Velocity pricing: What is it and how does it work?

When it comes to retail pricing strategies, there are plenty of choices available for your business. But this is a big decision; the entire success of your company depends on which pricing strategy you pick!

A popular option at the moment is velocity pricing; more and more organisations are adopting this strategy across their products and services.

So, why has velocity pricing suddenly taken off?

In this article, we get to grips with the nitty-gritty of velocity pricing and explain how you can use it to increase your business’s overall profitability.

What is velocity pricing?

Velocity pricing is an approach that involves setting prices for products/services based on the speed at which they sell.

Fast-moving products are typically priced lower, while slow-moving products are priced higher.

Take, for example, the fashion industry. Jeans sold at Primark will often be priced much lower than those sold at Levi’s. This is because fast-fashion items are cheaper and easier to produce, thereby increasing their sales velocity.

However, despite slow-fashion companies like Levi’s taking more time and expense to produce their products, the quality is normally better, which means a much higher price point and potential profit. They may sell at a slower rate, but they definitely bring more money back!

Both these companies use velocity pricing to sell their products but in very different ways. The versatility of velocity-based pricing is one of its main attractions among businesses, particularly brands looking to measure price elasticity more effectively.

How to calculate velocity pricing

Calculating velocity pricing is a somewhat ambiguous process, but the results will help to steer your business towards greater profitability.

Simply follow this equation to determine your velocity-based pricing:

Velocity pricing = total sales for a given product / annual industry sales of stores that carry the same item/brand/category

If you sell high-velocity products, you’re more likely to succeed with a velocity pricing strategy. This is because it works on a volume basis, with quantity making up for a reduction in price.

Got a product that’s so niche you’re the only one selling it? You’d be better off trialling a dynamic pricing strategy to see how much people are willing to pay in the long run.

Which industries use velocity pricing?

Velocity pricing works best for companies that have large product catalogues behind them. It also gives them a higher chance at success than competitors whose selections are small and/or niche.

Don’t worry about your products not fitting into either of these categories, though; sales velocity can still help boost profitability for you, just as long as you make sure it doesn’t completely define the pricing strategy you’ve set.

Remember, if velocity-based pricing doesn’t yield the results you expect, there are many other options. Everyday low pricing, for instance, could be a great way of gaining market share, or perhaps try penetration pricing to establish yourself as one to watch among consumers.

Benefits of velocity pricing

There are numerous ways that velocity pricing can benefit your business, including:

1) Easy, straightforward implementation

Unlike other pricing methods, velocity pricing is quick and inexpensive to calculate. This will end up saving you time and money, which can be better allocated to other areas of your sales funnel.

2) Clearly defines your brand’s health

Velocity pricing forces you to take a good look at where your company is currently positioned within the marketplace – and how it’s performing there.

Whether you end up choosing velocity-based pricing or not, you can at least be confident knowing that you’ve got all the information you need before choosing a more profitable strategy.

3) More efficient resource management

A velocity pricing strategy will reveal exactly how best to allocate your resources based on the items you have that are performing well sales-wise. 

Just make sure you have a production team in place to cope with any increased demand and choose a stock and delivery monitoring system you can trust to give you a clearer picture of your overall inventory – so customers continue to be satisfied.

4) Goal setting

Profitability is an important aspiration for all businesses, but please be realistic with your expectations.

By looking at pricing velocity among your competitors, and your own products, you will gain a much deeper understanding of how you can expand your business to meet consumer demand.

5) Gauges customer sentiment

Measuring how quickly your items are selling – and at what price point – lets you see exactly how much people are willing to pay for your stock!

Knowing shoppers’ limits when it comes to products is key to pricing your goods optimally. Remember to adjust margins for fast- and slow-moving products; this will maximise sales revenue with respect to velocity, and hopefully bring you a tidy profit as well.

6) Increased revenue!

As long as you’re confident that you have enough high- and low-velocity products to create a balanced velocity pricing strategy, you should start to see an increase in your revenue each quarter.

But if for any reason you don’t, try monitoring your competitors to see what’s going on market-wide. It could be that there’s a trend you haven’t spotted affecting customers’ shopping patterns! 

Implementing velocity pricing with Magpie DBX

Today, big data allows companies to analyse every aspect of their business, including price points throughout the digital shelf.

Magpie DBX is part of this growing trend. With our Price Tracker, we can obtain over 40 fields of aggregated data per each of your online product listings. This will highlight exactly how well you’re performing across your target market, and where crucial improvements need to be made.

Think your business will benefit from velocity pricing? Magpie can show you. Simply contact us to request a free demo and we’ll get started!

Also, be sure to follow us on LinkedIn for more helpful industry insights.

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