Effective pricing strategies are essential for any successful e-commerce business. Discover how to set the right price to attract customers and maximize profit on our E-commerce Pricing page.
What is an E-commerce Pricing Strategy?
The world of e-commerce is a multi-dimensional entity. This means enterprises that are present in this sphere must take care of a variety of factors to truly succeed. One such essential factor is e-commerce pricing.
As the name suggests, e-commerce pricing refers to the price sellers assign to different goods and products. Pricing in e-commerce is a deciding factor in how far a business can grow and expand successfully. Hence, companies have to come up with e-commerce pricing strategies that not only assure profit but also help bring in customers.
So, in a nutshell, pricing strategy for e-commerce refers to the methods sellers use to price their goods. These methods depend on production costs, average order value, revenue goals, etc. It is essential to develop an optimized pricing strategy since goods that are too costly will result in cart abandonment, while goods priced too low will yield loss.
The importance of having a defined pricing strategy:
As already mentioned, e-commerce pricing strategies play a quintessential role in the growth and development of any company. Here are some of the main reasons why, as a business owner, you should have a defined pricing strategy:
- A customer often perceives the price of a product as its reliability. Hence, with a defined pricing strategy, you can make your buyers understand that your goods are reasonably priced and reliable instead of being overpriced or underpriced and, therefore, unreliable.
- A good e-commerce pricing strategy will enable businesses to find the right balance between gaining customers and making a profit.
- Since there are different e-commerce pricing models, businesses can pick the one that suits their needs best and has an optimized outcome.
Pricing Strategies for E-commerce Businesses
A wide variety of pricing strategies and models are available for use by e-commerce enterprises. These strategies and models are based on different factors but help scale businesses. Here’s a list of the best pricing strategies beneficial to e-commerce businesses:
- Value-based pricing
Value-based pricing is one of the most common e-commerce business strategies in use. Enterprises use this model to price their products based on how much customers value them.
For instance, imagine you are a brand selling televisions that is about to release a 65-inch TV on the market. Your sole competitor recently released 60-inch TV for the price of $899 in the market.
- To build your value-based pricing strategy, you must first identify the features that differentiate you from your competitor.
- Then, you have to comprehend how much your target audience would likely pay extra for the unique features you offer that are not present in your alternative.
So, in this instance, since the only difference between the two televisions is screen size, you can price your 65-inch TV $150 higher based on that.
While value-based pricing works well in most cases, it requires much research and analysis.
- Price skimming
If what you sell is one of a kind, then price skimming is the right e-commerce pricing strategy for you. In a price skimming model, companies charge a high price for their innovative and unique product. However, when competitors begin to emerge for the same product, the company lowers its price to keep making sales and profits.
This is a kind of dynamic pricing for e-commerce enterprises that changes based on evolving market trends. Tech companies mainly implement this type of pricing strategy. If you plan to employ this model, make sure the product you are about to release is worth buyers shelling out for.
- Penetration pricing
Like price skimming, penetration pricing is another example of an e-commerce dynamic pricing model. However, it has the exact opposite mode of operation. This pricing model is designed for enterprises entering an already competitive market. Hence, in this pricing strategy, the enterprises have to set their initial prices low to result in sales.
Eventually, they can increase their price once they have established the reliability of their product. One risk associated with this strategy is that if a company makes its product too cheap, customers might equate it with poor quality.
- Bundle pricing
As a business owner, you might know the benefits of cross-selling. Bundle pricing is an e-commerce website pricing strategy wherein multiple products are sold simultaneously. While bundle pricing has a high risk of ending up in a loss, if done correctly, it can not only generate profit but also upsell different goods your company manufactures.
- Psychological pricing strategies
Nothing guarantees a profit like tapping into the psychology of buyers and pricing goods accordingly. A classic example is pricing goods at $9.99 or $1.99. Since the 1880s, it has been recorded that the price of goods that end with odd numbers tends to attract more buyers and result in successful sales.
