Pricing is the linchpin of retail success. One of the traditional methods used in the retail world is keystone pricing, a straightforward and popular strategy that has stood the test of time.
While it may not always be the perfect fit for every scenario, understanding how keystone pricing works—and how to use it in conjunction with modern tools like ecommerce analytics and competitor data—can help retailers optimize their strategies in today’s highly competitive landscape.
What is Keystone Pricing?
At its core, keystone pricing is a pricing strategy where a retailer doubles the cost of a product to determine its selling price. In other words, the keystone markup is a 100% markup on the wholesale or production cost of an item.
This method simplifies pricing decisions for retailers, ensuring they cover costs while making a healthy profit.
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For example, if a retailer buys a product at $50 from a wholesaler, with keystone pricing, the selling price to the customer would be $100. The goal here is to cover all associated costs, such as marketing, distribution, and store overhead while leaving a reasonable margin of profit.
Keystone Markup in Practice
The keystone markup formula is simple:
Keystone Price = Cost Price x 2
However, while this method is easy to apply, the retail landscape has evolved, and many argue that keystone pricing has its limitations, particularly in an era where competitor pricing is often more complex and fluctuates due to demand, market saturation, and online availability.
What Are The Benefits Of Keystone Pricing?
One of the main advantages of keystone pricing is its simplicity. Here’s why retailers—especially those operating brick-and-mortar stores—have long favored it:
- Simplicity and Efficiency: Keystone pricing offers a straightforward formula, making it easy for retailers to set prices without spending too much time calculating margins. It is particularly useful for smaller businesses that may not have access to complex ecommerce analytics or pricing tools.
- Predictable Profit Margins: By doubling the cost, retailers can ensure they are making a reasonable profit margin. This method also helps to ensure that costs such as rent, wages, and utilities are covered while generating enough revenue to grow.
- Consistency: With keystone pricing, customers enjoy consistent pricing across various products, fostering trust. A consistent pricing model can also reduce decision fatigue for retailers and customers.
- Simplified Inventory Management: For those who maintain a broad product range, keystone pricing simplifies inventory management. You don’t need to worry about tailoring individual markups to different products, which saves time and minimizes errors.
What Are The Drawbacks of Keystone Pricing?
Despite its advantages, keystone pricing is not without its challenges, especially in today’s rapidly changing retail environment.
- Competitor Pricing Pressure: With the rise of ecommerce insights and data-driven pricing strategies, consumers are increasingly price-sensitive. Competitors using dynamic pricing models or offering deep discounts can easily undercut businesses that rely solely on keystone pricing. This can lead to lost sales if consumers find a cheaper alternative online.
- Ignoring Market Demand: Keystone pricing doesn’t take into account demand elasticity. A product with low demand may require a lower markup, while a high-demand product could potentially bear a higher one. Applying a flat markup across the board means missing out on potential opportunities to optimize pricing based on consumer behavior.
- Not Suitable for All Products: Certain industries or products may not align with the keystone model. For instance, luxury goods or technology products often operate on smaller margins, while niche products with limited competition could justify a higher markup.
- Online Competition: Ecommerce analytics provides online retailers with deep insights into competitor data, allowing them to adjust prices quickly to remain competitive. Rigid keystone pricing can put retailers at a disadvantage in this fast-paced, tech-savvy environment.
How Keystone Pricing Adapts to Modern Ecommerce?
With the increasing prevalence of online shopping, ecommerce insights and advanced tools for tracking competitor pricing have emerged as essential resources.
Today’s retailers must contend with a global marketplace where consumers can compare prices with just a few clicks. In this environment, keystone pricing often feels too rigid and simplistic.
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Here’s how modern retailers can adapt keystone pricing to suit today’s competitive landscape:
1. Use Ecommerce Analytics to Adjust Pricing Dynamically
The modern ecommerce world has given retailers access to a wealth of data. Through ecommerce analytics, you can gain real-time insights into customer behavior, preferences, and competitor pricing strategies.
Instead of relying solely on keystone pricing, you can adjust prices dynamically based on factors such as:
- Demand Trends: If a product is in high demand, you might raise the markup beyond the keystone standard. Conversely, for slow-moving items, you may want to apply a lower markup to boost sales.
- Competitor Data: Ecommerce tools allow you to monitor competitor pricing in real time. You can use this data to tweak your own prices and stay competitive, while still maintaining profitability.
2. Segment Your Product Pricing
Not all products should have the same markup. For high-demand or exclusive products, you may want to set a markup higher than keystone pricing to maximize profitability.
On the other hand, for common or commodity products where price competition is fierce, consider lower markups to attract price-sensitive customers.
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For example, a store selling a mix of high-end designer handbags and everyday apparel may apply keystone pricing only to the apparel, while using a higher markup for the exclusive handbags.
Tailoring your pricing this way can help you better compete while optimizing profit margins.
3. Leverage Competitor Data for Competitive Edge
Keeping track of competitor data is essential in modern ecommerce. If competitors are using dynamic pricing models to attract customers, adhering rigidly to keystone pricing might cause you to lose business.
Today’s sophisticated pricing tools allow you to track not only competitors’ prices but also inventory levels, discounts, and promotions.
By leveraging these insights, you can develop a more nuanced pricing strategy.
For instance, if a competitor runs a sale, you could temporarily adjust your prices or offer promotions to maintain your competitive edge, all without having to abandon your overall pricing model.
4. Consider the Impact of Ecommerce Insights on Margins
While keystone pricing offers simplicity, ecommerce analytics gives retailers a much clearer view of what drives customer decisions. These insights can be applied to fine-tune pricing models, offering more flexibility.
With access to data like conversion rates, cart abandonment statistics, and product views, you can begin to tailor pricing strategies that maximize sales without sacrificing profitability.
For example, if your data shows that customers frequently abandon their carts when they reach checkout, it may be worth experimenting with slight price adjustments to reduce sticker shock.
Small changes based on these ecommerce insights can have a significant impact on sales.
When to Use Keystone Pricing
Despite its limitations, keystone pricing can still be a valuable tool, particularly for smaller retailers, specialty shops, or those operating in less price-sensitive markets.
Here are some situations where keystone pricing might work:
- Niche Markets: If you’re selling niche products or items with minimal competition, keystone pricing might still make sense. You’re less likely to face the intense price wars seen in more saturated markets.
- Consistent Sales: Keystone pricing can work well when you have predictable costs and stable demand. For example, retailers that sell seasonal or artisanal products may benefit from the simplicity of keystone pricing.
- Physical Stores: If you operate a brick-and-mortar store with fewer online competitors, keystone pricing could provide a reliable framework. Many customers shopping in physical stores are less price-sensitive than online shoppers, meaning consistency and customer service could take precedence over minor price differences.
Conclusion
While keystone pricing has long been a trusted method for setting retail prices, it’s important to recognize its limitations.
Incorporating ecommerce analytics into your pricing decisions allows you to stay competitive and cater to modern customer expectations.
Whether you’re a small retailer or a larger enterprise, understanding how to blend keystone pricing with real-time data can help you strike the right balance between profitability and competitiveness.Optimize your pricing with real-time data from 42Signals and stay ahead of the competition. Sign up today!
