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Choosing a pricing strategy for your products and services can be a real headache. It calls for a delicate balance between your customers’ purchasing power, product value, and bottom line.
Making the wrong choice can cost you sales and revenue, while the right pricing strategy can help you maximize your profits.
So, how do you strike the right balance and choose a pricing strategy that best fits your ecommerce business?
Our in-depth guide will help you answer this very question: we’ve outlined the 7 top ecommerce pricing strategies, with examples and pricing tips to help you get it right the first time.
What is a pricing strategy?
A pricing strategy is a process or methodology used by a business to set the best price for its products or services. It helps you standardize prices and margins based on market demand to maximize profits and shareholder value.
When choosing your pricing strategy, you should account for multiple factors, including:
- Marketing objectives: What is the market willing to pay for your product or service?
- Business revenue goals: What revenue target does your business need to achieve to be profitable?
- Target audience: Who are the customers you want to sell to?
- Brand positioning: Does your brand’s positioning reflect the pricing you want to set?
- Consumer demand: Is there sufficient demand in the market for your product or service at the price point you’re aiming for?
- Competitor pricing: Rather than basing your pricing strategy solely on target profit margin or business costs, you might want to consider adjusting them based on competitor pricing as well.
- Market and ecommerce trends: Finding a pricing strategy that works for you might take some time, and even then, you may need to adjust it according to changing ecommerce trends.
The right pricing strategy will minimize your costs while adding value to your customers, helping you grow your ecommerce business in the process. Price is often the most important factor in choosing a product or brand over another, thus it helps your customers make their decision.
Price does a few things for you:
- Communicates product value: Price can help you put a value on the solution your products offer.
- Helps you remain competitive in the market: Pricing too high means your customers can’t afford your product. Pricing too low means you’re not competitive.
- Increases your profits: Ultimately, price serves to increase your bottom line. Naturally, you’ll be able to determine your own margin. However, it’s important to consider that balance between how much you want to earn and how much your customer can pay.
By learning about the types of pricing strategies for your ecommerce business, you’ll be able to select the right one for your needs and tweak it as you go.
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Types of pricing strategies
With the definitions out of the way, let’s dive into the pricing strategies themselves and see what makes each type of strategy special.
Pretty much as it says on the tin, competition-based pricing considers your competitors’ pricing.
This is one of the best pricing strategies for attracting first-time ecommerce buyers. But you’ll need to do your homework: thorough research into your competitors is key here.
To make this type of pricing strategy work, you’ll have to search for and track competitors that are selling the same or similar products across a variety of price ranges. This may be time-consuming, but it’s one of the best ways to determine the best pricing for your products.
Once you have a range of competitor prices to work from, you can take the average of those prices for your baseline price. From that average, you can compare your competitors’ average price alongside your costs.
Now you know how much you can realistically charge for your product and how much margin you can expect.
If constantly keeping an eye on your competitors seems like a bit much, there are tools that help create dynamic pricing strategies for ecommerce that allow you to automate competitor price tracking. They eliminate the painstaking process of researching individual competitors and can track their prices over time.
Competition-based pricing strategy example
Let’s say you run a cookware ecommerce store and are looking to sell a stainless steel cooking pan, which costs you $25 to produce. You do your research and learn that your competitors fall somewhere between $40 and $60 per pan, averaging at $50. You’d be able to price your pan anywhere between $25 and $50.
Therefore, you could easily set your price to $40 to be on the lower end of the market. This would undercut your competitors with more advantageous pricing for a comparable product.
Cost-plus pricing is simply the cost plus the margin you want to earn. You’re free to decide exactly how much margin you want, so there’s freedom and flexibility in your pricing.
The upside of this type of pricing strategy is that it doesn’t take complex mathematical formulas to figure out. You already know your labor and production costs. To set the selling price, you just have to add a percentage on top of it. If your costs stay the same, this pricing strategy can return consistent profits.
That being said, cost-plus pricing can have a downside: it doesn’t factor in market conditions like perceived customer value or competitor pricing, which is essential in ecommerce.
Cost-plus pricing strategy example
Let’s go back to the stainless steel pan example. It costs you $25 to have it manufactured, labeled, and shipped to your warehouse. You also include the $5 you spend on marketing it to prospects. The total cost of your pan would be $30.
To earn back your cost plus your margin, you would sell your stainless steel pan at $40.
Value-based pricing involves basing your price on how much your target customers believe it is worth. While it’s slightly more theoretical than the previous two, this pricing strategy includes the value you bring your customers within the price, which is fair for both sides of the deal.
To use value-based pricing, you have to start from your baseline, which is cost. Once you know what the total cost of your product is, you compare it against your competitor’s average price. Now, consider the unique value you provide, and give it a number.
Value is essentially your unique selling proposition. How do you add value to your customers? It’s important to consider the value your brand brings to pricing, whether it’s through unique materials, a killer support team, fast shipping, or something else.
