Price Management

Velocity Pricing: What It Is & When to Use It

It’s no secret that there is an abundance of different pricing strategies to choose from. It’s a big decision, and the health and success of your business rely on you making the right choice.

One popular pricing strategy that you can choose is velocity pricing.

What Is Velocity Pricing?

Velocity pricing uses a product’s “sales velocity,” or the speed at which a product sells, when determining prices. Fast-moving products are priced lower, while slow-moving products are priced higher.

For example, clothing sold by fast-fashion companies like Forever 21 or H&M is often sold at a lower price point than clothing sold by slow-fashion brands like Patagonia or Levi’s.

The reason for this is simple—the clothing made by fast-fashion brands is cheaper and easier to produce, thereby increasing its sales velocity. The slow-fashion company requires more time and money to produce its products, which means they sell at a slower rate but for more money back.

Both companies in this example are using velocity-based pricing.

The Benefits of Pricing Based on Velocity

Velocity-based pricing can bring many benefits to your business, such as:

Measuring Customer Willingness to Pay

By measuring how quickly products are being sold and the price point at which they’re selling, you’re able to calculate what shoppers are willing to pay for a different range of items.

When it comes to your lower velocity products, knowing what prices the shoppers are willing to pay can help calculate optimal prices. To ensure that your efforts are resulting in adequate profit, margins should be adjusted on both slow and fast-moving products to maximize possible revenue with respect to sales velocity.

Determining Resource Efficiency

Pricing based on sales velocity can show you which items you should be allocating your resources toward. Products that can be sold for a higher profit require more time and effort with a higher payoff at the end. For example, if you have a large number of high-velocity products, ensure that your production team is adequately prepared to meet this high demand.

Ideally, your business is able to maintain or even increase sales velocity over time, but this requires a smart and efficient allocation of resources that doesn’t leave any area of your team struggling.

Easy to Implement

Calculating the sales velocity of your products is quick and inexpensive, setting this strategy apart from other pricing methods. This frees up resources that could be used in other areas of your sales strategy.

What Industries Use Velocity Pricing?

Velocity-based pricing is a strategy best used by companies with a large catalog of products. Brands that offer many different items have a higher chance at success than those with a small selection or niche items.

If you do not fall within these categories, you can still use sales velocity to your advantage. In this case, the sales velocity of your products should factor into your pricing strategy without necessarily defining it.

As with all pricing strategies, it’s important to regularly measure your success and assess what areas can be improved on. If velocity pricing isn’t the right fit for your business, then there are many other price optimization strategies you can look into to increase profits.

The key to any pricing strategy is knowing when and how best to use it for your business.

Examples of Velocity Pricing

Pricing based on sales velocity is used in many different areas of retail. Some examples include:

Artisanal Bread

When it comes to consumable artisan goods such as bread, sales velocity can play a big role in pricing.

Because there is a large enough market for different types of breads, ranging from mass-produced to local and artisanal, the wide range in prices is accepted by shoppers.

A typical Walmart Great Value loaf of white sandwich bread is expected to be cheap because the consumer is aware that it is easy and low-cost to produce. However, vegan challah bread made by a local baker can be sold at a much higher price because of the time, difficulty, and level of expertise that goes into its production.

The artisanal loaf will have a much lower sales velocity than the Walmart brand, resulting in a higher price.

Pricing Software

Velocity pricing does not just apply to products but can also be used when selling services. For example, Wiser Solutions offers a pricing product that has some similar capabilities to common web scrapers such as Octoparse.

However, Wiser’s Pricing Intelligence product offers a wide range of information with an interactive dashboard and can be shaped to your specific needs. Web scrapers are often add-ons that have been simplified to provide raw data without customization or actionable next steps.

Both tools serve a function for businesses and have their place in creating pricing strategies. Wiser’s tool offers more capabilities and is constantly being added to and improved on by a large team of engineers, lowering its sales velocity and raising its price. On the other hand, most pricing web scrapers have limited capabilities and can be created by anyone with the right skillset, increasing their sales velocity and lowering their price point.

Is Velocity Pricing Right for You?

Setting your prices might sound easy in theory, but in reality, pricing requires you to consider several different variables. Market fluctuations, customer expectations, supply chain issues, and technological advancements are just a few factors to consider.

While calculating your sales velocity will always be an important metric to track when determining your prices, velocity pricing has its time and place as a strategy. Some critics say that there are too many moving parts to keep track of, while others feel that using sales velocity to determine your prices leads to an increase in profits. It is not a method that suits every business’ needs.

Setting your prices is an ongoing endeavor. When one strategy isn’t working, move on to another that might better optimize your prices. The key to any pricing strategy is knowing when and how best to use it for your business.

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