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How to Tackle Pricing in Your Ecommerce?

by
in
Krzysztof (Kris) Szyszkiewicz
Head of Delivery, Partner
February 28, 2024
pricing

How do you set the right price for your products to ensure profitability, yet remain attractive to your customers? This question isn't just important – it's crucial for the survival and growth of your online store. A well-thought-out ecommerce pricing strategy goes beyond mere numbers; it's about understanding market dynamics, consumer psychology, and your competition. How to tackle pricing, then?

Why Set-and-Forget is Not an Approach in eCommerce

It's often a mistake to think that once you've set your product prices, you're done.

The digital market is too dynamic for such a static strategy.

E-commerce Businesses Have to Stay Competitive

In the bustling online marketplace, remaining competitive means more than just having an appealing product range. An effective ecommerce pricing strategy adapts to market changes, leveraging dynamic pricing to adjust to demand and competitor pricing.

For instance, during high-demand periods, surge pricing can maximize profits. Conversely, implementing discounted prices or loss leader pricing strategies can attract more customers during slower periods.

The key is flexibility; businesses that monitor market trends and adjust their pricing accordingly can maintain a competitive edge. This approach not only keeps you relevant but also ensures you're always offering a fair price that resonates with the ever-evolving expectations of your customers.

It's All About Maximizing Profits

Maximizing profits in ecommerce isn't just about setting high prices; it's about finding the right balance that attracts customers while enhancing your bottom line. Implementing a variety of pricing strategies, such as bundle pricing, value-based pricing, or cost-plus pricing, allows for flexibility in attracting different segments of the market.

For example, bundle pricing can increase the average order value, while cost-plus pricing ensures a consistent profit margin above production costs.

By strategically adjusting prices in response to market and consumer behavior, online stores can optimize their selling price to improve profit margins without alienating price-sensitive customers.

The Right Pricing Allows For Meeting Customer Expectations

Setting the right price in ecommerce is crucial for meeting customer expectations and fostering loyalty. A fair pricing strategy that considers competitor based pricing, cost of production, and consumer perceived value can significantly enhance customer satisfaction.

For instance, penetration pricing can help new online businesses enter the market by offering lower prices initially, building a customer base that values the offered products. Similarly, psychological pricing strategies can make prices seem more attractive, encouraging purchases.

By carefully selecting the right ecommerce pricing strategies, businesses can meet customer expectations, offering them value that goes beyond the price tag, thus securing a loyal customer base willing to pay a premium for perceived value.Optimizing revenue streams

E-commerce Businesses Need to Focus on Adapting to Market Changes

The digital marketplace never stands still, making adaptability key for e-commerce success. A static pricing strategy won't cut it when technology, consumer preferences, and competitive landscapes change rapidly.

Take, for example, dynamic pricing, which allows businesses to adjust prices in real-time based on market demand and competitor actions.

This strategy ensures that an e-commerce store remains competitive during sales peaks and troughs, maximizing profit margins while still offering fair prices to customers.

Successful online businesses monitor these variables closely, adjusting their ecommerce pricing strategies to stay ahead. The ability to swiftly adapt pricing not only keeps a business competitive but also aligns with consumer expectations for fair and responsive pricing.

There's a Need For Enhancing Brand Perception

In the competitive world of e-commerce, how customers perceive your brand can make all the difference. Effective pricing strategies play a crucial role in shaping this perception.

Implementing value-based pricing, for instance, shows that you understand and appreciate the intrinsic worth customers place on your products, enhancing brand loyalty and trust.

Similarly, cost-plus pricing strategies transparently link selling prices to production costs, further bolstering customer trust by ensuring a fair price.

These strategies, coupled with psychological pricing to make costs more appealing, not only help in maintaining competitive prices but also in positioning your ecommerce business as customer-centric. A brand that masters the art of aligning pricing with customer value perception stands out, encouraging repeat business and fostering a loyal customer base.

Changing Pricing Can Contribute To Driving Sales Growth

Revamping your pricing strategy is a powerful lever for catalyzing sales growth in e-commerce. Consider dynamic pricing, a flexible approach that adjusts prices in real-time based on market demand and competition.

This strategy enables ecommerce businesses to capture the highest possible price point the market will bear at any given time, significantly boosting profit margins.

For example, by employing loss leader pricing during strategic periods, retailers can attract a surge of traffic to their online stores, converting those bargain hunters into loyal customers who purchase other full-priced items.

Similarly, implementing bundle pricing can increase the average order value, encouraging customers to buy more by presenting a perceived value deal. E-commerce stores that master these pricing strategies not only see a spike in sales but also strengthen their position in a competitive online marketplace.

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Types of Ecommerce Pricing Models

Dynamic Pricing

Dynamic pricing allows ecommerce businesses to adjust their selling prices in real-time based on market demand, competitor prices, and customer behavior.

This strategy ensures that an online store remains competitive by offering prices that reflect the current market situation.

For example, during high-demand periods such as holidays, prices can increase to maximize profit margins, while during slower periods, prices can decrease to attract more customers.

