There is a lot of competition in the e-commerce business industry as it provides everyone with various entry-level options available in the market, like Amazon, eBay, Shopify, etc.
And pricing in the e-commerce business sector is the most significant that drives sales as customers are basing their purchasing decisions on the quality, benefits, and features offered by your products, your customer service, and ease of the customer journey.
Particularly, for an e-commerce business, success or downfall can depend on the product price. Various brands offer the product that you are selling, what makes yours stand out? How are your products that indispensable? Quality is important, but if you don’t set the product prices correctly, no one will be able to purchase it to appreciate the product. Thus, pricing is a major factor for any business, and setting the right price is not an easy task. To solve this problem, you will need to have a pricing strategy.
In this guide, we’ll walk you through what is a pricing strategy, the various kinds of pricing strategies, how to choose a pricing strategy that works for your business, some examples of e-commerce pricing strategies, and what are the factors that affect them.
What are pricing strategies in e-commerce?
First things first, let us look at what is pricing strategy before diving into the different types. Because pricing is simply selecting a price and then using it to retail your product.
By definition, a pricing strategy is designed to help the e-commerce business owner determine the price that will be maximizing that business profits while enticing the customers to purchase. It is essentially a logical equation that establishes the best price for your product.
Although it may seem like a complicated and time-consuming process, it is very crucial. If you shoot in the dark, hoping for the dart to hit the bullseye, it is not going to work. Choosing a random number out of nowhere and keeping it as your price for the product is not going to help you in achieving your goals and could potentially lead to the downfall of your e-commerce business.
Furthermore, it is dangerous to price your products too high or too low; if set them too high, you won’t get sales, and set them too low, you won’t make a profit.
Thus, an e-commerce pricing strategy is vital. And as an e-commerce business owner, you should consider the best pricing strategy for your audience.
Download the ebook!
In a hurry? Don’t worry, we got you covered. Download the ebook version of this page and read it anytime!
Pricing strategies for e-commerce businesses
There are various types of pricing strategies for e-commerce businesses. Here’s a list of the most popular ones:
- Cost-based pricing
Cost-based pricing is a strategy that is based on the cost of production, manufacturing, and distribution of the product.
Here, the company is required to note down its unit product costs for each product in its catalog and then set a target profit margin for all those products. The formula will be:
(Material cost + Labor cost + Overhead costs) x (1 + Markup) = Price
Although this strategy is too on the nose, it is quite shocking to see some e-commerce businesses even faulting with this one and are unable to apply this properly. The crucial task here is to come up with a profit margin that ensures maximum profits without being too obvious to the customers and putting them off. And this brings along two risks: either pricing your products too cheap will undervalue them or pricing them too expensive and people won’t be able to afford your products. And these risks can falter this strategy because it ignores competitors’ prices and the customer’s willingness to pay.
For instance, if you are selling diamond jewelry, you should be aware the customers will not care about the low prices. Thus, a fatter profit margin will be valid. But the same approach in the electronics industry will yield zero sales because the competition is too hard and there are identical products available. Here, the profit margins are slim.
Therefore, rather than pursuing a cost-based approach to pricing, focus on ensuring your costs are calculated according to the pricing strategy you pursue.
For example, when you’re selling a diamond neckless, you know that the buyers don’t care about low prices. So, a fatter profit margin could still hold valid.
However, the same approach would yield zero sales in the consumer electronics industry, where the competition is harsh and the products are identical. There, the profit margins are slim, and the players with relatively high prices do not have much chance in the market.
Rather than pursuing a cost-based approach to pricing, you must make sure that your costs are calculated in every pricing strategy you pursue.
- Market-based pricing
There is no industry or a market without a competitor. And to be aware of the workings of your competitors is of utmost importance.
As mentioned earlier, customers care about the price and they will go above and beyond to compare prices and purchase products at the cheapest rate. Thus, your pricing cannot be too far from the price of the market- neither too expensive nor too cheap.