Value-based pricing strategy example
Once again, we’re back to the stainless steel pan: Your cost is $25 and your competitor average is $50. Your typical margin would be anywhere between $25 and $50 if you wanted to offer something comparable to your competitors.
However, let’s say you offer a 10-year guarantee with your cookware. It doesn’t make sense to align your prices alongside competitors who don’t offer something similar. So you’d put a $10 number on that value and price accordingly.
In other words, including the value of your 10-year guarantee would bring the price of your pan up to $60.
The price skimming strategy, also known as skim pricing, involves entering the market with a deliberately high price in order to skim customers who are willing to pay such prices for your product or service. You can then lower the price over time and sell to more price-conscious customers, as well as align your pricing with your competition.
Typically used by high-tech manufacturers rather than ecommerce merchants, this type of pricing strategy seeks to maximize revenue while demand is strong and competition is minimal. Apple uses this strategy to cover the expenses of developing new products like the iPhone.
Price skimming strategy example
Let’s say you recently developed a new proprietary technology to manufacture a smart stainless steel pan with digital temperature control. You launch it in Q1 and set a skim price at $120 to recover your R&D costs.
In Q2, after satisfying demand from first adopters and smart cookware aficionados, you set a follow-on price at $80 to capture the price-conscious customer segment and put pressure on your competitors who just entered the smart pan market.
As a result, not only did you make a nice profit and recover your R&D expenses for the smart stainless steel pan. You also secured the funding for developing the SmartPan 2.0.
Unlike price skimming, penetration pricing involves setting a deliberately low price for your new product or service in order to undercut your competitors and destabilize their pricing by forcing them to match your offer.
As new customers buy into your cheaper offer, your competitors’ customers may switch as well. After the initial penetration period, you raise your price to reflect the product’s value and maximize profits.
Penetration pricing is typically used when your analytics show that the demand projections for your new product are high. The hope is that the sales volume of your product will make up for its initial low price.
Penetration pricing strategy example
Let’s say you want to penetrate the stainless steel pan market where pans sell at around $50. Your cost to source and ship the pan is $25. You decide to employ a penetration pricing strategy and begin selling your pans for $26.
With a marginal cost of $25 and a sale price of $26, you’re making negligible profits per sale. But since your primary goal is to switch customers over from your competitors and capture as much market share as you can, you’re pretty comfortable with this decision.
You believe that your competition won’t be able to sustain such prices in the long-term and will eventually exit the stainless steel pan market. When they do, you’ll become the only pan game in town and will be able to raise your prices to a level that will give you a much higher profit margin.
This strategy involves setting prices at levels that can influence customer spending habits to make more sales or sell at higher margins.
The goal of psychological pricing is to meet customers’ psychological needs. These can include saving money, getting good deals, or spending more on high-quality products.
The psychological pricing strategy plays on the notion that consumers don’t always know what products should cost. Usually, we tend to assume that something is a good deal when we can get it for a lower price than listed or by comparing prices to those of similar products in the same category.
Psychological pricing strategy example
Instead of pricing your stainless steel pans at $40, you set the price at $39 (or $39.99) to trick the customer’s brain into thinking your pans cost less. As a result, the customer may see this price as a good deal just because there’s a “9” in the price.
To step things up a notch, you also place a more expensive pan directly next to the one you want to sell, making customers feel as though the deal is too good to pass up.
And finally, you change the size, color, and font of your pricing info on and around your pan to resemble a once-in-a-lifetime promotion to boost sales even further.
Getting bundle pricing right might take a bit of testing and tweaking, as you’re dealing with multiple costs, margins, and prices. Typically, you want to increase the perceived value without taking too hard a hit in your margin.
This pricing strategy can be applied to the same product, such as “Buy 2 get 20% off.” It can also involve related products that go together well.
Bundle pricing strategy example
In addition to the 16-inch stainless steel pan you offer, maybe you have a 10-inch version of that same pan at $40, plus glass lids for both at $10. If you’re selling your 16-inch pan at $50, and each lid is $20 extra, it would cost a customer $130 to buy both pans and lids.
Let’s break it down:
The total cost comes out to $65, meaning your total margin is $65, and your customers would pay $130.
Unless, of course, you offered a bundle that would make the offer more attractive at $100, which would still leave you a sizable margin at $35.
If your offer is attractive enough, you’ll be able to sell more of these bundles and eventually erase the margin loss that comes with the discount. What’s more, if your costs include shipping to the customer, you’re likely to save even more by shipping all of these products together.
Pricing strategy guide: Wrap-up
Deciding on an ecommerce pricing strategy is far from simple. It means striking the perfect balance between what your customers are willing to pay, the value your brand offers, and the margin you want to earn.
Any of the above pricing strategy examples are completely valid choices for ecommerce. You can even combine a few strategies to find the one that works best for your store.
With a bit of research and tweaking here and there, you’ll be able to find a pricing strategy that will resonate with your unique value and your customers’ wallets.
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