Deciding on a pricing strategy is an essential part of your overall business strategy, and setting the right prices is a balancing act—and can be a tricky one at that.
Pricing too high will mean you lose out on business, but the same goes for pricing too low. So, how do we know what strategy to choose?
There are many ways to go about eCommerce pricing, and which way is best suited for your business depends on many factors. Regardless of how much experience you have, it will take time and experimentation to find the right prices for your particular products and offers.
That is why it helps to understand the different eCommerce pricing strategies that most companies use and the implications of some tried and true pricing tactics.
In this guide, we’ll look at five of the top eCommerce pricing strategies and the five pricing tactics that complement them.
Related reading: Digital Commerce Business Models–the Current Landscape
What is an eCommerce Pricing Strategy?
A pricing strategy is a plan or a framework that you will use to price your products accurately. Different eCommerce pricing strategies can be used depending on what type of products and services you’re selling, what the product demand looks like for those products and services, and how your competition is operating.
Keep in mind that costs will change as your business grows and scales, which affects your pricing strategy. Depending on your business model, your cost per sale may increase or decrease, and you may need an eCommerce pricing strategy that will accommodate this.
Related reading: Building a Digital Strategy Roadmap
Top 5 eCommerce Pricing Strategies
Cost-based pricing is also referred to as ‘markup pricing,’ ‘breakeven pricing,’ or ‘cost-plus pricing.’ This eCommerce pricing strategy is based on two numbers: the total cost of making a sale and the profit margin you’re looking to make.
For example, let’s say you’re running an online t-shirt store. You purchase the t-shirts from a third party and they are shipped directly to your customers. Since you are dropshipping, you don’t have to worry about production costs. It may cost you $3 to source a t-shirt from your supplier and $2 to ship it to your customer. But for the customer to even find your store, you also had to spend $2 on social media ads. $3 + $2 + $2 = $7, so the total cost of making a sale is $7. To set your price, you then add the profit margin you want on top of that. Let’s say you want a profit margin, or markup, of 50%. Then you’d add .50 * $7 = $3.50 to the $7, and your t-shirt will cost $10.50.
Competition-based pricing is a strategy where you aim to offer better prices than your competitors. This means you need to constantly keep track of the market and compare your prices to those of similar products offered by your competition. Buyers today will always be comparing prices, so spending time and effort to research your customers and defining a very tight competitive set is always a great investment. And you don’t have to do it manually—monitoring the competition and adjusting your prices accordingly is a very well-suited task for a bot or some of the pricing platforms in the market. Many if these us AI to really help boost the capture of related items.
Related reading: AI In eCommerce: It’s Everywhere
You know those times you bring a coupon to the store and wonder how the supermarket can possibly make any money at such a low price? Well, they probably don’t. They’re probably applying a loss-leader pricing strategy. Other terms used for this are penetration pricing and discount pricing. Sales, coupons, rebates, and other related markdowns are popular and efficient pricing strategies across all sectors.
Loss-leader pricing means you accept a loss at certain items, knowing that the initial purchase will lead to additional spending in your store. By enticing that first transaction, you’ve won a new customer, and based on their calculated customer lifetime value (LTV), their future spending will make up for the loss.
This eCommerce pricing strategy relies on customer loyalty to the brand for it to work. It’s essential to have an excellent digital commerce experience to make sure the customer is willing to buy from you again.
Dynamic pricing is exactly what it sounds like: it’s flexible prices that adapt to customer behavior and changes in demand. Adopting dynamic pricing will mean that your prices constantly change in relation to factors like:
- Supply and demand
- Market trends
- Competition and industry standards
- Consumer expectations
By combining dynamic pricing concepts with advanced eCommerce strategies, brands can continuously maximize profit margins in real-time. However, a word of caution is in order—if not executed well, dynamic pricing can decrease your conversions as buyers realize your prices are constantly changing. It can undermine trust in general, and if customers know prices may be going down, they’re likely to wait it out.
Price skimming is a pricing strategy where the seller starts by charging the highest price customers will pay for an item and gradually lowers it. This is a common strategy in niches where the interest in new products and their perceived value rapidly decreases. Price skimming is, for example, widespread in the electronics sector, where products tend to become less valuable or even obsolete as new innovative tech products are launched. Another typical example is seasonal products such as holiday decor, which will go on sale as soon as the holiday is over.
Price skimming is not a good option for newer and smaller eCommerce businesses and doesn’t work if you sell everyday products or commodities.
Top 5 eCommerce Pricing Tactics
Manufacturer Suggested retail price (MSRP)
As its name suggests, the manufacturer’s suggested retail price (MSRP) is the price a manufacturer recommends retailers use when selling a product. This tactic saves time, is simple to administer, and will make sure you always maintain a margin acceptable to both you and your customers. Consumers often appreciate knowing that the manufacturer sets the price and that you’re adhering to the recommended price.
Multiple Pricing or Bundle Pricing
Bundling products and offering a better price for a larger number is an efficient way to upsell. This is a common tactic in retail, where grocery stores and clothing stores will offer package deals for things like socks, underwear, and groceries. With this tactic, you will sell more than one product for a single price, also known as product-bundle pricing.
This tactic creates a higher perceived value for a lower cost, which drives larger volume sales.
You know how all prices tend to end with $0.99? This pricing tactic, known as psychological pricing, relies on the fact that $8.99 simply feels closer to $8 than to $9. It makes the item seem cheaper, and studies show that this type of “charm prices” (i.e., prices ending in odd numbers) increase sales dramatically.
Consumers tend to ignore the least significant digits, rather than round the number properly. The cents are seen, but they are often subconsciously ignored. Research suggests that this effect can be even more enhanced when the cent digits are printed in a smaller size (for example, $1999).
Anchor pricing is another commonly used pricing tactic that has similarities with psychological pricing. With this tactic, you list both the discounted and original prices to visualize the savings a buyer would gain from making the purchase.
Creating a reference point like this triggers what’s known as the anchoring cognitive bias. Consumers will regard the original price as a reference point, then “anchor” to it and form their opinion of the new, marked-down price.
Specific pricing is when you price your product with a very particular amount, such as $312.43 rather than $299. The reasoning behind this is that consumers tend to think stores round up their prices to the nearest $49 or $99, and when that’s not the case, the pricing can be perceived as more “honest.”
A University of Florida study shows how consumers believe stores make rounded prices artificially higher and that this belief reduces the willingness to make purchases.
Specific prices give the impression that the price has been calculated based on the sum of the product’s parts, and therefore it can be perceived as more fair.
How Vaimo Can Help
Today’s consumer expects a smooth, seamless experience regardless of what country they’re in, what channel they’re using, or what currency they’re using. This requires companies to manage their pricing strategies across the whole lifecycle and choose technology and pricing strategies that gather all touchpoints and data into the same system.
At Vaimo, we’re presently helping more than fifty multi-brand, multi-currency, multi-language clients sync all of their channels and create winning eCommerce strategies . . . even pricing strategies! Get in touch with our team of experts to learn how we can help you take your eCommerce business to the next level.