Every entrepreneur has been struck with the question of how they should price their products. A good pricing strategy is essential for your ecommerce success. It helps you to understand the pricing point at which you can maximize your profits on the sale of your products or services. For those who are new to the concept, it may seem like an intimidating one at first, but by considering the right factors you’ll be able to make the right pricing decisions for your products in no time.
There might be various questions popping up in your head when you think about pricing strategies for ecommerce. How do you really determine what the fair price is? How do you know the real worth of a product you are trying to sell?
There are a number of factors that you need to take into consideration before deciding on your pricing strategy, such as your distribution costs, competition, and customer base. In this article, we will present you with the ultimate pricing strategy guide that will help you set the right price for your products.
- What is a Pricing Strategy for Ecommerce?
- Pricing Strategy for Ecommerce: Why is Price Important?
- Pricing strategy for Ecommerce: First approach – Cost-based
- Pricing strategy for Ecommerce: Second approach – market-oriented
- Pricing strategy for Ecommerce: Third approach – consumer-oriented
- Other Types of Pricing Strategies for Ecommerce
- Price Strategy for Dropshippers
- Pricing Strategy for Ecommerce Should Involve the Full Organization
- Want to learn more?
What is a Pricing Strategy for Ecommerce?
A Pricing Strategy refers to the method a company uses to price their products or services. Pricing is a marketing tool and the most efficient way to improve conversion rate optimization. By applying various pricing approaches, your business will be more efficient, profitable, and sustainable in the long term.
If you don’t base your pricing on any strategy chances are that you might set it too high or too low. You’ll lose customers if you price your products too high, as they will stop buying the products, whereas if you price too low, your profit margins will decline and you might end up leaving the impression that your products are poor quality.
Pricing Strategy for Ecommerce: Why is Price Important?
Price optimization strongly impacts your profit. We live in a world that is driven by value. Therefore, it comes as no surprise that your pricing strategy is a reflection of you and everything you do as a business.
In addition to the information above, there are other reasons to point out why your pricing strategy is important. But we can summarize them in one: pricing is one of the main decision factors when online shoppers are going to buy something.
And here is the data: according to PWC research these are the main reasons why customers visited an ecommerce website:
- 61% to compare pricing
- 23% to participate in promotions
- 41% to look for coupons
What insight do we get from this?
First, that people are looking for good prices, and when they notice that one shop is offering coupons or deals, they visit the website.
Second, that when they don’t visit a website because of a promotion, it is very likely that they are comparing prices. An average online shopper will visit at least 3 websites before making their purchase, and also 86% of first time online shoppers say it’s important to be able to see and compare prices from different sellers.
You could say that we are now in the comparison era.
Pricing strategy for Ecommerce: First approach – Cost-based
What is Cost-based Pricing?
Cost-based pricing is a pricing method in which a fixed quantity or a percentage of the total cost is added to the cost of the product to determine its selling price.
It is known to be one of the most intuitive ways to set a price. The logic is simple. After calculating the costs of a product for your company, you just have to apply the profit margin you want to achieve. That way if the cost of product “A” is 50 and the margin you desire is 100%, you have to price it at 100.
How to do Cost-based Pricing?
To do cost-based pricing, there are two main things you need to consider- the costs and the margins.
Any type of cost-based pricing strategy begins with calculating the costs attached to the product. In order to calculate the costs of the products, you need to include the costs of production, promotion, and dropshipping. Luckily, with dropshipping you don’t have to worry about the production costs, as you won’t be coming in contact with the product. To achieve accuracy with cost-based pricing, you have to make sure that you are not ignoring any type of costs attached to the product. This includes all cash and non-cash costs that are included in the product cost subtotal. You need to consider the amount you are spending on your management expertise, or any other labor you are hiring, as well as any rent or land costs, or capital equipment that must also be valued. All of these values, if they apply to your business, must be included in the product cost subtotal.
