Ever wonder how to set prices for your products? It can be tricky, but one simple method is keystone pricing. This strategy has been around for ages and is still popular today.
In this guide, we’ll dive into keystone pricing, showing you what it is, how it works, its pros and cons, and when to use it. We’ll also explore alternatives to help you make the best decision for your business.
What is Keystone Pricing?
Keystone pricing is a cost-based pricing strategy, where the retailer sets the selling price of a product at twice the cost of the product
It is straightforward. You take the cost of a product and double it. That’s your selling price.
For example, if a product costs you $50, you sell it for $100. Easy, right?
The term “keystone pricing” has a bit of history. The term “keystone” comes from the architectural term for the central stone in an arch. Just as this stone holds the arch together, keystone pricing is a foundational pricing method in retail. It’s been used for decades, especially in retail. But it’s not a one-size-fits-all solution.
A common misconception is that keystone pricing works for every product and business. But that’s not true. It’s important to understand when and how to use it effectively.
How Keystone Pricing Works
Basic Calculation: The keystone pricing formula is simple. You take the cost of a product and multiply it by two to determine the selling price. This means if your product costs $50, you would set the selling price at $100.
Keystone Pricing Formula:
Keystone Price = 2 x Product Cost
For Example: You turned your hobby into a side hustle and started selling handmade candles on Etsy. If each candle costs $10 to make, using keystone pricing would mean pricing each candle at $20. This approach ensures a straightforward profit margin, making it easier to manage finances.
Gross Margin and Profit: But what about profit? Keystone pricing ensures a 50% gross margin. This means that for every $100 of sales, you’re making $50 in gross profit. It’s a quick way to ensure that you’re covering your costs and making a decent profit.
Quick and Easy Implementation: One of the biggest advantages of keystone pricing is its simplicity. No complex formulas or market research is needed. Just double your cost, and you’re done.
Advantages of Keystone Pricing
Keystone pricing has some clear benefits.
First, it’s simple. You don’t need an MBA to figure it out. Just double your cost, and you’re set.
Consistency is another advantage. It ensures a consistent profit margin across all products. This can make financial planning easier.
Higher prices can also imply higher quality. Customers often associate higher prices with better products. So, keystone pricing can enhance the perceived value of your products.
Disadvantages of Keystone Pricing
But keystone pricing isn’t perfect.
It ignores market dynamics. It doesn’t consider competition, demand, or economic conditions. If your competitors are selling similar products for less, you might lose customers.
It also oversimplifies things. Keystone pricing doesn’t account for additional costs like overhead, marketing, and shipping. These costs can eat into your profits.
There’s also a risk of missed opportunities. You might underprice products that could sell for more. Or you might overprice items, driving customers away.
When to Use Keystone Pricing
Keystone pricing works well for certain businesses and products.
Small businesses with limited resources benefit from its simplicity. It’s easy to implement without needing extensive market research.
Products with perceived high value also suit keystone pricing. For example, handmade or boutique items. Customers expect to pay more for these products, so doubling the cost makes sense.
Industries with traditional pricing structures often use keystone pricing. For example, jewelry and clothing stores.
Alternatives to Keystone Pricing
Keystone pricing isn’t the only option. There are other strategies you might consider.
Value-based pricing is one alternative. You set prices based on the perceived value to the customer. This can lead to higher profits but requires understanding your customers well.
Competitive pricing is another option. You adjust your prices based on what competitors are charging. This strategy keeps you competitive in the market.
Cost-plus pricing involves adding a fixed percentage to your cost. For example, if your markup is 30%, a $50 product would sell for $65 ($50 + 30%). This approach is more flexible than keystone pricing.
Dynamic pricing adjusts prices based on real-time market conditions. For instance, online retailers often use dynamic pricing to respond to changes in demand and competition, optimizing prices to maximize sales and profit. It requires advanced tools and constant monitoring but can maximize profits.
Actionable Tips:
- Evaluate Costs Carefully: Ensure you accurately calculate your product costs, including overhead and shipping.
- Conduct Market Research: Understand your competitors’ pricing and customer expectations.
- Be Flexible: Consider alternative pricing strategies to optimize your pricing model.
Conclusion
Keystone pricing is a simple and effective strategy. But it’s not a one-size-fits-all solution. It can be a great starting point, especially for small businesses and high-value products.
However, it’s essential to consider your specific business and industry. Market conditions, competition, and additional costs all influence pricing strategy.
Take the time to explore different pricing strategies. Test and see what works best for your business.