And when your price is based on the process of conducting market research to fix your product prices, it is called a market-based pricing strategy.
Here, you don’t undercut your competitors and lower your prices so much that your profit margins are thin like paper. This is a risk though, running the pricing to the bottom of the barrel, therefore, hampering your business. But one of the most overlooked benefits of market-based pricing is that it will sometimes grant brands opportunities for a good price increase where you can increase profits and hold a competitive edge at the same time.
For instance, if retail understands the opportunity through a competitor price analysis software and adjusts their price just a tad bit lower than its competitors, they’d increase their profit margins as customers will be inclined to purchase the cheaper option.
- Dynamic pricing
Dynamic pricing is an e-commerce pricing strategy that is profitable; here, the marketers set flexible prices by taking into account the demand of the markets, your costs, the target profit margin, and the prices set by your competitors. Essentially, it allows you to set optimal prices at the right time that is in tune with real-time demand and competitor assessment, all while accounting for the business goals.
This can be put on auto-pilot as well, with the help of a dynamic pricing engine. Having data and information is important but what’s crucial is to use that data to your advantage. Dynamic pricing and the subsequent software collect competitor prices and adjust your prices accordingly and that too immediately. Then, technology helps you test different price points and reprices to help you in a position you want your business to be in.
The repricing software works all day and constantly fluctuates your prices according to the standards of the market and based on the goals you have for your business. When you can react to every single change in the market quickly, your prices will stay competitive and optimized. With this mix of repricing ability and competitor knowledge, your e-commerce business will maintain that competitive edge in the market.
A company that uses dynamic pricing is Uber. Just try to get an Uber on a Friday night and you’ll notice the price being higher than normal, that’s because Friday night is the beginning of the weekend when people would prefer to be out and about, without worrying about driving back home. So competitors will hike the prices to try and achieve maximum profit margins and Uber to gain that edge, will do the same and reprice constantly. That is dynamic pricing.
- Consumer-based pricing
Your e-commerce business should be customer-centric and that be its priority. So when you are pricing your products, you should be able to answer these two questions:
- Who are my customers?
- What value do I bring to them?
Once you answer these questions and understand your audience, segment them. Identify who’s most likely to purchase your products, further divide them into groups to target them with right products and prices. Monitor real-time data and purchase history to identify customer segments accurately. And once you finish this segmenting, focus your attention on their willingness to pay for your product.
This pricing strategy can be applied in different geographical markets where supply and demand cycle is biased toward the sell and the customer may pay more than another one from some other place. The customer-driven pricing strategy works well for products that appeal to the customer’s emotional needs and are in niche markets.
- Bundle pricing
Product bundling is a simple concept- you sell a range of products together at a discounted rate.
For instance, when you are purchasing a product like a mobile phone, there are some mandatory accessories you’ll require- compatible headphones, a protective case, a screen guard, and maybe a phone charm to personalize. Thus, bundling these products and selling them can help increase your average order value since customers will already be browsing for similar things.
For example, McDonald’s combos are an example of bundle pricing. A medium burger, fries, and drink meal does have a lot more appeal than purchasing the items separately and this is because of two reasons- customers won’t have to rack their brain for each individual item and the price of a combo meal will be relatively cheaper than purchasing all those individual items together.
The appeal will increase the average order value, the ease of customer purchase decision will ensure customer satisfaction and you will still be able to make a profit despite the lower price of the combo meal if the volume ordered were enormous.
- Penetration pricing
Penetration pricing is a marketing strategy, actually. Here, when a business enters a new product market, they’d do so with below-average prices. This strategy can also be used when highlighting their new products or services.
It works in a very simple manner where the businesses will set their prices lower than that of the competitors to entice costumes to move from other businesses to theirs. Other advantages include high adoption and diffusion where the company is quickly accepted and adopted by the customers. Since the competitors are caught off guard by this pricing strategy, they’d not have much time to react, allowing the business to assert marketplace dominance. You can also expect a high inventory turnover.