Let’s take a look at a basic example. If we have product “A” and product “B” and our overall costs are 10,000 units, we could assume that each product takes up 50% of the costs. So you just need to divide 5,000 units by the amount of products “A”. However, mostly real data does not usually slip into round numbers. The percentage will be different and likely very hard to calculate. If you want to apply this approach you may need to use some indicators. Even when you know the numbers won’t be exact, it is important that you estimate them as accurately as possible.
Now, let’s take a look at margins. How do you really know how much you should earn? Ideally a lot, but you have to keep it interesting for buyers, which takes us to our second approach.
A useful and sustainable way to enrich your pricing strategy is setting smart prices by defining repricing rules through competitor pricing intelligence software. With these tools, you’re able to set ecommerce pricing rules by targeting certain profit margins and competitive pricing positions and can receive the smart price recommendations as an outcome.
Note: An example of the set of rules to figure out the smart price.
What are the Advantages of Cost-based Pricing Strategy?
Cost-based pricing has the advantage of simplicity. It allows a store to set prices without in-depth customer or market research, but still ensures a minimum return on each product sold. Another advantage of cost-based pricing is that it can act as a buffer when a certain project or plan grows beyond initial expectation or the original scope. With cost-based pricing, there’s always a sense of comfort attached, as you know that you are covering your costs and gaining some profit on all the work that you are putting in.
What are the Disadvantages of Cost-based Pricing Strategy?
Even though the cost-based pricing strategy saves your business from losses, it can sometime also be saving your business from the profit that you can gain. There’s a possibility that the customers are willing to pay more for the product, which could earn you an additional profit on each sale. However, there is also a possibility that the price is higher than what customers are willing to pay, resulting in less profit than what you can potentially earn with a better pricing strategy.
Pricing strategy for Ecommerce: Second approach – market-oriented
What is Market-oriented Pricing?
Market-oriented pricing is a pricing strategy based on the market conditions and competition. This means that you compare the prices with similar products that are being offered on the market. That’s why, this pricing strategy is sometimes referred to as competition-based pricing.
With more than 12 million online shops in the world, you can’t simply rely on cost-based pricing to determine how you should price your products. And that’s why we need to look at what our competitors are offering, and at what price.
How to do Market-oriented Pricing?
In order to do market-oriented pricing, you need to know how you compare against your competitors. To find out, you can take advantage of a price tracking tool which will give you data about your competitors’ prices and assortment, without needing to visit all their product pages every day.
With this tool you will know if you are setting your prices among the most expensive online shops or among the cheapest. There might be a chance that you have set your prices way too low. If that is the case, you can make your margins bigger and keep your competitiveness. If on the other hand, you discover you are pricing too high, you may decide to lower your prices to start to get more visitors from price comparison engines and higher conversion rates. Also, you will know when your competitors are out of stock. When it happens, you can try to boost your sales with extra effort in advertising campaigns.
If this is your first ecommerce experience, one thing you should focus on understanding is whether your Unique Selling Proposition (USP) is price-oriented or value-oriented. An understanding of your USP will help you to figure out where you stand in comparison to your competitors, and where you aim to stand in the future.
It’s always a good idea to understand what your competitors have to offer, and at what price. After researching your competitors, you now have a bigger and better picture, which makes it easier for you to determine your own pricing. You can for instance, make an assessment based on the competition and in-turn raise or lower your prices, or stick to what your competitors are offering. Penetration pricing, is another market-oriented pricing model where companies use very low prices in comparison to their competitors, as an advantage in order to enter a new market. Once they have successfully entered a market and gained market share, they slowly then start raising the price. This method can be of potential use to certain industries, however can also discourage customer groups that are more focused on pricing in comparison to the availability of the product.
Let’s go through a real example in a scenario where you aim to be the most competitive and get bigger margins.
Below you can see two different ecommerce retailers selling the same Skeleton watch – one of the best dropshipping products for fall 2017. The first one is the most competitive in terms of price, selling it at £185.49. The second retailer sells the same watch at £206.10. So, in that scenario, the first e-commerce retailer can raise the price just below its competitor by setting it £200. This move will bring increased profit margins that lift up the balance sheet and still let the product be the most competitive one in the market.
