As you’ll know, e-commerce is different to brick-and-mortar stores. You can’t feel the products, you can’t get face-to-face interactions with the staff.
You’re limited by the product images, descriptions and most of all: pricing.
60% of consumers worldwide state pricing as a definite purchasing decision maker. Therefore it needs to be good.
Coming up with the right pricing strategy for your e-commerce store involves a two core things. First, you need to have a strong understanding of your typical customer. What resonates well with them and what sort of things do they value.
Second, you need to decide on what you want to achieve with your pricing strategy. Setting the right pricing strategy is a direct path to extreme growth so getting it right is imperative.
In this blog post, we’re going to look at some of the tactics you can use to set the perfect pricing strategy for your e-commerce store. We’re then going to look at a number of different pricing strategies you can test out.
Let’s dive into it.
Why there is no one-fits-all-approach to pricing
When it comes to e-commerce pricing, a strategy that works for one store might not work for the other.
Some stores like, Supreme Gift Shop prefer to offer their products for free, customers simply need to pay for shipping. There are definitely benefits to this pricing strategy and it works best when customers are using a dropshipping model to sell their products.
But imagine a scenario where Apple also did free + shipping, you can see how that would easily lead to lower profit and revenue margins for Apple.
So getting your pricing approach right really depends on what you’re selling and who you’re selling to.
With all this in mind, let’s consider some popular e-commerce pricing strategies and the types of businesses they are most commonly used by.
Cost-based pricing strategy
Cost-based pricing strategies are what most new e-commerce store owners start with. It involves taking note of all your business costs, including hosting, buying stock, marketing and staff wages and setting a target profit margin based off that.
Although this approach is simple in its execution, there are a surprising number of e-commerce owners who don’t factor in overall business costs into their profits.
Meaning, they are selling profits (at a higher margin than they paid for them to be manufactured), yet their overall business profits aren’t growing.
In this example, we’ll use Cubitts, an online glasses retailer. Suppose they calculated their entire unit cost (including other business overheads) to come to 65, by selling their product at £125, their makin a cost-based profit of £60.
Keeping track of this is an easy way to maximize profits. You have two options, either lower your overhead costs to increase profit per order, or increase price.
Choosing your target profit percentage comes down to the market and industry you’re in.
In markets where price is a real defining factor, where customers are thinking “I could get that cheaper elsewhere”, you should choose the profit margin that will allow you to comfortably keep selling that product, but not alienate a majority of your customer base.
This phone case costs £89,
Imagine, though, they wanted a 50% profit margin on this and instead charged £133.75.
I can find a similar phone case from a similar vendor for £44, therefore it make no economical sense for this business to charge £133.75 for the phone case as there’s no real reason for any customer to buy from them, especially when they can get it cheaper.
Whereas, for higher end products, like say an iPhone, the profit margin on that product is much higher because their customers are used to paying a premium. This is largely down to Apple’s inherent marketing of themselves as a premium brand.
If you are going to adopt a cost-based pricing strategy then make sure you’re not over or undervaluing your product.
Competitive pricing strategy
The world of e-commerce is competitive. No matter what niche or industry you’re in there are countless other e-commerce stores competing for the same keywords as you.
And if they’re competing for the same keywords as you, you can expect they’re offering the same products.
A simple Google search of “dog kong” shows 28,300,000 results. You can see from the image below there are identical products with different price points.
This means the sellers have tried to keep their prices in line with what their competitors are charging, however, as eBay has a much larger share of the market potential, they are able to offer lower prices.
In many cases, when you compare your prices to your competitors using a competitor price tracking tool, you’re often led to believe the best approach is the race-to-the-bottom where you undercut your competitors to achieve the best price.
However, if you’ve already implemented the cost-based pricing strategy above, you’ll know there’s only so much you can reduce your prices by before they start to lose you profit.
But competitive pricing cannot be done flippantly. It needs you to have a strong understanding of your target audience and market to know what price they’d be happy to pay.
For example, through effective branding, you can often usurp your competitors and charge a premium for the same/or similar product.
No matter how meticulously you calculate the ideal prices of your products, there’s one factor that can always undermine everything: your competitor’s prices
Dynamic pricing strategy
Dynamic pricing is a type of pricing discrimination that looks to change the price of products based on your own costs and your competitors’ prices. This approach is often automated through the use of AI and big data.
It means that one day a customer could come onto your website and see the price point of $100 and the next day, because of fluctuations between your competitors, your price might automatically rise to $130.
Dynamic pricing affects all your consumers at the same time, based on the same external factor.
For example, time could be a factor that changes your prices. You might have an automated feature that alters your prices during a busy holiday period like Black Friday.
Or you might have an increase in prices as soon as the weather drops below a certain temperature, if you for example sell outdoor goods.
There are a range of different factors you can use with dynamic pricing, but they all involve understanding what your customers value in and of itself and what will keep your customers spending their money with you, even if your prices have increased.
Note: dynamic pricing, doesn’t just have to increase your prices, you could also consider lowering prices for certain products that only sell well at certain times of the year. For example Christmas decorations could decrease in price March through to September and increase October onwards, when people are actively searching for these items and are happy to pay a premium for good quality.
Include the whole team in your pricing strategy
So far in the article, we’ve outlined a number of different pricing strategies you can try and test out. Whether your e-commerce store has one product or a range of products, it might be useful to combine a number of these strategies together to find what works best for you.
That said, this is not the entire list of pricing strategies you can use, but these are the foundations for which you should begin, if you want to begin working on pricing strategies for your e-commerce store, or optimize the strategies you’re already using.
Pricing, however, shouldn’t happen in silos in one person’s department. Get your entire business involved in the decision on pricing. Use the helpful tools available to you to help you get closer to choose a price point and ensure the strategic decision involves the whole company.
To help your team come up with better pricing strategies, consider the following tools in conjunction:
Divvit: To track how your e-commerce store is currently performing
Prisync: For competitor price tracking and monitoring
Your entire e-commerce strategy is likely to be different to a store that only sells in physical shops. Because of this, pricing becomes even more important for consumers when making a decision.
Comparing prices online is a load easier than comparing them in person. In person, you need to visit each store individually before you make a decision. Online, you can research, at ease, through a couple of clicks.
Getting your e-commerce pricing strategy right, and choosing the one that works best for you is often a trial and error approach as you come to learn your customers in greater detail.
Although we’ve listed a number of different pricing strategies for you to try here, don’t think of them as mutually exclusive. As in, you don’t have to stick to one and neglect the rest (although, if that works best for your business, then do what feels right and generates the highest amount of profit and happy customers).
Despite this, e-commerce pricing should not be seen as a static task, moreover, an ongoing approach to better serving your customers at the same time as increasing your profits.
What pricing strategies do you use on your e-commerce store?