This flexibility helps ecommerce stores to optimize revenue and stay ahead in the competitive market.

Value-Based Pricing

Value-based pricing sets prices primarily on the perceived value of the product to the customer rather than on its cost of production or market competition.

This strategy is effective for ecommerce businesses offering unique or highly valued products where customers are willing to pay a premium for perceived benefits.

For instance, eco-friendly products often employ value-based pricing, as customers perceive higher value in sustainable practices and are therefore willing to pay a higher price.

Cost-Plus Pricing Strategy

The cost-plus pricing strategy involves setting the selling price of a product by adding a fixed percentage markup to its production cost.

This straightforward approach ensures that all costs are covered and a profit margin is secured.

Ecommerce businesses might use this strategy for products with predictable costs, ensuring a consistent profit margin regardless of market changes.

It's particularly useful for retailers selling goods with stable production costs.

Competitor-Based Pricing

Competitor-based pricing involves setting your prices based on those of your competitors. Ecommerce stores often use this strategy to remain competitive in a market with similar products.

By monitoring and adjusting prices to match or undercut competitors, businesses can attract price-sensitive customers. This strategy requires constant market analysis to stay competitive without sacrificing profit margins significantly.

Loss Leader Pricing

Loss leader pricing is a strategy where ecommerce businesses sell one or more products at a loss to attract customers, hoping they will make additional purchases of more profitable items.

This approach can be effective for introducing new customers to your store or clearing out old inventory. It's a strategic move to increase foot traffic (or, in the digital world, click traffic) and overall sales volume.

Penetration Pricing

Penetration pricing is used to enter a new market by setting prices lower than competitors to quickly attract customers and gain market share.

Once a significant customer base is established, prices can gradually increase. This strategy is effective for new ecommerce businesses looking to establish themselves in a competitive market.

It can lead to rapid customer acquisition but requires careful planning to ensure profitability in the long term.

Price Skimming

Price skimming involves setting a high price for a new product initially and then gradually lowering the price over time. This strategy capitalizes on the willingness of early adopters to pay a premium for the latest products. Ecommerce businesses launching innovative or high-demand products can use price skimming to maximize profits before competitors enter the market with similar offerings.

Bundle Pricing

Bundle pricing combines several products or services into a single package offered at a lower price than if each item were purchased separately.

This strategy not only increases the average order value but also encourages customers to purchase additional items they might not have bought individually.

Ecommerce stores often use bundle pricing for complementary products, enhancing customer value and boosting sales with the right pricing strategy.

Psychological Pricing

Psychological pricing employs pricing tactics that have a psychological impact on consumers, encouraging them to make a purchase. This includes strategies like setting prices just below a round number (e.g., $19.99 instead of $20) to make the price seem lower.

Ecommerce businesses use psychological pricing to appeal to cost-conscious customers, making products seem more affordable and thus increasing the likelihood of purchase.

Factors that Affect Your Ecommerce Pricing Strategy

Market Competition

Market competition significantly influences your ecommerce pricing strategy. Competitive pricing ensures your prices are comparable to or better than those of your competitors. Retailers often adjust their prices based on the competitive landscape to attract price-sensitive customers.

For instance, adopting a competition-based pricing strategy might mean setting prices lower than the leading brand to capture market share or using price skimming to differentiate on quality and innovation.

Production and Operational Costs

Production and operational costs are the backbone of cost-based pricing strategies.

This approach calculates the total cost of bringing a product to market, including manufacturing, labor, and overhead, and then adds a markup for profit.

Ecommerce stores must account for these costs to ensure prices cover expenses and generate profit. Dynamic pricing can also factor in fluctuating costs, such as seasonal changes in raw material prices, to maintain profitability.

Customer Perceptions and Expectations

Customer perceptions and expectations shape the best pricing strategy for any ecommerce business. Value-based pricing focuses on setting prices that reflect the perceived value of a product to the customer.

For example, premium brands often employ anchor pricing to establish high price points that reinforce the premium quality perception, targeting customers who are willing to pay more for perceived value.

Shipping Costs and Policies

Shipping costs and policies can profoundly impact your ecommerce pricing strategy. Offering free shipping often necessitates embedding shipping costs into the product price, which might lead to higher overall prices.

Alternatively, transparently adding shipping costs at checkout can affect customer loyalty and purchase decisions.

Ecommerce stores must balance these strategies to find the optimum price point that appeals to their target audience without diminishing profit margins.

Product Life Cycle Stage

The stage of the product life cycle influences the pricing strategy, from introduction (price skimming) to decline (discounted price). Initially, a high price may be set to recover development costs, adopting a price skimming strategy.

As the product matures and competition increases, strategies may shift to discounted pricing or bundle pricing to maintain interest and clear inventory, ensuring the right ecommerce pricing strategy evolves with the product’s lifecycle.

Economic Conditions

Economic conditions, including inflation and consumer purchasing power, dictate how flexible your pricing strategy can be.

During economic downturns, ecommerce businesses might opt for more aggressive discounting or loss leader pricing strategies to stimulate demand.