On the downside, customers will always expect low prices. And if the prices gradually increase, customers will become dissatisfied and no longer interact with your business. It can also damage brand image as being cheap or have poor quality. It can sometimes not be an efficient long-term plan because having a lower price is not a viable option.
- Price discrimination
Price discrimination is a specific approach that is tailored to e-commerce pricing, where an identical item is sold by different buyers at different prices. And this works on three levels:
- First degree: Here, customers are charged the maximum they’d be willing to pay. This is for auction or bidding sites like eBay.
- Second degree: Now, customers can choose their price discrimination. For instance, if they purchase a higher quantity of the product, then they’d be offered a lower price.
- Third degree: Here’s where products are priced differently based on customer segment.
Essentially, it is involved in assessing past and real-time customer data and generating prices specific to each customer segment.
Some advantages include bringing more revenue for the seller as it gives the business a chance to increase its profit more than when charging the same price for everyone. It also helps in lowering the price for some customers and it also regulates the demands of the customers.
However, there are certain disadvantages to this strategy as well. It reduces customer surplus and lowers product choices.
- Loss leader pricing
The loss leader pricing strategy focuses on setting a few products to be sold at a lower price- a price that actually puts the business at a loss- to get potential customers to visit our e-commerce store.
Once customers are on your site, Loss leaders will hope that the customers will also purchase normal priced items in your catalogue.
For instance, an electric toothbrush costs $110. And manufacturing costs aside, most of the profits generated comes from the sale of replaceable toothbrush heads.
People don’t often buy electric toothbrushes, so brands sell them at an affordable price (at a loss to the company) to entice customers because the idea is to offer them accessories that will need to be changed regularly to maintain good oral hygiene and recoup their lost profit costs.
Therefore, when implementing the loss leader strategy, you should consider whether you have any add-on products that you can sell to people when they come back to your e-commerce store to make that supplementary purchase.
- Price skimming
In its essence, price skimming as an e-commerce pricing strategy is the art of setting high prices for your products when they are first introduced, meaning that business can leverage this “newness” of their product and profit from it from the get-go.
Here, you need to remember that in price skimming, there are customers who want to be the first ones to purchase a product because they’d like to feel that exclusivity. Therefore, when implementing this strategy, target the customers using phrases like “limited model”, “exclusive offer”, and “be the first one to get this” in your marketing and advertisement copies to highlight that urgency and exclusivity.
Apple is the prime user of price skimming. During their run-up to a new iPhone release, there will be rumors even before the official announcement. And by the time the announcement is actually, there is a desire and excitement to purchase the brand-new iPhone first.
The fans of this tech company will camp outside the store to be the first ones to get their hands on the newest model they are offering. This can be seen with even OnePlus where they maintain this desire for exclusivity.
- Competitive Pricing
If a brand uses a competitive pricing strategy, it is paying microscopic attention to the conditions of the market in real-time to determine their prices. It aims to offer the lowest prices possible to entice the customers. And encourages higher volumes in sales rather than high pricing.
An example of this would be the grocery giant Costco where you’ll receive discounts on almost every item, starting from bread to meat to liquor. Seeing discounts and lower prices than the competition, customers are enticed to purchase from them. And once they are on the website, browsing, they are likely to spend more than they intended to because Costco offers great deals on products that customers find unmissable.
Additionally, their loyalty program also heavily contributes to their large sales volumes and high profit margins.
- Value-based pricing
Value-based price means to set a price that focuses on how much the customer believes the worth of the product should be. It is an outward approach where it takes the wants and needs of the targetted market into consideration.
This is different than the cost-plus pricing which takes the cost of the product into account. Here, companies that sell unique or highly valuable products are better suited to benefit from value-based pricing in comparison to the ones that sell everyday, commodity items.
