In today's competitive online marketplace, sellers must be savvy about pricing if they want to stay ahead of the game.
After all, the right ecommerce pricing strategies can mean the difference between a sale and a missed opportunity—a profit and a loss.
With so many factors to consider, how can sellers choose the right pricing strategy for their product or service?
In this article, we'll take a look at some pricing strategies and how they work.
By the end, you will know which strategies are right for your ecommerce pricing.
What Is a Pricing Strategy?
A pricing strategy is a plan for setting prices that takes into account the company's overall goals and objectives.
The right pricing strategy must help to increase sales, attract new customers, break into an existing market, and improve profitability.
There are a number of different approaches that companies can use, and the best option depends on the products or services being offered, the overall goal, and the target market.
Before choosing an ecommerce pricing strategy, or set of strategies, it's important to carefully consider all of the factors involved.
Factors to Consider When Weaving a Strategy
A number of factors will indicate the best pricing strategies for you to use.
The main ones are as follows:
Costs
A baseline factor is the cost of acquiring your products, whether you’re manufacturing them or buying them premade.
As a general rule, you want a pricing strategy that will ensure you don’t make less than what the business is costing you.
However, as you’ll see soon, some strategies work by losing money on some items, in order to sell more expensive ones later.
Reasonability
Another factor is reasonability.
This is subjective, but you have to consider whether the average person would think your pricing policy and rates are “reasonable”.
If a price is unreasonable, it’s unlikely to sell, unless it’s a high-tier luxury good.
As you’ll see when we discuss premium pricing, sometimes things are priced unreasonably on purpose.
Your Competition
Naturally, it is important to be aware of the prices charged by competitors.
Knowing the prices of competitors helps you understand what the going rates are for your products.
They also allow you to adjust your prices to undercut competitors and possibly take some of their customers.
Your Objectives
This is the most crucial factor. Your set of business pricing strategies will ultimately depend on what you want to achieve.
If your aim is a good profit margin, you’ll need to aim for a strategy that maximizes it.
But if your aim is to get into the market, you may aim for a strategy that sells at a slim margin to entice new customers.
Types of Pricing Strategies
Now we’ll go over the pricing strategies.
Before that, it’s important to emphasize that you don’t have to choose just one.
You can put together a set to help different sections of your business.
Cost-Based
Cost-based pricing is the setting of prices based on the cost of production.
Its main advantage is that it’s relatively straightforward and easy to calculate.
It also ensures that the company covers its costs and makes a profit.
Its only downside is that it’s static, and so you may be leaving money on the table by not optimizing.
Competition-Based
Competition-based pricing is the norm.
This is where companies keep an eye on their competitors in order to price their products accordingly. It can be done through external product matching.
Such an approach ensures that prices are in line with the market rate, to the standard consumers expect.
In addition, it makes sure that prices are competitive.
The only danger is the possibility of a “price war” where companies try and undercut each other.
While this is great for consumers, companies run the risk of slashing profits along with prices.
Consumer-Based
Also known as value-based pricing, this strategy involves setting prices based on the perceived value of a product or service.
In other words, rather than simply charging what it costs to produce something, businesses use value-based pricing to charge what they believe consumers are willing to pay for it.
The perception of customers can be based on scarcity or the prestige associated with the product.
One way to get a better idea is to actually survey your target market through the use of survey tools.
Premium Pricing
A subcategory of consumer-based pricing, premium pricing aims to give products a “high class” image by pricing them at a big markup.
For premium pricing examples, just think of luxury brands such as Gucci, Supreme, etc. The brands often employ tactics like viral marketing, to boost the image of products even further.
The “price” is actually part of the product.
They’re unattainable by average people unless they save up for them, and this makes them more desirable and adds to the brand’s image as something exclusive.
Dynamic Pricing
This pricing strategy involves setting prices based on real-time market conditions.
The goal of dynamic pricing is to allow businesses to adjust prices quickly in line with the other strategies on this list.
In essence, it’s a strategy that sets businesses up to be “fluid” with online pricing.
Price Skimming
This strategy sees companies charging a high initial price for a new product or service and then gradually lowering the price over time.
The goal of price skimming is to make a lot of revenue quickly from early adopters, before lowering the price for the general market.
It works well with highly anticipated and trending products, where “early access” adds value to buying.
Penetration Pricing
This strategy is the opposite of price skimming, and with it, companies set low initial prices in order to “penetrate” the market by attracting new customers.
Penetration pricing isn’t a fixed strategy, as once companies have a foothold in the market, they can then begin raising the price.
This is a popular strategy for online services, a good example being Netflix.
While it appears to have worked initially, with Netflix having roughly 34% of the streaming market share, the raising of prices has been met with criticism and a loss of subscribers in 2022.
Loss Leader Pricing
Loss leader pricing is a more granular strategy and works only with specific products. It involves companies pricing certain items at a loss, in order to draw customers in and upsell them on more expensive products.
When balanced right, it can be extremely effective, but it requires good research, customer data, and great conversion rate optimization.
Conclusion
When it comes to ecommerce pricing, getting the right combination of strategies is vital.
As you can see there are a number of ecommerce pricing strategies that you can mix and match depending on what your goals are, but remember, they are only a part of making your business work.
Things like order fulfillment and inventory management are just as important if you want to succeed.
Garan is a writer interested in how tech reshapes the environment, and how the environment reshapes tech. You'll usually find him inoculating against future shock and arguing with bots.