What are the Advantages of Market-oriented Pricing Strategy?
Market-oriented pricing strategy helps to avoid price competition that can damage the company. If market-oriented pricing is combined with cost-based pricing, not only will it help keep the costs in mind, but it will also take note of where the current competition stands. Additionally, there are many ways to automate your competitive pricing analysis, to make it even more efficient for you. The bottom line here is that if you make sure to do your own competitor research before customers do, you’ll be able to stay a step ahead of them.
What are the Disadvantages of Market-oriented Pricing Strategy?
For companies with smaller revenues, market-oriented pricing might be more difficult to implement, as you require resources, such as tools, money, and staff to implement it. Adding to this, with the market-oriented pricing strategy, you are relying on the assumption that competitors have priced their products correctly. That’s why it’s always helpful to use this pricing strategy together with some other pricing strategies, such as cost-based pricing strategy.
Now that you know well where you and your competitors are, why don’t you take a look at the customers?
Pricing strategy for Ecommerce: Third approach – consumer-oriented
Last but not least, you have to look at your customers to set your prices.
What is Consumer-oriented Pricing?
Consumer-oriented pricing, also known as value-based pricing is a pricing strategy which sets prices according to the perceived or estimated value of the product or service to the customer.
Many questions might pop-up along the way- Who are my customers? What do they expect when they visit my store? What are their motivations when buying products? An understanding of your customer group is important before determining your pricing strategy.
How to do Consumer-oriented Pricing?
To benefit from the consumer-oriented pricing strategy, you need to have an understanding of your customers. Your customer groups might not all be the same. There may be some customers that carry out their fare share of internet research before selecting their preferred store. Or, there might be some customers who are looking for coupons or discount sales only. These customers might be of great potential to your ecommerce store as there’s a great chance that they’re willing to contribute data like their email address for further reductions and discounts, which can be beneficial for your email marketing.
So, for this approach to work well, we can determine that you need to know your customers well, which means you have to know who they are and what they value about your product and what your Unique Selling Proposition (USP) is.
The truth is most of today’s customers are deal-hunters. We already analyzed the reasons at the beginning of this article, but there are still a proportion of customers that don’t care much about the price. This is possible in luxury products. If your customers are among these last ones, you don’t have to force your customers’ attention to the price. So you should avoid deals and offers. What you have to do is focus on improving your brand, set a fixed valuable price and don’t move it if it’s not necessary.
You can use some Neuromarketing tips to optimize your pricing strategy:
- 99 is better than 100. The biggest ecommerce companies use it, so why wouldn’t you? It’s shorter, and it looks smaller.
- The same logic goes for pronunciations. A price that is pronounced shorter seems lower than a price pronounced longer. Thirty-six-twenty-eight dollars ($36.28) is worse than thirty-seven-one dollars ($37.01).
- If your buyers are experts, try to set prices as precisely as possible. They know the small differences between your products, and they will understand why one costs $ 36 and other $ 38. However, if they are not experts, do not make things difficult and just set it at $39.
- I guess you don’t like paying, right? Nor do your customers. Price has to be visible, and don’t oversize it, nobody likes that.
What are the Advantages of Consumer-oriented Pricing Strategy?
There’s no denying that with every step of ecommerce, customer-centricity should come first. Consumer-oriented pricing enhances your customer loyalty. In the case that customers perceive your products to be of high quality- you’ll be able to build brand recognition and a loyal customer following. That’s why if you set a high standard when it comes to the products you are offering, there is a good chance that your profits might increase. Additionally, the customers can trust that your brand will offer them the value that they are paying for.
What are the Disadvantages of Consumer-oriented Pricing Strategy?
Consumer-oriented pricing may take some time and resources to determine. It takes time for you to understand your customers and study them. Only then you’ll be able to truly determine what they consider to be high value and what they are willing to pay for it. Also, often the “high price equals high quality” concept might not be accepted by a segment of your customers. Additionally, you can’t afford to ignore your competitors, as they might start offering similar products for a much lower price, eating up your market share eventually.