Another way to employ psychological pricing strategies is offering the option to pay in installments. This makes buyers think they are spending less, even though they are spending the same amount, just over an extended period.
- Anchor pricing
Best described as a form of psychological pricing, in anchor pricing, enterprises add a lowered price for any item while making sure the original higher price is visible to the customers. This gives a positive impression to the customers, who can visually see how much less they are paying. Needless to say, this technique will most certainly drive up sales.
- Specific Pricing
Customer-specific pricing is usually a part of b2b e-commerce pricing strategies. In this case, different price points are applied to the same product based on the customer it is sold to. This allows businesses to customize their pricing plans and generate loyal customers.
How to Choose a Pricing Strategy
Now that you know about the different e-commerce fulfillment pricing strategies, you must be curious about choosing one model effectively. Here is a quick guide to help you understand:
Refine your ideal customer profiles
Pricing e-commerce goods starts with a better understanding of who you want to sell to. Even though most companies already have customer profiles, refining that and pinpointing the market segment they want to serve is essential. Building an optimized customer profile helps you gain better insight into your target audience and choose the correct pricing strategy accordingly.
To refine your customer profiles or build one, follow these steps:
- Understand your target customer demographics and their needs,
- Analyze how your target customers are interacting with your brand,
- Apart from collecting data, it is also essential to collect actual customer feedback to understand your audience better.
Identify ideal traits
It will be much easier to build your e-commerce pricing strategy if you can identify your best customers. To do so, look for customers who have generated the highest profits for you. Additionally, some other traits worth considering are frequency of product usage, the longest time associated with your brand, highest growth potential, and so on.
Once you identify these ideal traits and the best customers, you can group them up and analyze them to understand which pricing factors from your side are common to all. Consequently, you can employ that pricing strategy on a large scale.
Research your target market
Needless to say, it is essential to research your target market before you set a pricing strategy. The current landscape of the market determines which pricing model you should implement in your enterprise. For instance, the penetration pricing approach is ideal if you are about to enter an already competitive market.
Build a behavioral profile
Building a behavioral profile is integral to creating a refined customer profile. For any business, big or small, it is essential to understand how customers interact with your enterprise. It includes understanding how your buyers interact with your business and what they like and don’t like. Of course, information related to this will play a massive role in how you model your pricing strategies and plans.
Solidify your unique selling proposition
More often than not, customers are attracted to unique selling propositions. A unique selling proposition or USP is the critical factor that sets your business and products apart from your competitors. This could be a tagline, using quirky names for your products, and so on. Once you have solidified your unique USP, you can build your pricing strategy.
What is a Discount Pricing Strategy?
Another type of pricing strategy in e-commerce is the discount pricing strategy. This is a commonly used pricing model employed by big and small brands. In this model, enterprises sell products at a discounted or lowered price rate. This helps in more sales and increases customer loyalty.
One of the key advantages of a discount pricing strategy is that it not only helps retain old customers but also ensures brands can become more visible to new customers. Consequently, profits increase, brands get better exposure and visibility, and their products reach a wider audience.
The Common Types of Discount Pricing
There are different types of discount pricing that companies use. Some of them are discussed here:
- Seasonal discount: This type of discount does not last all year long uniformly and is customized based on the seasonal needs of any concerned product. For instance, enterprises selling air conditioners offer heavy discounts during the winter months. Since the demand for air conditioners is less during winter, attractive discount prices can attract customers and keep sales from sinking.
- Quantity discount: As the name suggests, this type of discount pricing is applied when customers buy various kinds of goods together. As you already saw in bundle pricing, quantity discounts help upsell and cross-sell products and generate more sales, which results in profit.
- Promotional discount: This discount pricing involves temporarily lowering the value of any item to attract more customers. This tactic is used to promote any new product in the market.
- Trade discount: This discount applies to the mediators in business structures. For instance, you can give special discounts to wholesalers who buy from you in bulk and sell those items.
