What Is a Pricing Strategy for eCommerce?
A pricing strategy is the art of setting the right price or value for a product or service to increase profits while staying in the competition. This strategy helps you decide what your product is worth. A product or service with a higher price may ultimately lead to a loss of market positioning while one with a lower price isn’t always the best as it may bring in fewer profits. So, pricing strategy is a well thought out plan to accurately price the product to gain maximum profit while staying competitive.
Choosing a Pricing Strategy for Your eCommerce Store
It is imperative that you choose the best pricing strategy for your eCommerce store to stay competitive. Your pricing strategy should be based on your knowledge of the cost of production, customer trends, revenue goals, funding options, and competitor product pricing.
A pricing strategy can be correctly determined if you have a good understanding of cost. It involves accurately figuring out the costs involved in the making of your product to its release in the market. If you order a product, all you need to do is calculate the cost per unit to find the cost of goods sold. Similarly, if you manufacture a product yourself, find out the cost of the entire process like the cost of goods sold, production time, packaging, promotion, shipping, etc.
Having a Defined Commercial Objective
Determining your ultimate goal for the product can help you with better product pricing. Treat your commercial goal as your company’s pricing guide. This will help you make better decisions when it comes to product pricing. It is important to identify your objectives for the product to keep going in the right direction. For example, what are your expectations from the product? How do you want people to view your product? Brands that create luxury products price them differently. Are you looking for your brand to have that vibe of luxury? Is something minimalistic and chic like Ikea your commercial objective? Figuring this out will ultimately lead to the product price being affected.
Identifying Target Customers
Though profit margins are important, it is equally important to identify your customers. You should know your target audience that is willing to pay for your product. Keep in mind their disposable income. Potential customers help you build a brand. Knowing your customers better goes a long way in keeping the sales up and bringing in a profit. This helps you resonate with the target customers better and come up with pricing that works in the favor of both parties.
Finding a Value Proposition
Your price reflects the unique quality you bring to the market and determines whether you stand out among your competitors. A value proposition is your testimony of the product that you promise to deliver to your target audience. This is what attracts customers to your product. It should be specific, pain-focused, and exclusive. Once you have figured this out, pricing the product becomes easy.
Types of Pricing Strategies
After figuring out how to choose a suitable pricing strategy, you must determine the type of pricing strategy that is best suited for your product. There are 7 types of pricing strategies for small businesses:
Cost-plus pricing is the simplest of all the pricing strategies. It is also known as mark-up pricing. You manufacture a product, add all the costs (material cost, labor cost, shipping cost, marketing, and overhead costs) then add a marked-up percentage and sell to the customers for the total.
Cost-plus pricing is easy to calculate. If all the costs remain the same, it provides consistent returns.
The downside of this pricing is that it doesn’t take into account the marketing conditions such as competitive pricing or perceived customer value.
Competitive pricing helps you beat out the competition and is driven by product value. You consciously price your product below competitors’ products. It is a tactic to use their pricing data as a benchmark.
If you can reduce cost and actively market your special pricing while negotiating a lower cost per unit with the providers, this technique might work well for you. It is not as suitable for smaller retailers. This is because lower pricing means lower profits, so a small retailer will have to sell higher volumes of their products. Also, depending on what is being sold, customers may not always want to purchase a product that is cheaper.
Value-based pricing refers to the value of your product perceived by the customers. In this approach, you take the wants and needs of your target customers into account. You determine the price of your product based on the worth anticipated by your buyers.
Value-based pricing is prevalent in markets where the product provides the customers with a unique life experience or makes them feel good about themselves. You need a solid brand, a high-quality product, a good rapport with your customers, an innovative marketing strategy, and a stellar track record to use value-based pricing.
Take for example luxury brands like Gucci or Louis Vuitton. They price their products keeping in mind the value that customers assign to them. This form of pricing works best for luxury items, not for ordinary ones. Value-based pricing is also hard to determine because various socio-economic and cultural factors influence this pricing, and these factors are not easy to determine. There is no math behind value-based pricing.
In this approach, the business lowers its price over time after initially charging the highest that the customers are willing to pay. It does so to keep itself in the competition and attract new and price-sensitive customers. This pricing strategy is based on the principle of generating maximum profit while the demand is high and competition is little.
This approach is beneficial for launching innovative products resulting in high short-term profits.
It is the best approach only when you have unique features that no other competitor can copy.
Penetration pricing refers to temporarily selling your product at a lower price to gain more customers when introducing a new product. It is beneficial for new brands looking to gain market share. Heavy sale volumes make up for the small margins. This strategy works well if the customers are price-conscious. The only downside is that it can devalue the product.
Discounting is the best pricing method as every customer loves sales and discounts. This approach increases foot traffic to your eCommerce store and attracts more price-conscious customers. It is also beneficial in offloading unsold products which are out-of-season. But you must avoid using discount pricing too frequently as it might give you a reputation as a bargain retailer and psychologically make your customers question the quality of your product.
This pricing strategy is most common among retail stores. In this approach, the seller determines a keystone price within the scope of resale at a set amount which is double the wholesale price or the production cost. This strategy is an effective considered rule of thumb for retailers to bring them good profit margins. The retailer should always keep in mind the availability and demand for a product before setting a keystone price.
Finding the Right Pricing Strategy for your Business
You must have a good knowledge of your product, marketing strategies, and your customers to come up with the right pricing strategy for your business. Finding the right pricing strategy is more like a trial-and-error method. You need to test what works best for your eCommerce store while staying in the competition and gaining good profit margins.
Frequently Asked Questions
How can one set price tiers?
One can set price tiers by identifying their target market, matching services to production levels, and creating a marketing plan for each tier.
How can one set a suggested retail price?
One can set a suggested retail price by having good knowledge of their product, marketing strategies, and customers to come up with a suggested retail price. There are several strategies one can employ such as competitive pricing, value-based pricing, or discount pricing amongst others.
How can one set the maximum retail price for a product?
Finding the right price for your product is a trial-and-error method- you need to take into account factors such as cost, competition, and value before determining the price of your products. The MRP should cover the cost of manufacturing and bringing the product to the retailer, it should consider the competition and keep the pricing competitive, and should have an understanding of the value proposition it holds in society.
Figuring out these three important factors will help you set a maximum retail price for any product you want to sell.