To be a successful Ecommerce retailer you need to pay close attention to your pricing strategy/pricing strategies.
To create a successful ecommerce site you need to pay close attention to your pricing strategy. Get your pricing strategy right and it can lead to great success – get it wrong and you're going to sink without trace! It may therefore be a case of "trial and error" before deciding which pricing strategy will work best for you and your business.
How to Decide on the Right Price
One of the most exciting yet nerve-wracking aspects of ecommerce is determining at what price to sell your product or service. It's both an art and a science that requires an experimental attitude coupled with an intuitive feel for how you want to be perceived - price your products too low and you might get loads of sales yet not make enough to cover your costs. On the other hand, pricing your products higher than the competition may attract a smaller number of customers – but what you lose in volume you gain in revenue.
Test your Ecommerce Pricing Strategy
As with many things in ecommerce, one size does not fit all, so it's important to measure and test the success of changes you make to your online store's pricing strategy. Ideally, every change should be tested and validated with an analytics tool. Pricing Analytics tools (also known as Price Optimisation Tools) can analyse your historical data and support you by making recommendations to increase or decrease specific prices in order to either increase profitability or drive revenues.
Top 5 Pricing Strategies for Ecommerce – the pros and cons
- "Keystone" Pricing
Essentially, this is when an online retailer simply doubles the wholesale cost they paid for the product to determine the selling price. There are however a number of scenarios in which keystone pricing may be too low or too high for your business.
For instance, if you have products that have a slow turnover, have substantial delivery and handling costs, or are unique and/or scarce then you might be selling yourself short - and could possibly get away with an even higher markup. However, if your products are easily available elsewhere keystone pricing may not be right for you.
Pros: works as a quick-and-easy rule of thumb that ensures an ample profitability margin.
Cons: depending on the availability and how competitive a product is, it’s usually unreasonable for an online retailer to mark up a product that high.
- Manufacturer Suggested Retail Price (MSRP)
This is the price the manufacturer recommends that you as an online retailer use to sell their products. The reason manufacturers first started doing this was to help standardise prices of products across multiple locations and retailers.
Pros: as an online retailer, you can save yourself some stress by taking yourself out of the decision-making process and just "go with the flow".
Cons: you’re unable to carve out or sustain an advantage over your competitors because you're stuck with the MSRP.
- Discount Pricing
Consumers love sales, coupons, rebates, seasonal pricing and other promotion-related markdowns – i.e. getting a bargain.
Pros: great for attracting a larger amount of traffic to your online store and getting rid of out-of-season or old stock, whilst attracting a more price-sensitive group of customers.
Cons: if utilised too often, you gain the reputation of a bargain retailer, which could detract consumers from purchasing your products for the "normal" price.
- Loss-leader Pricing
The loss-leader pricing strategy assumes that an item sold below market value will encourage customers to buy more overall. Using this strategy, online store owners have the opportunity to upsell, cross-sell and increase the total shopping basket value. Even if the profit is not impressive, this strategy stimulates client interest for future purchases.
Maybe the value of a customer purchase outweighs the value of the transaction. Choose products that have a low CPA (cost per acquisition), to minimise loss. The end goal is to sacrifice losing money on one item in order to make a profit on other products, i.e. cheap shampoos, expensive conditioners.
Pros: this tactic can work wonders, especially, when you consider any complementary or additional purchases a consumer might make, resulting in a boost in overall sales.
Cons: similar to the effect of using discount pricing too often, when you overdo loss-leading prices, people will always expect bargains from you.
- Anchor Pricing
This is another psychological tactic where you list both a sale price and the original price to establish the amount of savings a consumer perceives to be gaining from making the purchase.
The original price establishes itself as a reference point in the minds of consumers which they then anchor onto to form a favourable opinion of the marked down price. Another way you can take advantage of this principle is to intentionally place a higher priced item next to a cheaper one to draw the customer's attention to it.
Pros: it will automatically trigger a response in the consumer of having found a great deal, pushing them to act on their impulsive buying habits.
Cons: consumers can readily research the original prices anywhere on the internet and if your anchor price is perceivably unrealistic it can lead to distrust.
Experimentation is the key
Building an online business involves a lot of experimentation to understand what pricing strategy works most advantageously for your particular business. The wisest approach is to choose a goal for every campaign, start small and measure the results. The key is to understand who you are targeting – and why.
As consumers take advantage of all the latest technologies and trends, the online retailer must have the latest (and best) strategy, tools, tactics, and prices for success. You will need to formulate and follow a great business plan – and monitor your competition’s pricing and products 24/7.
Pricing Intelligence Software will help you compete on a level playing field. It's readily available and affordable to help you extract the information you need about your competition and the competitive marketplace. This is essential information to help achieve maximum market penetration and to garner maximum £s for your products - ensuring your long-term success and profitability.
Remember, though that it's not ALL about price - when companies establish themselves with the best service, experience or guarantee, price can become a secondary consideration. Go above and beyond with your customer service and customers will gladly pay any price for the pleasure of doing business with you.
The Strategy and Tactics of Pricing, Tom Nagle and John Hogan 2016.
Marketing: Concepts and Strategies, Lyndon Simkin and Sally Dibb, 2016.
Confessions of the Pricing Man: How price affects everything, Hermann Simon, 2015.
Pricing with Confidence: 10 ways to stop leaving money on the table, Reed K Holden and Mark Burton, 2014.
Pricing for Profit: How to develop a powerful pricing strategy for your business, Peter Hill, 2013.
Pricing Strategy: How to price a product, Bill McFarlane 2012.
Value-based pricing: Drive sales and boost your bottom line by creating, communicating and capturing customer value, Harry Macdivitt and Mike Wilkinson, 2011.