Most ecommerce retailers use cost-plus or value-based pricing strategies. These usually work satisfactorily but there are other effective ways to price your products that you may not yet have considered.
Pay What You Want Ecommerce Pricing Strategy
The pay-what-you-want (PWYW) ecommerce pricing strategy has been around for a while but has not been used heavily.
In almost all cases, this strategy does not result in a significant profit or loss but does lead to a lot of free marketing, one of the main reasons for adopting this strategy.
There are several types of online retailers who can benefit from PWYW – for the following reasons:
- If you believe that your customers are fair-minded and understand the value of your products
- If your site shares revenue with charities as customers often pay more to help the charity, increasing your share of the revenue in the process.
- You can tie the PWYW ecommerce pricing strategy with an incentive such as an additional product once the price exceeds a certain threshold, say £50. This threshold can be withheld or made public on the site as a marketing tactic to encourage customers to pay more.
- You can be limit this strategy to a just a few products or categories that are the best fit.
Some examples of PWYW pricing (online and offline):
- Bridge Hotel’s Pay What You Want Karma Keg that brings in 10-25% more than their fixed-price kegs
- Linda Formichelli’s Pay What You Want eCourse experiment that brought in 10 times more than her fixed price eCourse (and is now a permanent option on her site)
- Larian Studios PWYW video game compilation experiment that brought in more money than they ever expected
- Humble Bundle that raises millions for charity and for video game publishers through their PWYW video game bundles
- Joost van Dongen’s hobby project Proun that brought in over $20,000 using PWYW pricing
- Libboo, Zoho, Propellerhead and BinaryNow, all software companies that use or have tried PWYW
The 3 most important benefits of a PWYW ecommerce pricing strategy are:Gets rid of barriers to entry
Fixed-price products by their very nature create a barrier to entry for some consumers. By lowering the price to zero, you remove the barrier to entry. With PWYW people still contribute and often more generously than you'd imagine.
Removes the price ceiling
This allows your top 1-3% of customers to contribute more - so much so that they often more than
Contrary to popular belief, people are not always self-serving. A Harvard Business Review article "When the Rule Is “Pay What You Want,” Almost Everyone Pays Something”.
The article goes on to reveal that 95.95% of customers contribute money when paying is optional and in most
Free Ecommerce Pricing Strategy
Several software companies are using free pricing successfully where the software is given away for free and the customer is charged either for support or for premium features.
An example of this is Hortonworks, a development firm that offers the Apache Hadoop platform for free and then charges for support of that platform.
An effective free pricing strategy can be implemented in the following ways:
- Loss leader: Use this strategy to offer free products as loss leaders. Customers come to your site to get the free products and once they are on the site, you can up-sell or cross-sell them other products.
- Seasonal products: If your site sells seasonal products, then this strategy can drive traffic. For example, an online retailer could give away free flags during national celebrations and sporting events, while also selling their usual products
- Emphasise consumables: Products that have durable and consumable components can benefit from a free pricing
strategy,if customers can only buy both pieces from your site. For example, Gillette sometimes offers razors for free since only Gillette shaving blades will work with its razors.
- Basic vs. premium versions: This strategy can be effective if the basic version is free and the customer pays for a premium version. The life insurance industry in the US uses this approach, where a basic $10,000 insurance is often free. If even a small percentage of customers buy the premium offering, the insurer makes a profit.
Name your Price Ecommerce Pricing Strategy
This is a variation of the PWYW ecommerce pricing model, where the price has to exceed a threshold to get the product. This threshold price is not shown to shoppers, thus allowing them to name their own price.
This model has been successfully used in the travel industry by Priceline, among others, where availability of airlines, hotels, and travel dates is based on the named price. This strategy can also work well for online retailers that are selling the following:
Products of imprecise value: the products can be sold at a wide range of prices and still generate a profit. This could include one-of-a-kind products or artwork, where it is difficult to assess the value.
Products with a high perceived value: the perceived value of the product is much higher than the cost of procuring it, prompting consumers to name a higher price. This can apply to books, music, and food products.
Defined price ranges: gifts site where NYP can be a guide to show products that are within that price range. NYP can be used as a guided selling tool to show gifts within a defined price range. Retailers can use price discrimination in combination with this strategy to increase their profits.
Flat Pricing Strategy for Ecommerce
Flat pricing is a strategy where a limited number of prices are used for all product offerings, such as in pound stores where every product is priced at one pound. This strategy works well in the following situations.
- You are selling many similarly priced products: if your site sells a wide variety of products that are priced nearly the same, flat pricing will be simpler to manage, easier for consumers, and also result in greater profit
- Subscription pricing: this newish trend invites customers to sign up for a flat price of, say, £25, £49, or £99 to receive a set of products every month.