Customer care more for the perceived value of the products and will be willing to pay more from them. For this to work in your favor, you product and business as a whole should’ve a solid brand, high-quality and in-demand products, creative and enticing marketing strategies, great customer services and an exceptional track record.
The advantage of this pricing strategy is that you can command higher prices for your items and it also pushes you to innovate and create unique products that resonated with your target audience and market. But the disadvantage lies in the fact that you are selling commodity products, it can be challenging to justify the added value.
Value-based pricing is common within brands that enhances the customer’s self-image or provide a unique life experience. For instance, luxury brands like Gucci produce products and offer services that are different from their competitors.
- Keystone pricing
Keystone pricing uses a very easy rule of thumb where a retailer determined the price of the product by simply doubling the wholesale cost they paid to procure that product to set a healthy profit margin.
You can use this formula to set your retail price:
Retail price = [cost of item ÷ (100 – markup percentage)] x 100
If you have a slower turnover for your products and have substantial shipping and handling costs, or have a exclusivity aspect, then you may sell yourself short with keystone pricing. In such a case, a selling could likely use a higher markup formula to increase the price for these products. On the other hands, if your products are standardised and commoditized, then using this pricing strategy can be challenging.
An advantage of using the keystone pricing strategy is that it works in a quick-and-easy manner because a simple rule can you make ample profit margin but the disadvantage is that depending on the demand and supply of a particular product, it may be unreasonable for a retailer to simply markup a product so high.
How to choose a pricing strategy
Your pricing strategy depends various factors such as your target audience, their spending behavior, what are they willing to pay, and what is the price range offered by your competitors for similar products. It is a practice where retailers test and change their pricing over timer due to variable like customer demands and the conditions of the market.
Let us look at how to design the pricing strategy for your e-commerce business.
- Refine your ideal customer profiles
An ideal customer profile is a hypothetical description of an ideal customer that would benefit from the solution provided by your product and in exchange, will provide your business with significant value. This helps improve your e-commerce business overall- right from price setting to customer experience, ensuring all the parties involved are satisfied.
Here, the marketing team should couple up with the sales team to develop the ideal customer profile and define vital information that should be available and set up as mandatory factors for the customer database.
The factors should include their overview like gender, age, etc.; their motivators to purchase the product and the pain points. This will help you figure out how much the price of the product would be and if it is crucial and accessible for the customers.
- Identify ideal traits
Your ideal customer should be in a position to purchase your products, in terms of finance and desires. Ideally, you should create a ground where you want them to be a profitable, growing business and big on networking, so that they can highlight your virtues and values to others.
e-commerce businesses that are just launching or recently launched can use the market data to inform the profile, while businesses that have been around for some time will already have a proper list of customers who ranks high in value and loyalty.
- Research your target market
You can extract data from your existing customers through interactions and figure out what makes them an overall good customer and how they are a good fit for your e-commerce business.
You can invite them to talk about how is your service different and why they value it. Don’t conceal your reasons for asking- let them know that your intentions lie in improving your business and that their opinions are powerful and valuable. Furthermore, you can also offer them an incentive for participating.
Make most of the negative feedback as well. If the interaction didn’t go well, just analyze the customer data to find common themes and work upon them.
- Build a behavioral profile
Now, using the data from the above two points, you now identify their behavioral patterns. Be on the lookout for information about the type of high-value customers you want to attract.
Build their profile around their needs, connection (emotional and mental) with the brand, and their responsiveness. Additionally, factor in their preferences such as the social media platform they like and use the most, the sales channel they prefer as well as the communication channels for interaction.
Having all this data and information, you should have a clarity on who your ideal customer is and what is their environment, motivator, pain points, and requirements. Now, use this ideal customer profile to analyze potential customers by finding similarities between both to ensure happy and satisfied customers all around.
- Solidify your unique selling proposition
In such a competitive industry, it will prove to be difficult for any e-commerce business to be completely unique. However, making at least one factor of your business effectively and sufficiently different from your competitors is the key to finding that unique selling proposition.
