The Fundamentals of an eCommerce Pricing Strategy
Pricing can make or break your business but it's surely the easiest way in which you can manipulate and control demand for the products or services that you sell.
Knowing how much your products are worth, and how much potential customers are willing to pay, is key to developing your successful eCommerce business.
It's a sometimes disheartening fact that no one is going to buy from you if they can find the same item on Amazon at half the price you are asking – and which they can receive in half the time.
Amazon definitely has the advantage with their dynamic prices that change frequently but there are other ways to compete - and it all starts with developing an eCommerce pricing strategy that will work for you and your business.
Let's start at the very beginning - if you want to be a big fish in eCommerce then sooner rather than later you’ve got to get a grip on the following pricing fundamentals:
1. Know Your Margins
When you are putting together an Ecommerce pricing strategy your first aim is to know your margins
This means primarily making sure that you don’t have prices that are too low. Make sure you price your products sensibly so that you will (after costs) gain profit every time you sell.
If you are pricing your products as low as possible you could be underselling yourself, which is inherently bad for your business. To accurately calculate your margins, you need to factor in the time it takes to develop, create, manufacture and advertise a product before it even arrives at your online store.
Some retailers believe that by slightly underpricing their products on launch (and initially losing money), they can hopefully help boost repeat purchasing. On the face of it this may seem like a good idea but it's not always sustainable when trying to grow your business.
Customers will expect to see these low prices every time they shop, and when the day comes that you decide that you can no longer justify a 10% reduction you start to lose their custom.
To decide whether this is the right method for your business, you need to evaluate what the average lifetime value of a customer is and whether it’ll be worth the risk in the long run. If you’re selling products that consumers buy on a regular basis you’re much more likely to see success from using a low margin pricing strategy.
2. Understand Your Unique Selling Point (USP)
You will need to consider your unique selling point when you are working on your E-commerce pricing strategy. With the relentless competition in eCommerce you have to differentiate yourself somehow and consider every aspect of what you do and service that you offer. Whatever it is, identify it and then make it a big part of your marketing strategy.
Customers need a reason to pay more; if they feel your products are worth extra then they are usually willing to pay extra. Your unique selling points should consist of the key points about your business that set you apart from the competition, whether it's faster delivery, superior customer service or greater choice.
Once you've defined your USPs, it's time to publicise them. Displaying them prominently on your store's home page is a great way to communicate what's special about your business to potential customers.
More and more, brand values are a big influencing factor in your customers' purchasing decisions, so this is essential to consider when deciding on your strategy.
3. Ensure Your Price Test
It is also important as part of your E-commerce pricing strategy to test your pricing carefully on a regular basis. This means using Analytics tools and working out which strategies work and bring you the most conversions. Anything that doesn’t work needs to be assigned to history.
A/B testing your price is an easy way to test the success or otherwise of your pricing strategy so that you can determine which price point yields the best results.
As an example, 10 people accessing your website might see the price of a product at £9.99, 10 others might see the price at £5.99. The idea of A/B testing isn’t necessarily to see which price sells the most units (because that will invariably be the lowest priced item) but the idea is to see which price generates the most profit.
You may sell 20% fewer items at the £9.99 price point but you might be making 100% more profit – in which case it makes business sense to charge the higher price.
You should be receptive to changing your prices if the evidence tells you to do so. Ideally, every change should be tested and validated using an analytics tool.
4. Consider "Good/Better/Best" Pricing
Give your customers as much choice as possible in terms of style, colour, size - and of course price.
You need to offer price sensitive customers an option they can afford, as well as cater to customers looking for high end, premium items.
Pricing has traditionally been thought of as a simple search for one perfect price but if your company views pricing in this way it’s not making the most of this powerful bottom-line enhancing strategy: no matter what price you set, you’ll inevitably create missed profit opportunities.
Some people would have paid more, while others would have purchased if only the price had been lower.
The way to break out of this pricing conundrum is to offer good-better-best prices. Instead of creating missed pricing opportunities with a single price, this multi-price strategy empowers you to capitalise on the fact that customers will choose which price best suits them.
When this strategy is implemented, it’s often surprising how many customers choose the best version!
5. Incentivise Your Customers
To further improve your E-commerce pricing strategy you can also consider offering incentives. This might mean temporarily discounting so that customers find your products more appealing. Think carefully about how you phrase your discounts, and try to make them time specific.
Having incentives as part of your eCommerce pricing strategy on an occasional basis can make your product very attractive. You can also build customer loyalty as people keep coming back to buy a product that they bought at a discount initially but have now become accustomed to – and can't do without!
Using seasonal sales and regular discounts effectively can massively increase conversions on your online store. Even if you can’t sustain an ultra-low price in the long term, you can always offer limited time pricing. For example, “Purchase in the next hour and receive 20% off!”
If you have a surplus of products, you can offer a 2 for 1. Additionally, people perceive large percentages as big savings. For example, “Buy one, get one 50% off!” The customer sees the 50% off, but really they are only getting a 25% discount.
Shopify App Product Discount lets you run sales based on a variety of conditions: by product brand, type, collection, and more - so "buy one get one free" , "buy 3 get one 75% off" and similar sale situations become easy.
Being savvy with your incentives allows you the ability to garner attention to your products, and build a reputation for having good deals, without breaking the bank.
You can also download the Ultimate Guide To Discounting written by pricing experts for FREE.
6. Evaluate Your Product Mix
Also try to diversify your product offerings so that you sell stuff that is trending. This helps you boost your profit across a range of products, which in the end increases revenue overall.
To offer diverse products that will sell, eCommerce store owners must first understand their market demand. Make sure that you are up to date with current trends by reading eCommerce news. Use products like “Google Trends” or “Google Insight” to check the popularity of a SKU.
Having a better idea of what your customers want gives you the opportunity to sell and generate profit from diversified products. When in doubt, give your customers multiple options to help them figure out what they want.
In the lecture, "Are We In Control of Our Decisions" Dan Ariely recounts an MIT experiment he conducted to test the effects of product and pricing diversification.
Dan Ariely found that giving a customer more options influences their choice and their perception of a ‘good deal.’ Specifically, one unattractive option can emphasize the benefit of other options, helping the consumer decide on an option that best suits them.
Instead of focusing purely on driving more traffic to your website, ensure you’ve firstly laid the foundations for success by optimising your eCommerce pricing strategy.
It really should be a daily task - don’t just set your prices when you add products to your website and then hope for the best! Re-visit your eCommerce pricing strategy on an ongoing basis to ensure you’re not leaving profit on the table.
Having an effective and sustainable E-commerce pricing strategy is crucial if your business is to succeed in the long term. Your pricing strategy depends entirely on the nature of your business and the products you sell so we recommend that you are choosy as to which strategy you pick for your business.
We also recommend testing out the various methods to see what works best in practice, and analysing the results to generate a rock-solid strategy.
Pricing Strategy: tactics and strategies for pricing with confidence, Warren D. Hamilton 2014
Pricing for Profit by Peter Hill 2013