One of the most nerve-wracking tasks in e-commerce is determining your product pricing. On one hand, you have all the power to put any price on your products. On the other hand, there are costs and calculations to be factored into the price.
Customer tastes and preferences may change over time, but you can’t change your product prices over and over again. This clearly indicates that there are several rules you must follow to make your e-commerce business more profitable, sustainable and efficient in the long term.
Pricing is more of a marketing tool, and has direct implications on your conversion rates. If you set a price that is too high or too low compared to the market, your business will suffer. Low pricing may seem like a good deal for the short term, but you may miss out on investing opportunities for your business in the future.
If you set a high price on your products, people will soon switch to a cheaper product and call your products expensive. Ultimately, your sales will go down.
When a person opens the home page of an e-commerce store, the first thing they spot is product pricing. However, the spending habits of each customer are different. Some spendthrift customers don’t really care about the prices, while some customers are extremely price sensitive. Most consumer behavior ranges from the high end to the low end of the spectrum, so an appropriate pricing strategy can convert most of them into paying customers.
Depending on the industry your e-commerce store operates in, there are various factors to keep in mind when deciding on product prices. At first, you need to sit down with your marketing department and figure out the unique selling point (USP) of your store.
Are you selling something extraordinary? Is your store providing same-day shipping? “It’s probably the toughest thing there is to do,” says Dr. Charles Toftoy, Management Professor at George Washington University. “It’s part art and part science,” he says, and it involves factoring in specific components, such as “pinpointing your target customer, tracking how much competitors are charging, and understanding the relationship between qualities and price.”
Your store’s USP will define whether your prices are discount-centric or value-centric. Each business has to perform this exercise through multiple experiments, and then figure out the pricing model that best suits their needs.
For example, if you price a product at $40 without doing any research about it, you may be missing out on a chance to earn $60 to $70 due to a lack of market knowledge. E-commerce marketers need to drive traffic to get more sales. To make more sales, it is extremely important to learn about both your USP and your customer preferences.
A proven way of getting more conversions in e-commerce business is by adopting a cost-based pricing model. When multiple stores are selling the same things and the competition is high, customers choose the store which is promising the most suitable price.
Customers want to buy from the store which provides highest value within a reasonable price. You need to be that store. The pricing model may not be reasonable for you, but it will make customers flock to your checkout process.
In the beginning, this is the best way to price your products. Later, when you have built a reputation within the market, you can choose other ways of pricing. This is how cost-based pricing works:
Step 1: Find out your cost price
The first thing you need to do in retail is find out the basic cost of the product. Basic cost is the cost the manufacturer spent in making your end product. The cost will include everything: raw material, labor, rent, utilities, salaries, etc. Money spent in finding a manufacturer, deals and transit are also some pre-manufacturing costs you need to add. Once you know this cost price, you can easily find wholesale prices.
Step 2: Find out your wholesale price
Once you have figured out the basic cost, you can determine the price you have to charge suppliers or buyers for your products. Wholesale price is the lowest price you are willing to accept from a supplier or buyer for your goods. Wholesalers then sell these products to retailers with a profit margin. One way is to add a profit margin to the cost price which is made up of all the extra costs associated with the product. Now you know your wholesale price.
Step 3: Determine your retail price
Retailers and brands selling directly to customers need to know the retail prices. Retail price is what you want to charge the customer, made up of both your cost and wholesale price markups. Keystone pricing, industry surveys and industry benchmarks are popular ways to find out retail prices. According to Maker’s Row:
Cost-based pricing is the simplest way to sell an item online, since it takes into account the basic costs, as well as the logistics of web-shop spending. Some customers will arrive on your store and ask for bargain prices, because another e-store is providing a higher or lower cost.
You can research the market to see where you stand, but moving your price tags because of other stores isn’t advisable in e-commerce. What you can do is to start off with a lower price, then move on to the real prices once you’ve built trust.
This may drive away some bargain-hunting customers, but your business will not be called selfish; it only wants to make money.
This pricing strategy tries to grab the attention of customers by labeling it better than competing products and their prices. Value-based pricing largely uses a customer’s perceived value to sell products. In online stores, customers can compare products in minutes, so if you can justify that your store provides a higher value than other stores, they will probably believe you.
The cost of production, shipping, tariffs and other related expenses determines how to price your product. At the basic level, you try to depict an intersection between supply and demand. The price should be an embodiment of the value and quality of the whole package, and the customer should feel satisfied with their purchase.
A very good example of value-based pricing is the brand Under Armor. They have a pre-existing following, which trusts and loves the brand. The brand is so confident of its fan base that they price their products on value and luxury rather than competitive prices. Their customers, in turn, feel satisfied with their purchases because they know they are getting a good deal for the money they have spent.
You can adopt value-based pricing once you have established your brand and have a strong following.
This strategy is based on the findings of the research done on market competition. It results in a narrow gap between profit and the cost of your products. You can charge competitively for a product which is available on other stores.
For example, CDW Corporation is a B2B store, which provides technology products to businesses. They know very well that they compete with giants like Dell, Apple and Microsoft to sell the same product. To gain more customers, they constantly monitor the prices of their competitors and update the items on their site. Customers who wish to have a better deal on the same product will ultimately buy from CDW.
This is a pricing strategy, where all of the products in a store are sold for the same price. The best example of this strategy is Dollar Tree, where everything is a dollar.
You can either price all your products the same, keeping the value similar, or you can adopt the newest trend in online markets where customers can sign up for a preset price to receive a set of products every month. Box services usually use this model, and many e-commerce retailers have started to incorporate it into their services now.
Psychological pricing is the hottest trend in the e-commerce world. This is a tried and tested way of “tricking” your customers into thinking they are paying less. As a consumer, you may have fallen for it countless times.
For example, Apple continues to label MacBooks for £899, despite the fact that they can easily round up the price for £900. Studied by many researchers, this “left digit effect” will convince the customer that the price is closer to £800 and not £900. Your sale price will not be reduced, and the customer will purchase more at the same time.
This is a new way of pricing products, thanks to Big Data. Personalized pricing is done in real time, by analyzing various factors like customer loyalty, device used, customer choices, history of purchases and so on. The following types of retailers can benefit most from this strategy:
Bundle pricing is also a good way of selling more than the customer was willing to buy. E-commerce sites are full of bundle offers where retailers bundle individual items together for a specific price. When the customer buys the bundle, they perceive it to be cheaper. This kind of offer is very popular in grocery stores or with common apparel like socks and underwear.
This is a very tricky strategy that has been used offline by Panera Bread for years. The “Pay What You Want” strategy asks the customers to pay their desired amount of money, which often starts at a base price of $3 to $5. PWYW may not be a good thing due to the loss of money, but it can surely get your brand a lot of free publicity. You can use this strategy in some parts of your store by putting some items on the PWYW menu.
At the end of the day, your pricing strategy depends entirely on the type of business you run. So, take all of the above methods and compare them with your business model. If you’re still confused about pricing your products, run A/B tests on your product pages. These tests can answer your queries by providing you statistics about customer conversion rates. Analyze those results and form a rock solid strategy!