A USP is a point that makes your products or brand (overall) stand out and gives the customers a reason to choose your brand and products that of your competitors. It could be the way you communicate your business vision and values, offering exceptional customer service or enhancing the quality of the product, anything that could be a unique benefit to your e-commerce business.
For instance, you can sell limited-edition items or a better version of the product than those sold by your competitors. Additionally, you could stay ahead of the curve through the brand vision and value through donating and supporting a charity or committing to a more environmentally sustainable manufacturing.
Once all your company’s departments have clarity on the USP, it will be easier to draft your pricing strategy. If your particular product or branding cannot be seen anywhere else, you can charge for that. But remember to keep the pricing of your competitor and niche industry in mind.
- Study customer behaviors
Buying habits and the factors that influence their purchase decision make up customer behavior. When you assess these habits and behavior, you can align your business with the mindset of the customer.
In the e-commerce business industry, customer behaviors are rapidly changing. Demands come at an increasing speed and they are met (by efficient sites that offer next-day delivery) which brings difficult challenges for retail inventory management.
People love shopping online because of the efficiency and convenience while products are available for lower prices. These days customers are savvy for finding deals and discounts and might abandon their purchase with you before checkout if they find another site selling the same item at a cheaper rate.
There is a phenomenon known as psychological pricing- people are happy with $9.99 but $10.00 will psychologically block them from making the purchase. Here, you have to price your items to ensure that the customers’ psychology doesn’t hinder their purchase decision.
For instance, if you offer two similar skirts at the same price, customers may find it difficult to choose one. But if one out of the two is even slightly cheaper, it can influence their behavior to pick the cheaper item since it would be a comparative bargain. Along the same lines, if you place premier/premium products near cheaper option, you will create a sense of value for your customers.
Examples of e-commerce pricing strategies
Let us go through some examples of a select few types of pricing strategies discussed above:
- Competitive Pricing
When you think of competitive pricing, especially in the last couple of years, Fashion Nova- an American fast-fashion retailer- and their excessive influencer marketing strategy comes to mind. However, they didn’t simply rise through the ranks within the e-commerce fashion industry only because of their marketing. It was also their pricing strategy i.e. competitive pricing.
Here, customers are encouraged to purchase products at total price because most of their products retail for less than USD$50. Even their “premium” products won’t burn a hole in your pocket- you can buy a trendy dress for just $80.
How is this different than brands like Forever 21? To be completely honest there isn’t much of a difference. But that becomes the point of focus- there isn’t much of a difference but what made the biggest impact on the success of Fashion Nova over brands like Forever 21 is accessibility and affordability.
- Price skimming
This is a strategy that is frequently employed by tech companies. And one worthy of mention is Apple- the most famous use of the price skimming strategy.
Apple focuses on creating and offering a limited number of high-end products and producing that halo effect around the product that entices the customer to get new products. And once the first round of customers have purchased the goods and competitors emerge with similar products, they drop their prices.
For instance, back in 2010, when the iPad was first released, it was a completely new and revolutionary product for the time. And a 64GB variant would’ve cost you $699. But now, a over a decade later, you can purchase a 64GB version of an iPad (amidst a market that offers a variety and range of tablets to choose from) for just $329 (which is almost half of the 2010 version).
- Penetration pricing
One of the most famous users of penetration pricing is Netflix. Back in the late 90s, when Netflix launched, its competitor was everyone’s beloved Blockbuster. And while everyone loved to rent a movie from the legendary and now forever-closed business, it had some drawbacks like the high rental fees. For example, it cost $4.99 for a three-day rental, and additional late fees were charged.
Now Netflix when it entered the market, it penetrated the space by offering lower prices and eliminating late fees like for $16 per month, one could rent four movies. And once Netflix was preferred by everyone and inevitably lead to the decline and closing of Blockbuster, the former was able to raise its prices to profit off of the lack of competition and have higher profit margins.
