What is Keystone Pricing, and Is It Right for Your Business?
Keystone pricing can be instrumental in increasing sales and profit margins for many businesses by basing the retail price on wholesale cost to cover expenses.
Adequately pricing products is vital for sales and profits, yet only one in ten businesses have implemented a proper pricing strategy.
Companies need to consider what will satisfy customers and their bottom line when choosing or developing a method to price items and services. While increasing prices can immediately boost profit margins, businesses shouldn't exceed the amount consumers are willing to pay. If the cost is too high, customers will find a new supplier that offers more economical choices.
On the other hand, lowering prices too much will shrink profits and give buyers the impression that the business offers low-quality goods. Therefore, companies must have insight into demand, competition, and market prices.
Keystone pricing, an original method practiced by brick-and-mortar stores, sets an item's initial purchase cost by doubling its wholesale price. This strategy ensures the revenue covers the business's inventory cost with capital leftover. However, the keystone method can be innovated to fit any business need.
This article will discuss the background of keystone pricing, its pros and cons, and what types of businesses can benefit from it.
What is Keystone Pricing?
Keystone is a pricing technique that bases a sale price on doubling how much the company spent on the product. This model was used before computers and pricing algorithms by small businesses because of its simple calculation. The keystone markup guaranteed that businesses could afford the risk of discounting items and still make a profit.
This method is flexible and can be tweaked to produce any profit margin. Therefore, if a business finds that consumers are willing to pay more than double the wholesale amount, they can set a higher price for more profit.
Keystone pricing is prevalent in retailers that need to compensate for hefty shipping, handling, and storage costs. If overhead costs for some products are higher, management can use keystone to formulate a higher retail price to optimize profit margins.
Advantages and Disadvantages
There are serious advantages and disadvantages to consider when using keystone pricing because of how dated the method is. Its history in retail certainly shows its longevity, but innovation in online vendors has created some obstacles within the technique. Some common pros and cons of using keystone pricing include-
- Keystone's basic formula makes calculating prices relatively quick and straightforward.
- High markups supplement overhead costs and create high-profit margins.
- Keystone inflated prices provide some flexibility if rates need to be marked down.
- Marking up prices to receive a 50% profit margin may make products too expensive, making customers look elsewhere for lower prices.
- Oftentimes, one price does not fit all, so management has to discern what items keystone pricing can be applied to, if any.
- Unfortunately, the keystone method does not consider the competition. If a competitor is offering the same item at a lower or higher price, the keystone formula needs to be adjusted to emulate the market price.
Who Should Use Keystone Pricing?
Since the keystone pricing method was created and implemented in brick-and-mortar stores, it stands to reason traditional retailers find the most success using this strategy.
Even though online shopping has soared over the last decade, studies show that people prefer traditional shopping methods as long as the experience is enjoyable. Customers are willing to pay more for an item if a retailer provides quality products.
However, management should recognize what a price says about the brand's identity. An item with a low cost can be perceived as low-quality or cheap. Whereas, a high-priced item may cause customers to view a business as a luxury brand. Finding the perfect medium to represent the brand accurately can attract loyal consumers.
Typical retailers that find success in keystone markups include-
- Department Stores
- Mom and Pop Shops
- Novelty Stores
- Sportswear Stores
- Small Businesses
Who Shouldn't Use Keystone Pricing?
The progression of technology has severely impacted how consumers can shop and find the best deals. This convenience has severely limited the scope of businesses that can successfully implement the keystone pricing method.
E-commerce businesses have an edge when pricing items because they do not have the overhead costs a physical store has when housing products. Therefore, online stores can price their items lower and still maintain a high-profit margin. If an e-commerce company were to use keystone pricing, their low-cost incentives would no longer exist, driving customers elsewhere to shop.
Some brick-and-mortar stores should even reconsider using keystone pricing, depending on their industry. For example, if a bookstore is located in an area with a high density of other book providers, keystone markups may be too high to compete for consumers.
Retailers should also consider their turnover rate. If a store is experiencing low stock turnover, then these price increases are not advisable. On the other hand, if a business is selling a limited number of high-demand products, the keystone pricing method may not be the optimized markup.
Common businesses that should avoid keystone pricing include-
- E-commerce Sites
- Grocery Stores
- Electronic Stores
- Specialty Stores
- Flea Markets
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