Other Types of Pricing Strategies for Ecommerce
- Product Bundle Pricing
As suggested by the name, product bundle pricing is the practice of offering more than one product for a single price. Normally this pricing strategy may be seen with socks, t-shirts, and underwear. Another notable industry where product bundle pricing has been famously used is the gaming industry. Where sales of gaming consoles are normally increased by including a game in the bundle.
Pros: Merchants often use this strategy to create a higher perceived value which can increase the volume of purchases, and lead to an increase in profits.
Cons: It may be more difficult to sell products individually after product bundle pricing, as customers might not be willing to pay higher individual costs for the products.
- Free-plus Shipping Pricing
A free plus shipping pricing strategy is when a business offers products for free, and the customers pay just for the shipping. It is one of the most enticing marketing offers when selling physical products. Ecommerce entrepreneurs who are running their store with a free plus shipping business model generate profit by inflating their shipping prices to incorporate their sourcing and shipping fees.
With this pricing strategy, it is recommended to stick to products that are in the lower range ($4-$10). If you start to offer free-plus shipping on higher-end products your customers might become a bit skeptical. For instance, it might not be the best idea to sell a camera for free and then add a $100 shipping charge when customers check-out.
Pros: The unmissable keyword here is “free”. You will catch the attention of many customers using this keyword. Additionally, it will be a great catch to market through your social media platforms.
Cons: This pricing strategy might only be useful for products that fall in a specific price range, and therefore might not be applicable broadly to your product offerings.
- Psychological Pricing
This type of pricing is used when the marketer aims to connect to the customer on an emotional rather than rational basis. A very common example of psychological pricing is pricing an object at $9.99 and not $10. It’s interesting to note how consumers perceive pricing, and how their purchase behaviour changes accordingly.
Pros: By reaching out to customers on emotional responses you might be able to trigger some impulse buys, through the perception of a bargain or deal.
Cons: If yours is a luxury brand, it may actually be harmful for you to go down from a whole number like $10,000 to $9,999.99.
- Discount Pricing
Businesses use discount pricing to sell low-priced products in high quantities. Customers love discounts, deals, and offers.
Pros: This pricing strategy is useful for driving traffic and sales in the short term. Discounts are also used to reward high volume customers, repeat customers, and to build customer loyalty.
Cons: Customers might associate low prices with low quality, especially when they are not familiar with the brand name. Additionally, if you offer discount prices for too long, you might risk competitors matching your actions. This may in turn make it very difficult to raise prices in the future.
- Pricing Below Competition
As the name suggests, this pricing strategy is based on using competitors data as a benchmark and pricing products below them in order to attract customers into your own store over theirs.
Pros: If you are able to negotiate a lower per unit cost with your suppliers, while at the same time focusing on cutting other costs, you’ll be able to steal customers successfully from your competitors.
Cons: If you are a small scale retailer and don’t have many resources, it can be a hard strategy to focus on, considering the low margins that you will be making.
- Pricing Above Competition
Working in a similar way to pricing below competition, this strategy uses competitors data as a benchmark and consciously prices your products above them, marketing them as luxurious and exclusive to the customers.
Pros: This pricing strategy can end up giving customers an impression that your products are of high quality and more exclusive due to their price.
Cons: If your customers are too price-sensitive or have many other options available this strategy might not work out as well. Customers might also end up seeing you as overpriced if they find the same exact products that you are offering for much cheaper with competitors.
Price Strategy for Dropshippers
One of the great benefits of dropshipping is that you never have to store inventory, or spend time managing it. This saves you ample time which you can focus on selling. Your financial risk is minimised to zero as you don’t have to buy a product until you make a sale. This gives you the opportunity to set your pricing strategy in a way that is most beneficial to make your drop shipping business prosper and for you to earn profit.