- Cash discount: In this plan, sellers reward the buyer for any specific purchase activity. For instance, some businesses provide cashbacks if buyers purchase something within a stipulated time. This ensures faster payments and hence, more money for enterprises to invest elsewhere.
The Psychology of Discounting
Discounting pricing always works, and the reason for that is purely psychological. A recent survey conducted in 2021 had the following findings:
- Almost 70% of millennials actively seek better deals before they finalize any purchase.
- 48% of buyers said they wouldn’t buy from a brand that doesn’t offer discounts.
- 2/3rd of the buyers said they would most definitely buy something from a brand if they have a coupon for it, even if they initially did not plan to buy anything.
- 80% of the buyers said they’d be ready to try a new brand if the said brand was offering discounts.
Here are some discounting strategies that positively affect the psychology of buyers:
- Along with discounting, create an urgency mindset. This will make buyers think discounted items are scarce, and they will make quicker purchases.
- Use a percentage discount for items below $100 (for instance, 10% off). On the other hand, for items above $100, use the dollar-off discount method (for instance, $200 off).
- Keep the discount math simple, so customers can easily calculate how much they have to pay.
- End your discounted prices with .99 for more sales.
Discount Strategies and Tactics: Top-performing Discounts You Can Use Today
Here is a quick guide to the discount strategies and tactics you can use to drive sales and growth:
- Discount codes
Discount codes are unique codes that, when typed in, result in a certain discount percentage. These are beneficial, as you can limit the usage of discount codes to only once and also put a specific duration on it, to maintain your profits and also have higher purchase frequency.
- Abandoned cart discount
An abandoned cart is a recurring issue faced by e-commerce sellers. To avoid this, you can entice your customers by sending them promotional emails giving them some form of a discount on the goods abandoned in their cart. This greatly improves sales turnover rates.
- Flash sales
Flash sales are a great discounting tactic, as it creates a sense of urgency among the buyers. Buyers will think the item they want to purchase will run out soon and immediately buy the products you are offering.
- Free gift with purchase
All buyers are delighted with free gifts. Hence, you can offer a free gift instead of giving a discount on any product. Even this will drive up sales and help you gain more customers.
- Free shipping if you spend over X
Most customers these days prefer free shipping. However, if enterprises begin to ship all kinds of products for free, they might incur heavy losses. So, you can offer free shipping to those who spend over a certain amount. This will gain customers and also maintain your profits.
- First-time customer discount
The best way to attract new customers to your website is by offering first-time customer discounts. These discount sales always work and help in successful turnovers.
- Tiered discounts
In tiered discounts, multiple pricing plans are put in place, and the customer gets to decide which tier they want to be in. For instance, an enterprise can offer 5 t-shirts for ₱250 each and 6-10 t-shirts for ₱200 each. The biggest advantage of this model is that it stimulates customers to buy more.
Discount pricing strategy pros and cons:
While discounting pricing strategy for e-commerce is most definitely a good idea, it also has some cons. Continue reading to learn more about the pros and cons of discount pricing strategy:
- Customers make faster purchases when offered discounted prices. This is very beneficial for enterprises, as it helps drive sales and revenues.
- Discounts result in improved conversion rates. This is because you can offer discounts on abandoned carts as well, and hence, turn them into successful purchases.
- Discounts attract more buyers. Hence, you will become more visible in the market and attract more buyers.
- When customers buy a product at a discount, it reduces their willingness to pay the actual price for that exact product later on. This can lead to lowered sales for particular goods.
- Discounts also bring in one-time customers who don’t plan to make future purchases from your business.
- It is challenging to model and analyze a steady growth model with a discount pricing strategy. This is because customers who make purchases from you due to discounts tend to be one-time instead of recurring.
Combining E-commerce Pricing Strategies When Needed
Essentially, while making your e-commerce pricing strategy, you will have to use different pricing models to develop an optimized pricing plan. It would be wise to combine different pricing strategies instead of employing a particular one. For instance, you can combine bundle pricing plans with tiered discounting to give your buyers the best deal.