The price of the product or the service plays a very crucial role in the sales of the product. The price of the product is also a major deciding factor for a customer to make the purchase decision. In times like today, where the world is functioning online and customers have more options than ever, the price can surely be a deal-breaker.
Choosing the right price and a pricing strategy is vital. In this process, retailers will have to consider factors like business costs, revenue models, competitive pricing, and such others to find a suitable range of pricing. But this is just math, only one side of the huge process. To set the right price and pick the apt strategy is a lot more than just playing around with these numbers. What businesses also need to consider are the psychological factors that result in a purchase decision.
There are various ways to do so. It requires a lot of experimentation.
An eCommerce pricing strategy can either make or break your eCommerce business. Like we already know, the right strategy can help you scale up your eCommerce business and grow exponentially in terms of revenue and profits. Right pricing strategies can be total game-changers.
Sources state that around 90% of eCommerce shoppers are masters in hunting beneficial deals.
Well, the reason is technology and shopping engines that make eCommerce shopping and comparison super easy. In this fact, lies a great opportunity for eCommerce businesses to set the right eCommerce pricing strategy and have great conversion rates.
In this article, we will read why it is cardinal to have eCommerce pricing strategies, types of eCommerce pricing strategies, and some quick tips on how to choose the right one.
What is a pricing strategy?
Before diving deep into the need and types of eCommerce pricing strategies, let us quickly understand what an eCommerce pricing strategy refers to. A lot of people consider it to be a basic calculation of price and then selling the product at it. But it is a lot more than just that.
An eCommerce pricing strategy is a well-researched and formatted plan that helps businesses find out how to set the price of their products with precision and maximize their sales. All this, while staying competitive enough in the market.
Without having a concrete eCommerce business strategy, no business would be able to make great sales or profits. Choose the best pricing strategy for your business.
Types of eCommerce pricing strategies
To pin down the right eCommerce strategy is going to require enough research, math, trials, and errors. An eCommerce pricing strategy that you might choose for the growth phase, might not work in the later phases of your business, making the process very dynamic.
Each factor needs to be studied carefully to make the right decisions. Below are a few different types of eCommerce pricing strategy that an eCommerce business can use.
Cost-based pricing strategy
This cost-based eCommerce pricing strategy is one of the simplest eCommerce pricing strategies. It is generally also known as markup pricing or break-even pricing.
This type of eCommerce pricing strategy helps companies make profits by adding a stipulated percentage of margin to the costs of the product.
Take the basic costs of production for a given product or service, add a fixed percentage, and voila, your final price is obtained.
The generalized formula to calculate cost-based pricing looks like this-
(Material cost+Labor cost+Overheads cost)*(1+markup)=Price
In the case of eCommerce businesses, the most common types of costs involved-
- The domain
- The webpage hosting
- Software fee
- Costs for the production
- A platform fee
- Marketing expenses, etc.
This type of eCommerce pricing strategy is considered to be the best for startups and new eCommerce businesses in the market.
As long as there’s no monopoly happening in the market, you always have to keep on what your competitors are doing.
A source suggests, there are around 86,000 eCommerce businesses in the industry, and as a result, each company is at least directly competing with 15-20 other companies.
In this type of eCommerce pricing strategy, your company has to analyze the products offered by the competitors and then set a price accordingly. In this process, you will require time to research the different pricing patterns by different companies.
What you can do is, calculate the average of all your findings and then make it your product price.
If you are setting a lower price, a lot of customers will be attracted and this can bring in more sales. Lower costs attract cost-conscious consumers to the company.
But, in cases like these, you need to make sure your costs fit into the right brackets.
In case you are setting a price higher than your competitors, you need to make sure that it is justified by adding some extra features or providing better quality.
It is advisable to spend a good amount of time researching your audience and competitors to yield dividends for your eCommerce business.
It’s all about flexibility, dynamic pricing is said to be one of the most profitable eCommerce pricing strategies. In this strategy, companies set prices by considering various parameters. These parameters include costs of production, desired profits, the demand of the offerings in the market, and also the prices set by the competitors.
The change in demand or change in any other factor will lead to a change in the prices. This is why it is said to be dynamic and flexible.
For example, if you are aiming at high sales, you can decrease the prices or when you are looking for higher profits you can simply increase them.
Dynamic pricing very well suits the fast-paced environments in eCommerce markets. It is also known as “surge pricing”. Due to its flexible and dynamic nature, this type of eCommerce pricing strategy helps eCommerce businesses stay optimized.
This pricing strategy is best for eCommerce businesses with time and resources to keep up with the daily changes in the market and the prices too.