Factors That Affect Your E-commerce Pricing Strategy
It doesn’t matter if your e-commerce business is large, medium, or small, there are factors run across the scale that influences the pricing strategy of a business.
1. What Are Your Costs?
You need to understand and analyze the manufacturing costs, labour costs, marketing and advertising costs, shipping costs, and maintenance costs when you determine and establish your e-commerce pricing strategy.
If you want your product to be profitable and your e-commerce business to succeed, your pricing must be of an appropriate amount that covers the aforementioned costs and gives you a profit too. You need to change and scale your economics and finance as your company grows and market changes.
2. What is a Fair Price?
As we mentioned earlier, in any case, if there are two products that same they will choose the product that is priced lower than the other. However, there is a difference between a “low” price and “fair” price.
Lower-price products appear affordable and motivate the customer to choose your product over the one offered by your competitor. Fair prices can be achieved when your products have that edge over the ones sold by your customer- this “something extra” can entice your customer to choose you over your competitor. Additionally, this will also justify the fair pricing.
Thus, a unique selling proposition is important.
3. What Price is Relative?
Your pricing strategy will be determined by specific factors, the most important one being the evaluation of the prices set by competitors in your industry. You need to research their prices, and what they offer as a whole including the tangible and the intangible. Once you have an assessment of this data, you can establish your prices in a relative manner to theirs.
For instance, if you sell curtains and your USP is that the curtains ensure complete blackout, you can charge extra for this over your competitors who do not sell blackout curtains. If your competitor is selling luxury leather belts over the belts you sell, made using rexine and faux leather, you will have to charge lesser than your competitors. This is relativity applied in pricing strategies.
Now that you have understood the nitty-gritty of drafting a pricing strategy, next stage is actually drafting it. However, there is no single equation that can help you work out the ultimate best pricing for your products. Just ensure it works best for your business model.
Tools to Ace your E-commerce Pricing Strategy
Implementing competitive pricing is crucial for e-commerce businesses in Southeast Asia to attract and retain customers, and thrive. Here are some tools that can help you monitor and offer competitive pricing strategy:
- Price2Spy: Price2Spy is a comprehensive price monitoring tool that allows you to track competitors’ prices in real-time, helping you adjust the price of products on your online store accordingly.
- Prisync: Prisync is a Shopify add on that provides competitor price tracking and dynamic pricing suggestions to help you optimize your prices for competitiveness.
- RepricerExpress: RepricerExpress is an e-bay repricing tool that automates price adjustments based on your predefined pricing rules and competitor prices.
- Price Intelligence Price Intelligence provides competitive intelligence and pricing data to help you make informed pricing decisions.
- Competera: Competera uses AI-powered pricing algorithms to optimize your prices based on competitor data and market trends.
- Wiser: Wiser offers dynamic pricing and competitive intelligence solutions to help e-commerce businesses adjust their prices in real-time.
- PriceMole: PriceMole provides price monitoring and tracking tools for Shopify and BigCommerce stores to maintain competitive prices in the market.
When you put in the work and draft your pricing strategy in a well-informed manner, it will reward you. We have discussed common e-commerce pricing strategies and presented you with their pros and cons, so assess them carefully and determine which one works the best for you and your business goals. It is not necessary to simply choose one and stick to it like glue, you can combine elements from different strategies if it suits your business model- for instance, you can combine market-based and dynamic pricing.
But when implement any e-commerce pricing strategy, ensure to test and gain insight into the consumer response and behavior to understand the success rate of the price points you have set. The correlation between the customer experience and pricing strategies is imperative and if you risk getting it wrong, you’ll never hear from these customers ever again. But get it right and you’ll have satisfied your customer and they’ll remain loyal to your brand.
We hope that this guide has provided you clarity regarding pricing strategies. So get out their, start analysing and assessing the key points and set yourself a pricing strategy that can ensure the success of your e-commerce business.