According to an SPS Commerce survey, 68% of the retailers pointed out that pricing was the most significant factor affecting the online consumer’s buying decisions. Every shopper wants the best price for the value of the product. To survive in the eCommerce space with a lot of competition in every niche, it’s paramount to have an effective pricing strategy that’s more than just covering your expenses with a profit margin.
Pricing is vital for both starting and running a successful eCommerce business. Not just the customer, product pricing impacts your business directly as well. This article explores six pricing strategies for eCommerce businesses to have winning product prices that meet the expectations of the customers and your business goals.
Pricing strategies for eCommerce businesses
1. Cost-Based Pricing
Cost-based pricing strategy is the most popular because of a simple formula, also known as cost-plus pricing. This strategy is mainly used by beginners because of its ease of implementation. This strategy considers all your expenses and adds the profit margin markup to determine the product’s price.
As an online business, many of the costs associated with a brick-and-mortar business get eliminated, such as no shop & warehouse rent and associated recurring charges like electricity, staff, and fixed expenditures. However, online businesses have their expenses, such as store hosting, marketing, internet, customer support, and shipping costs.
Cost-based pricing is a basic, short-term, and risk-free pricing approach that lets you predict your profit from sales. Competitors can steal your customers by offering the same products at a lower price than yours.
2. Competition-Based Pricing
This pricing model is based on finding an average price for your product by looking at what your competitors are charging. It’s like positioning your product in the middle, not too expensive nor too cheap.
You can research the product prices of your competitors. Knowing what others are doing in the market helps you make informed decisions. It is a good approach if your product costs less than the competitors otherwise, it would not be profitable like your competitor. Also, when you are new to the market, using a competition-based pricing strategy might make it difficult to attract customers.
3. Value-Based Pricing
Value-based pricing is rooted in the cost and competition-based pricing strategies combined and is more complicated than either of the two. In this pricing method, you base the price of your product on the value it delivers to your customers.
Research suggests that customers are willing to pay high prices depending on the brand reputation, quality & ethical standards, and sustainability considerations. Based on your unique selling proposition, you determine the maximum price of product customers will be willing to pay.
With research, determine the minimum cost of a product you can sell at. Next, based on the research of your competition, determine the average selling price of the same product. Now add the price based on the value of your unique selling proposition (USP) to increase your profit potential.
Stores with a strong brand identity can benefit significantly from this pricing strategy. Finding the right product price can take time, effort, and resources. Therefore, for beginners, it’s not easy with limited resources to set up consumer research budgets. A/B testing with pricing is an excellent method to reach value-based pricing effective for your business and customers.
4. Penetration Pricing
Penetration pricing is a strategy in which businesses introduce a product or variant in the market at a lower price to attract customers. Once the product receives attention and builds a following business then raise the product price. Penetration pricing strategy overcomes the barrier of pricing in making the purchasing decision.
This strategy has the benefit of introducing a product in the market despite the competition at attractive pricing. This approach is usually employed by new market entering businesses that want to capture the market share.
A challenge associated with this pricing technique is that customers might resist paying more for the same product in the long term. Also, customer loyalty also gets affected by this strategy as the same customers can get pulled by another competitor with low pricing. You would have to retain them with other incentives like customer support, unmatched quality, or a strong USP.
5. Bundle Pricing
Bundle pricing is a straightforward technique whereby businesses sell a set of products in a bundle. This is usually done in the form of a ‘Buy 1 Get 1 Free offer, ‘Buy a set (including 2 or more products) or as an option to choose from a selection of complementary products.
Bundle pricing is a good approach to selling less-sold products and is found mostly in the cosmetics and food industry. It increases the order value at your store thus more sales revenue in the same time period. This pricing works if you make your potential customer feel like they are getting the best value for their purchase in a bundle form.
Once the customer buys a bundle, it is more likely that they will purchase a product or two again. Drop shippers need to be careful while implementing this strategy. They need to ensure that the products they are bundling are shipped by the same supplier otherwise the bundle would cost shipping fees multiple times which is avoided by the customers.
6. Loss Leader Pricing
In a loss leader pricing strategy, businesses sell a few products at a lower price that costs them with the hope of getting customers to their store. The motive is to give your customers a product at an unbelievable price with the hope of getting them to buy other products from your store at the usual price. The loss leader product works as bait or a hook.
Loss leaders are usually products that are not bought by the customers frequently. Or the products that have an associated product requiring repeat purchases such as razors, electric toothbrushes, skin care kits, devices like printers, etc. If you fail to convert one-time buyers into repeat buyers the loss leader strategy won’t work.
Not all the customers visiting your store would buy another product with the loss leader. Some customers will only buy the loss leaders. You can club together a loss leader with a more profitable product to minimize the loss.
This pricing strategy is a bit tricky and requires more strategic planning to make it successful. It works best for stores with big product lines and stores that sell products requiring refills or repeat purchases. Large brick and mortar stores use this pricing strategy.
A lot of factors are involved in the decision to choose which pricing strategy is best for your business ranging from knowing your customer, business goals, competitive advantage, etc. But awareness of the different kinds of pricing strategies employed in the eCommerce industry by successful brands is the first step to a reach the best product pricing strategy for your business.