Consumer-based pricing is also very widely termed as “value-based pricing”. In this strategy, the eCommerce business figures out what a customer would exactly be willing to pay and then sets a price following it. This type of eCommerce pricing strategy is based on consumers.
In this type of pricing, it is advised to segment the audiences and analyze whether or not the customers are willing to pay the price in return for the value provided. You should carry out a willingness to pay (WTP) research.
Consumer-based pricing is a customer-centric approach. This type of eCommerce pricing strategy will help eCommerce businesses build customer loyalty and brand awareness by perfectly satisfying the needs of the customers.
This pricing strategy is great for eCommerce businesses with some experience in testing pricing strategies.
In layman’s terms, price skimming is setting high prices for a product in the introductory phrase. The price of the products tends to decrease over time. The reason behind high prices in the primary phase is to build a brand image along with a sense of urgency. In this process, eCommerce businesses try promoting the exclusivity factor to leverage the “newness” of the product that is introduced in the market.
This typically results in people trying to buy the products as soon as possible and the company making good profits in the first go. When an eCommerce business is trying to implement this pricing strategy, they will use phrases like “limited edition” in the marketing copies to create a sense of exclusivity among the customers.
“Apple, which recently became the first US company to enter the $3 trillion market capitalization is also said to follow this pricing strategy.
Price skimming is a great strategy for eCommerce businesses that offer technological or automobile products which are on a higher end. It also works well for seasonal products. It is a go-to eCommerce pricing strategy for businesses that want to have large profits in the first go itself.
Loss Leader Pricing
With this pricing strategy, you set a price for your products or services that incurs losses but helps you in establishing your position in the market. When customers visit your website to buy or view the lower-priced items, there are chances that they may buy other items too.
It is like opening the doors for your customers in anticipation that you will be able to knock off these losses with an increase in sales.
So consumers need fries with a burger, a tripod with a professional camera, a screen guard with a mobile phone, and refill cartridges with a printer. Sellers who identify the need for these combinations and an opportunity to sell more offer bundle pricing.
It is a way to increase your average order value by offering product bundles to the customers.
These are a few of the many eCommerce pricing strategies that exist. Let us now take a look at 5 tips that we need to remember while picking the best eCommerce strategy for our company.
5 tips to choose the right business strategy
Choosing the right eCommerce pricing strategy doesn’t always revolve around quick profits. It also depends on how you want to be portrayed as a brand, what are your long-term goals and other such factors. Here are a few quick tips for you to keep in mind.
Your audience matters, above anything
In the case of eCommerce businesses, you will not be able to make a considerable amount of sales unless you don’t connect with your potential customers. You should know about your customers.
What motivates them, how they spend their time online, what is the best means to communicate and engage with them, how much they would be willing to spend on our products, and other such factors. Knowing your audience right will help your eCommerce company grow exponentially and make great sales.
Once you have spent enough time researching your audience, you can make use of that data and decide which is the perfect eCommerce pricing strategy for you.
Psychology-your best friend!
Understanding consumer minds play a huge role in eCommerce. Understanding psychological tactics is a very vital part of analyzing and implementing the right eCommerce pricing strategy. Tactics like comparison pricing, the power of 9’s, and short syllables have proven to be very effective and have resulted in higher sales.
No eCommerce business can ace a perfect pricing strategy at once. With consistent testing, trial, and error you can find out what works best for your eCommerce business. Evaluate and test different types of eCommerce pricing strategies to find out the right one.
A combination of testing and customer feedback can do wonders in deciding whether particular pricing is right for your business or not.
Whenever you change your pricing strategy, you can run a social media campaign or include a section in reviews for customers to respond to this change. This way you get the direct feelers from your customers about the pricing strategy.
This trick has worked wonders for a lot of eCommerce business owners, being one of the easiest ways to figure out the pricing of the products. In general, if you are unsure of what price to set, you can work backward.
For example, ask yourself, are you trying to capture large markets, or is your company trying to make large profits in a short time?
The answers will help you take the backward theory and figure out the right pricing strategy for your eCommerce business.
This trick will also help you plan bigger goals for your business and also aid you in achieving them.
Branding and USP are important
Customers remember and observe everything. Your brand reputation and USP influence how much a customer would be willing to spend on your products.
Sometimes the customers are ready to pay a higher price for a good brand name. That kind of trust, of course, takes time to establish in the minds of your consumers.
Analyze and make your notes to work on your branding and USP, because this is what will help you finalize your eCommerce pricing strategy.
Get your pricing strategy right
Now that we’ve had detailed insights into the types of eCommerce pricing strategies and some tips about how to choose the right one, let us get one thing straight-
“This process will require time, effort, consistency, research, and enough testing.”
The relationship formed between pricing strategies and sales is very delicate but important, so do it right.