes. Higher prices simply carry an intrinsic sense of value simply by being high. People assume that more expensive products are less common and not easily accessible to everyone and as such carry an aspirational value, making the sheer ability to afford the price tag an achievement, an investment in yourself.
Your ability to ask for a premium and your buyer willingness to pay, however, is a direct function of brand awareness, how familiar your target audience is with your brand, and how well they recognize it. Your brand value should be obvious and clear. Brands that apply premium pricing successfully are known for providing value and status through their products and give a clear reason for their price. Fashion, beauty, and technology products often use this strategy because these products can be marketed as luxurious, exclusive, and rare.
Bundle Pricing Strategy
Bundle pricing strategy is when a business offers a bundle, a set of complimentary products, or a themed collection of products and sells them together for a single price. You can choose to sell your products as part of a bundle only or in addition to selling them as individual products. This can be a great way to add value to customers who are willing to buy more than one product and can help you introduce new customers to more of your products faster.
This pricing strategy is especially useful for a new business looking to introduce more than one product at once and have a limited advertising budget to do so. The strategy is widely used in the food industry such as happy meals at Macdonald but this is also the strategy implemented by subscription box businesses and clothing brands to offer complete outfits or seasonal sets.
Some people simply don’t like the process of shopping, be it busy schedules, decision fatigue, or the pain of spending money, bundles make buying less painful for them. Bundles also have a powerful psychological by convincing shoppers that they’re getting a bargain, even if they wouldn’t buy the additional items, and often buying the bundle is more expensive than buying the items separately.
Bundling also allows you to charge a premium by masking the real value of each of the single items making it difficult for shoppers to make price-value judgments. There is also the simplicity of a single-priced product, it’s easier to sell the same bundle to everyone, which usually means lower marketing and advertising costs.
However, bundling is not always the solution and can actually hurt sales and your brand value. Bundling should only be used when the items are roughly in the same perceived price-value range. Bundling expensive and inexpensive products changed what people thought those items were worth. Even when they found both items in a bundle attractive, they were willing to pay less for the bundle than for the more expensive product alone. People were also less likely to buy bundles that combined expensive and inexpensive products.
High-Low Pricing Strategy (Discount Pricing)
A High-low pricing strategy is when a brand starts by selling at a high price and then lowers that price through promotions, discounts, and special sales. Usually, discounts are used for a set period of time to create a sense of urgency to acquire a good deal. Oftentimes high-low pricing strategy is used when the products drop in relevance or popularity, such as the end of season sales in fashion or when a trend is coming to an end, similar to a price skimming strategy. However, too many businesses use high-low pricing every time they want to bump up their sales and attract customers according to the classic law of supply and demand that states that the demand for goods will rise as prices fall. That’s why high-low pricing is also known as Discount Pricing.
The common misconception is that discounting is the best way to drive sales quickly while creating excitement for a great deal, that is why discounts become the norm rather than the exception in the fashion business and we get special “Christmas in July” sales. But blindly discounting without a good reason is one of the worst business decisions you can make as you’re conditioning your buyer into devaluing your brand and throwing money away by teaching your buyers to only buy on sale. This is also the most expensive pricing strategy as it requires a constant and heavy investment in advertising to promote the specials. Even a mere discount of 10% carries costs that many businesses ignore, check out my promotion cost calculator to find out how expensive discounting really is.
Psychological Pricing Strategy
What if there was a way to avoid discounting altogether by presenting your full price as a great deal? Actually, there is. Psychological pricing strategy.
It has been known for quite some time that consumers make 95% of their buying decisions subconsciously based on emotions and intangible goals and that our brain uses shortcuts to make decisions, called cognitive biases. These biases affect and influence our behavior in relation to how we buy, invest and judge people, brands, and organizations. They are a critical part of understanding behavior and provide practical ways in which you can favorably influence how your customer perceives your price.
Psychological pricing focuses on using cognitive biases with the goal of changing the perception of the price in your favor. This is especially important for DTC brands whose first encounter with a shopper is online, a world without physical experiences. Your shoppers cannot touch, feel or see the products so they rely heavily on visual and perceptual cues in their decision-making process so the perception of price becomes more important than the price itself. A price is no longer just a transaction cost but a reflection of the perceived value.
Ever wondered into a designer store and felt so happy because the prices didn’t seem as high as you expected? That’s because many designer brands carry expensive items on display to make everything else look like a bargain in comparison. That’s Price Anchoring. People used to download music for free, then Steve Jobs convinced you to pay. How? By charging 99 cents. People are willing to pay more for beer in fancy hotel than in a grocery store because the setting is more luxurious demanding a higher price tag. The reason is that prices are nor simply how much something costs, prices are a collective hallucination.
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I work exclusively with fashion brands, DTC brands, and online stores.