No surprises here! Your end goal is to make money with your ecommerce store! Well, that's all fine and dandy but it's not always easy to decide how to price your ecommerce products in a way that will maximise your profits whilst being fair to your customers.
Product pricing for your ecommerce store can be the most powerful tool in your toolkit when it comes to improving your bottom line but a fine balance is always required - and determined by the products you’re trying to sell.
So, first things first, you should evaluate the factors that make up your product mix:
- How many items are in your product line?
- Do you have more than one line of product?
- What kind of variety do you stock in each product line?
- How do customers relate to your products?
After completing this task you should consider which pricing strategy will best suit your business.
The most popular pricing strategies for ecommerce stores are:
Also known as “keystone pricing”. This simply involves adding a markup percentage on top of the wholesale price for each product, coming up with a competitive market price for your customers.
This method takes into account the competition. By measuring typical market prices, you price items in an effort to undercut the competition, netting customers with lower prices.
Target Return Pricing
This strategy can be used when you have a better idea of your sales projections – it's based on a certain number of items you expect to sell and computes the price based on a projected total profit.
This is a pricing strategy which sets prices primarily, but not exclusively, according to the perceived or estimated value of a product or service to the customer rather than according to the cost of the product or historical prices.
Where it is successfully used, it will improve profitability through generating higher prices without impacting greatly on sales volumes. The approach is most successful when products are sold based on emotions (fashion), in niche markets, in shortages, (e.g. a "must-have" toy at Christmas) or for complementary products, (e.g. printer cartridges, headsets for mobile phones).
Today it seems like almost every online price ends with a .49 or .99. This is what psychologists call the “left digit effect” where consumers tend to only focus on the pound/dollar amount and instead of rounding up, they round down.
This is the reason why companies like Apple will price a laptop at $1299.99 and not $1300. If you use odd pricing, i.e. numbers ending in 5, 7, 8 or 9 this gives the impression that you've carefully calculated the price and marked it down to the lowest possible price.
Most ecommerce store owners set prices using the cost-plus or the value-based method. These strategies often work well but there are several other ways to price your products.
Here are five unusual and effective ways to price products in your ecommerce store – perhaps you could give them a go?
Pay What You Want
The pay-what-you-want strategy (PWYW) has been around for a while but has not been used widely in ecommerce. In most cases, this strategy doesn't result in a significant change to profits but does lead to a lot of free marketing. Use this strategy if:
- You believe that your customers are fair-minded and understand the value of your products.
- Your site shares revenue with charities. Customers often pay more to help the charity.
- You can also tie the PWYW strategy with an incentive, such as an additional product once the price exceeds a certain threshold, say £10. This threshold can be kept secret or made public as a marketing tactic to encourage customers to pay more.
This strategy does not have to be implemented throughout your ecommerce store – it can be limited to a few products or a few categories that seem the best fit.
Yes, free!! A free pricing strategy can be an effective way for ecommerce stores to attract customers, as in:
- A loss leader: Use this strategy to offer products for free. Customers come to your site to get the free loss leader product and once they are "engaged" you can up-sell or cross-sell additional products to them.
- Seasonal products: If your ecommerce store sells seasonal products, then this strategy can create traffic. For example, a retailer could give away free Union flags during royal/national/sporting events to increase traffic, whilst a the same time pushing other non-free items.
- Promoting 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 because only Gillette shaving blades can be used 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 uses this approach. If even a small percentage of customers buy the premium offering, the insurer makes a profit.
Name your Price
A variation of the PWYW model, where the price has to exceed a threshold to get the product. This threshold price is not shown to shoppers to allow them to name their own price, rather like an auction.
This model has been successfully used in the travel industry by Priceline, 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: Your products can be sold at a wide range of prices and still generate a profit. This could include one-of-a-kind artwork, where it is sometimes difficult to assess the value.
- Products of high perceived value: The perceived value of the product is much higher than the cost of purchasing it, prompting the consumers to name a higher price. This can apply to books, music and antiques.
- You have defined price ranges: Gift sites where NYP can be a guide to show products that are within that price range. "Not-on-the-high-street" uses this strategy. Online retailers are able to use price discrimination in combination with this strategy to increase their profits.
Flat pricing is a strategy where a limited number of prices are used for all product offerings, best exemplified in highstreet Poundland shops where every product is priced at one pound. This strategy works well if your site sells a wide variety of (and similarly priced) products Flat pricing is simple to manage, easy for consumers and can result in healthy profits.
A new trend in online retail is subscription pricing, where customers can sign up to receive a set of products each week/month. For example, Gousto delivers all the pre-portioned ingredients for a recipe each week. There are 2 types of boxes, recurring or one-off.
The recurring boxes are controlled by your subscription. The frequency, delivery day, size, servings and recipe type are determined by the subscription, which can be changed. 2 recipes for 2 people costs £24.99 per week, 4 recipes for 4 people costs £47.45 per week.
This is a relatively new strategy where specialised yield management algorithms are used to personalise the price offered to each visitor to your website.
Most of the personalised pricing is done in real-time by analysing a variety of factors like customer loyalty, device used by the shopper, customer preferences, history of purchases etc. It's best suited to you if:
- You introduce new products regularly: This makes personalised pricing more effective as repeat customers see the new product and the new promotional pricing to reward their loyalty, or it encourages new customers to make a first purchase.
- You have wide profit margins: Products are sold with good margins, allowing you to offer discounts at any time. For example if the product is sitting in a shopper’s basket for a few days, the retailer might offer a discount or lower the price to encourage the shopper to complete the purchase.
- You have repeat customers: Customers know that they will be rewarded with personalised pricing and promotions based on their loyalty.
Some Advice About Amazon
Don't be afraid of Amazon. The cheaper the items you are selling in your ecommerce store the less important it is that you always have to match Amazon’s price. This is especially true if the product details offered on Amazon are rather thin. If you have an attractive landing page with detailed product descriptions/videos these can help you get away with charging a little more.
Check to see if the products are eligible for Amazon Prime and how many reviews they've got. If there are limited reviews and customers aren’t able to get it delivered for free within 24 hours you’ve got more scope to charge a bit more.