Keystone Pricing is a method where every distribution level doubles the price of a product.
If you’re in retail, keystone pricing is a pricing technique that you should be familiar with. When pricing your merchandise with the keystone pricing technique, you double the wholesale price of that product.
For example, if you’re pricing a product with a total cost of $50 using the keystone pricing technique, the retail price of that product would be $100. This %50 markup allows for an excellent profit margin and makes having big discounts easier.
In addition to that, this technique makes pricing multiple products easier and more time efficient. Instead of pricing each product separately, you just double the cost of everything to get your retail price. Despite having many advantages, keystone pricing isn’t the best choice for all product types. While it works perfectly for some products, it’s a poor pricing method for others, which is something that you should always keep in mind when assessing its suitability for your business model.
Most people get the impression that keystone markup is a one-size-fits-all solution that works for everything when they first hear about it. However, there are many factors that you must consider when using this pricing strategy.
The following are the most important considerations that are associated with the keystone pricing technique. Being aware of these things will help you make the most out of this technique and utilize it to achieve your business goals.
The Perceived Value of Your Products
Selling a product for double the cost might sound good. Who doesn’t like doubling their money? In some cases, however, this is not true. While this technique might work exceptionally well for some products, it can be disastrous for others because of their perceived value.
If you’re selling high-end products that people don’t buy that often, setting your prices at double the cost is just too low. People are willing to pay more for your products and that is what you should be charging. When you’re not doing that, you’re lowering your profit margins while you don’t have to.
In other cases, things are quite the opposite. If people only buy your products because they’re cheaper than the alternatives, keystone markup can cause your sales to plummet. When your prices are higher, people will just find a cheaper alternative.
Before you decide to use keystone pricing, make sure that this pricing technique is the best option for your business.
Using Keystone Pricing for the Right Departments
Large retail stores have different departments with different products. When it comes to pricing these products, the rule of thumb is that what works for one department won’t necessarily work for the other.
For example, keystone pricing might work well in a department such as gifts, when people are looking for something they like, and the products can vary significantly from one store to the other. Using keystone pricing in this scenario makes perfect sense.
In another department in the same store, keystone pricing won’t make much sense. These are usually the departments from which people buy everyday goods that can be found elsewhere. For similar products, the competition is usually fierce, and the price is a major factor a purchase decision.
The takeaway here is that you don’t have to apply keystone pricing to every product in your store. Analyze each department separately and apply this technique only where it makes sense.
Keystone Pricing: Advantages and Disadvantages
Keystone pricing has its unique pros and cons, which make it an excellent choice in some situations and a poor choice in others. Whether you should use this technique or not depends on the nature of your business. If the pros outweigh the cons for your business, you should consider it.
The following are the major advantages and disadvantages that are associated with this pricing technique.
Advantage: An Easy-to-Apply Rule of Thumb
Keystone pricing is by far one of the easiest pricing techniques to use. Applying this method to multiple products is fast and easy, which makes it an excellent choice for most retailers.
If the products that you’re pricing are suitable for this pricing method based on the criteria that we’ve previously mentioned, it’ll make your process faster and easier.
Disadvantage: Can Make Your Products Too Expensive
When used with the wrong products, keystone pricing can make your products too expensive compared to your competitors. In price-sensitive markets, this can cause your business to rapidly lose customers and hurt the bottom line of your business.
Whether this advantage is applicable to your business or not depends on the market that you’re in. In markets where low prices are everything, this is a pricing technique that you better avoid. If that’s not the case, you should use it, provided that your customers aren’t willing to pay more for your products.
How can Sniffie help?
To successfully use keystone pricing, you must keep track of the total cost of your products as well as the prices of your competitors. Doing so will help you make sure your prices are as profitable as possible.
Keeping track of all these variables requires lots of time and work. Also, the results aren’t always as accurate as you want them to be. That’s why using a tool like Sniffie makes the process much easier.
Want to learn more about pricing?
Are you keen to learn more about pricing? Head to our Pricing Academy, from there you can find our latest articles about pricing and other free resources related to pricing, be sure to check them out!
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