The Keystone Pricing Strategy is a crucial aspect of retail operations, including e-commerce businesses. Understanding this pricing approach can help online retailers set profitable product prices while maintaining competitive edge. This article explores the concept of the Keystone Pricing Strategy and provides a guide on how to implement it in an online store.
What is the Keystone Pricing Strategy?
The Keystone Pricing Strategy is a traditional pricing method where retailers set the retail price of a product at double the wholesale cost.
In other words, if an online retailer procures a product for $10, the product would be listed on the online store for $20, providing a 100% markup. This strategy aims to simplify the pricing process while ensuring a healthy profit margin.
Benefits of Keystone Pricing Strategy in E-commerce
The Keystone Pricing Strategy is rather straightforward and can be applied in various retail settings, including e-commerce. Here are some benefits of adopting the Keystone pricing strategy in e-commerce:
Simplicity: The main advantage of the Keystone Pricing Strategy is its simplicity. The method requires minimal calculation, making it a convenient choice for online retailers.
Profitable Margins: Implementing the strategy ensures substantial profit margins, helping online retailers to cover operating costs and still make a profit.
Pricing Consistency: This strategy provides consistency across all products, making it easier for e-commerce retailers to manage their inventory and pricing structure.
Applying Keystone Pricing Strategy in an Online Store
Here’s a step-by-step guide to implementing Keystone Strategy:
Understand Costs: Before applying any pricing strategy, it is important to have a clear understanding of the costs involved in obtaining your products. This includes not just the cost of goods, but also shipping, handling, taxes, and any other expenses associated with procuring the products.
Calculate Wholesale Costs and Double It: Add up all the costs associated with obtaining a product to find the total cost for each item. This will serve as the wholesale cost. Then, multiply the wholesale cost by two. This will be the retail price of the product.
Integrate into the Online Store: Once you have calculated the retail prices using the keystone pricing strategy, update the prices in your online store. Ensure your eCommerce platform allows for bulk editing if you have a large product catalog. For this purpose, you can use a price monitoring tool, as MarketLabs, which helps in effective management of prices in e-commerce.
Communicate Value: Since keystone pricing may result in higher prices compared to competitors, it is important to effectively communicate the value of your products. This can be done through product descriptions, customer testimonials, quality images, and other content that highlights the benefits and quality of your products.
Monitor Competitor Pricing: Regularly monitor the prices of competitors. If your prices are significantly higher due to the keystone pricing strategy, you may need to reevaluate if this is the right approach for your market.
Offer Promotions and Discounts: Utilize the margin buffer created by keystone pricing to offer promotions and discounts. This can help in attracting price-sensitive customers without hurting your bottom line.
Adjust Prices as Necessary: If you find that certain products aren’t selling well at double the wholesale cost, don’t be afraid to adjust the prices as necessary. Conversely, if some products are selling very well, you may be able to increase the markup even more.
Remember that while the Keystone Pricing Strategy can be effective, it is not one-size-fits-all. It’s essential to be flexible and responsive to market conditions and customer preferences.
Limitations of Keystone Pricing Strategy
Lack of Market Consideration: The Keystone pricing strategy does not take into account market conditions, competition, or product demand. As a result, a company may end up overpricing or underpricing their products, which can lead to potential losses.
Limited Flexibility: The strategy offers limited flexibility. Retailers may find it challenging to adjust their prices according to changing supply costs or market trends.
Potential for Customer Alienation: If the keystone pricing strategy results in significantly higher prices than competitors, it could lead to customer dissatisfaction and potential loss of business.
To overcome these limitations, consider combining the Keystone Pricing Strategy with other pricing strategies (such as dynamic pricing, psychological pricing etc.) and use price intelligence software to understand how your prices compare to the competition.
Is Keystone Pricing Right for Your Online Store?
While the keystone pricing strategy can provide a simple method for ensuring profitability, it’s crucial for businesses to consider their unique circumstances before implementing it. Factors such as market conditions, competition, cost of goods, and consumer behavior should all be taken into account. In some cases, a hybrid strategy that combines keystone pricing with other pricing strategies might be more beneficial. Remember, pricing is not a set-and-forget process – it requires regular analysis and adjustment to maximize profitability.
Also check: Skimming Pricing Strategy