Conversely, in a booming economy, consumers may be less price-sensitive, allowing for premium pricing or reduced discounts, showcasing the need for dynamic pricing strategies that adapt to economic shifts.

Technological Advancements

Technological advancements impact ecommerce by enabling dynamic pricing, which allows for real-time price adjustments based on demand, competition, and inventory levels.

Ecommerce stores leverage technology to implement various pricing strategies efficiently, from using algorithms for competition-based pricing to employing software that tracks market demand for dynamic prices, ensuring they remain competitive and responsive to market shifts.

Brand Positioning and Identity

Brand positioning and identity dictate the premium price or competitive price points an ecommerce store can command.

A luxury brand might use price anchoring to set higher price tags that reflect its market position and customer loyalty, whereas a brand known for value might focus on offering the lowest price to attract cost-conscious customers.

The right ecommerce pricing strategy reinforces the brand’s identity and targets its core audience effectively, aligning price with brand perception.

How Valueships Can Help with e Commerce Pricing Strategies

Our client's testimonials speak for themselves...

But if you need to know more, here's the gist!

Our Mission:

  • Optimize pricing models for maximum profitability.
  • Refine sales processes to enhance customer acquisition and retention.
  • Develop and implement comprehensive, long-term business strategies.

Why Choose Us:

  • Targeted Customer Insights: We specialize in identifying and understanding your core customer groups, tailoring your product offerings to meet their specific needs.
  • Strategic Portfolio Adjustment: Our expertise ensures your product portfolio is perfectly aligned with market demands, maximizing your business's growth potential.

Overcoming E-Commerce Challenges:

  • Pricing & Portfolio Alignment: Tackle the common pitfall of cost-plus pricing and unlock the true value of your Key Value Items (KVIs).
  • Smart Discounting: Move away from broad-brush discounting strategies that harm margins and brand perception, towards a data-driven promotional strategy.
  • Enhanced Data Analytics: Upgrade your data stack with our help to gain critical insights into SKU-level margins and competitive price monitoring.

How We Can Transform Your Business:

  • Unlock Revenue & Margin Potential: Utilize our advanced analytics and competitive scraping techniques.
  • Data-Driven Decision Making: Analyze key metrics like average shopping cart value and website conversion rates to align pricing with market sensitivity.
  • Promotion Optimization: Employ our price-promo linkage methodology to identify promotion-sensitive products and optimize promotion frequency and depth.
  • Long-Term Analytics Strategy: Establish a solid analytics foundation to support your company's growth, focusing on both tools and team capabilities.

📅 Schedule a free consultation with us and start your journey toward enhanced profitability and efficiency.

Key Takeaways

  1. Efficient pricing models increase e-commerce profitability.
  2. Aligning sales processes enhances customer retention.
  3. Long-term strategy implementation is crucial for growth.
  4. Understanding target customer groups optimizes product offerings.
  5. Addressing pricing and portfolio alignment maximizes margins.
  6. Smart discounting strategies protect brand perception.
  7. Enhanced data analytics unlock growth opportunities.
  8. Advanced analytics guide pricing and promotional decisions.
  9. Competitive scraping provides crucial market insights.
  10. Tailored approaches address unique e-commerce challenges.

Conclusion

E-commerce success hinges on strategic pricing, data-driven decision-making, and market alignment. By focusing on these areas, businesses can navigate the complexities of online selling, ensuring profitability and growth. Embrace these insights and strategies to refine your e-commerce approach. Now it's your turn to apply these principles and propel your business forward. Good luck with your effective pricing strategy!

FAQ

What is ecommerce pricing?

Ecommerce pricing refers to the strategy used by online businesses to set prices for their products or services, considering factors like cost, competition, and customer demand.

How do you set ecommerce prices?

Setting e-commerce prices involves analyzing production costs, competitor prices, market demand, and customer value perception to find an optimal price point that maximizes profit while attracting customers.

What is a pricing example?

A pricing example is loss leader pricing strategy, where a product is sold at a low price to attract customers, hoping they will buy other higher-priced items at best price.

What is an example of product pricing?

An example of product pricing is dynamic pricing, where prices fluctuate based on real-time market demand and competition, often seen in online retail.

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Krzysztof (Kris) Szyszkiewicz
Head of Delivery, Partner

Certified expert in price, revenue and margin management in B2B companies and e-commerce. Member of the prestigious Professional Pricing Society. At Valueships, he is responsible for the implementation of consulting projects and taking care of the profitability of clients. Prior to joining Valueships, he worked at McKinsey & Company in the area of ​​pricing and strategy.

Schedlue a free consultation
Krzysztof (Kris) Szyszkiewicz
Head of Delivery, Partner

Certified expert in price, revenue and margin management in B2B companies and e-commerce. Member of the prestigious Professional Pricing Society. At Valueships, he is responsible for the implementation of consulting projects and taking care of the profitability of clients. Prior to joining Valueships, he worked at McKinsey & Company in the area of ​​pricing and strategy.