Personalised Ecommerce Pricing Strategy
Again this is a relatively new strategy where specialised yield management algorithms are used to personalise the price offered to each visitor.
With the rise of Big Data, most of the personalised pricing is done in real-time by analysing a variety of factors like customer loyalty, a device used by the shopper, customer preferences, history of purchases etc.
Personalised pricing occurs if an ecommerce retailer offers different prices to different customers depending on the information they have collected. This is done primarily in two ways.
Firstly, retailers can collect details of a customer's previous purchases made on the website or they can buy information about the customer's purchases or internet searches from a third party.
Personalised pricing is best suited for the following:
Online retailers regularly selling new products: this makes personalised pricing more effective as repeat customers see the new product and the new promotional pricing to reward their loyalty, or to encourage the first purchase for new customers
Your products are sold with good margins: this allows the online retailer to offer discounts at any time.
For example, if a product is sitting in a shopper’s cart for a few days, the retailer might offer a discount or drop the price to encourage the shopper to complete the transaction.
Repeat customers: customers know that they will be rewarded with personalised pricing and promotions based on their loyalty to your site.
Segmented Ecommerce Pricing Strategy
This is when an ecommerce retailer sets more than one price for a product to different types of customers irrespective of its production and distribution costs
This pricing strategy has been proven to increase overall profit and revenue, especially in industries with high fixed cost structures.
Example. Imagine you have a product priced at £10.
Some potential customers may see this price as too high and never purchase. Other potential customers may be willing to pay £15. If you only set the £10 price, you lose £10 from the people who won’t buy, but at the same time lose £5 from the people who would have paid more, for a total loss of £15.
If you have 3 prices, £5, £10, and £15, you get the £15 from the higher price segment, plus the £5 from the lower price segment and you end up with a total of £20.
Customers can be segmented by volume, attribute, service offering, time of purchase or time used. From a billing perspective, your system will need to set different attributes for customers and apply price changes and discounts to specific segments.
Here are some of the most popular ways to use segmentation as a pricing strategy:
- Channel purchase: customers who purchase online rather than in-store can be offered a lower price because the cost to serve this purchase is lower.
- Time of purchase: for example, many items are priced higher before Christmas and drop in price soon after. Fashion-conscious customers will pay a premium to wear the latest styles while those on a budget will wait for an end of season clearance.
- Volume: the larger the volume ordered the lower the price per unit.
- Attribute: for example, hardwood vs laminate.
- Geographical locations: in areas or regions where the customers are less price sensitive, the prices of products are higher, and vice versa.
Segmentation must be done keeping in mind the cost parameters. Further, the perceived value of the product must be constantly assessed and it must be ensured that the image of the brand doesn’t get degraded at any stage due to this activity.
Used properly, a segmented pricing strategy can be very beneficial. However, it’s not the best fit for every business, so make sure it’s right for your company before selecting this ecommerce pricing strategy.
Premium Pricing (Above Competition) Ecommerce Pricing Strategy
A premium pricing strategy involves setting the price of a product higher than similar products on the market. This strategy is sometimes called skim pricing because it is an attempt to “skim the cream” off the top of the market.
It is used to maximise profit in areas where customers are happy to pay more, where there are no substitutes for the product, where there are barriers to entering the market or when the seller cannot save on costs by producing at a high volume. Do any of these apply to your ecommerce business?
Premium pricing can be used to improve brand identity in particular markets
For example, Apple now has 91% of the market in computers costing $1,000 or more. The company has used premium pricing to capture the market for high-end, high-quality computers.
Premium pricing is not generally used when there is direct competition for a product because competition tends to undercut prices and lead to poor sales.
For this reason, premium pricing is often only a short-term strategy. Many products start out at premium prices, but the price is cut once competitors appear in the marketplace.
However, the longer a company can keep its competitive advantage, the longer it can charge a premium price.
Some brands can continue to charge a premium price because their entire brand image is based on luxury.
According to John Quelch, of Harvard Business School, it is very challenging for companies to maintain a premium-priced brand while trading as a public company. Luxury brands, such as Prada, often chose to remain private businesses, so they can stay small and exclusive, and continue to use premium pricing.
Unique products usually have the best chance of commanding premium prices and this is especially true of technology products.
On the other hand, it's difficult to pull off premium pricing if your usual demographic are price-sensitive and have several other similar and cheaper options.
In summary, building an ecommerce company involves a fair bit of experimentation to understand which pricing strategy works most advantageously for your particular business.
If you have used the "tried and tested strategies" but still feel the need to shake things up a bit, perhaps one of the strategies outlined here might be worth a try.
After all, as consumers take advantage of all the latest technologies and trends, the online retailer must match them with the latest strategies, tools, tactics, and prices.