There is no single pricing strategy that will fit every type of dropshipping business. However, there are a number of ways that you can improve your pricing and cater it better to your products.
- Your product: The first thing you need to consider is what you are selling. The type of product determines the pricing strategy that can be implemented, as not every product can be priced in the same way. For instance, electronics or certain clothes may sell in higher volume but with a lower profit margin. On the contrary, fragrances and home decor may sell lower in volume but with a higher margin. Pay attention to the product types that you can sell and consider the pricing strategy in accordance with the product source that you have selected.
- Discounts: One tip that might be of use to your dropshipping store is to focus on discounts, deals, and offers. For instance, you can start off by keeping your price high and then once you feel more comfortable in your space you can start offering discounts, coupons, or deals to your customers. Varying the price a bit may also show you how many new customers you can attract at the lower price, and as a result give you a better understanding of the market and the customers.
- Opt for zero/minimal shipping costs: Shipping costs always reduce the profit margin, so it’s always better to focus on the products with no shipping costs as it will be preferred by your customers too.
- Returns: It can be very stressful as a drop shipper or supplier to get products returned. The aim here is to focus on the satisfaction of the customer, so keep that in mind. Knowing how to manage your customers is a sign of a good business. Once the customers know that they can trust your dealings, they will be willing to pay good prices for what you are offering.
- Be open to changes: Change is the only constant. You might not benefit from sticking to the same strategy forever. Try new strategies and explore new areas, especially in terms of your product line. Analyse how different markets react to different pricing strategies. Keep an eye on your competitors and regularly assess your pricing strategy. Once the customers like what they are seeing, they will visit again. If you are providing the customers a good variety paired with high quality products, they will be more willing to pay a good price for it.
- Psychological Pricing: Another great tip for your drop shipping pricing strategy is to mark the price of your product ending with odd numbers. So instead of $20, you can offer $19.99. Customers normally seem to prefer the latter option. You can play around with your pricing and see how well it works for your dropshipping store.
- Customer Service: Pay close attention to the needs of your customers and aim to provide the best customer service. In the end, if you build a good reputation, your customers will be willing to pay a higher price for a better service. It’s about building the trust and working on your relationship with your customers.
- Cheap isn’t always the answer: Simply listing cheap products might not work wonders for your dropshipping business. You need to work on building a reputable image as a dropshipper, and continuing to list your products at the cheapest price may lead to your customers feeling that you offer low-quality products. This may discourage them from purchasing anything at your store.
- Talk to your supplier: Before getting started it is advised to talk to your supplier and share your pricing strategy thoughts with them. By contacting your supplier directly, you can get to know whether they have any pricing recommendations for you, which are more specific to the type of product that you are selling. You may not always end up with a pricing strategy advise or tip, but you will improve your relationship with your supplier which can help in the longer term.
In dropshipping, you get to choose what type of products you will sell. If you want higher-profit margins, you can decide to focus on high-end products. But keep in mind that your pricing strategy depends on the type of drop shipping business you decide to pursue.
Pricing Strategy for Ecommerce Should Involve the Full Organization
As you have seen throughout this article, pricing is a decision that has a lot of factors to take into consideration. The company itself, competitors and customers are the three top areas to think about. I don’t think there is a single person in your business that is an expert on all three. So take advantage of the fact that a group makes better decisions than a single isolated person, and make pricing a strategic decision that involves the full company.
If you nail your pricing strategy for ecommerce your conversion rates will rise, and your company will be more efficient.
Besides, you will have a better knowledge of your business. Mix the approaches mentioned above and set the prices as they should be set. Also, you will see the the effects of fine-tuned pricing strategies in your marketing results. Good luck!
Want to learn more?
- How I launched my eCommerce store in less than 30 minutes (with products)
- 25+ Best Price Comparison Websites and Apps You Need to Try
- Comparison of the Best Email Marketing Platforms for eCommerce
- Top 15 Free Shopify Apps You Need to Install
Is there anything else you’d like to know more about and wish was included in this article? Let us know in the comments below!