What’s the Best eCommerce Pricing Strategy for Your Business?
Identifying the right eCommerce pricing strategy for your brand is one of the most challenging aspects of running a business. Price too high, and it’s three strikes you’re out with your target market. Price too low, and you might find yourself scrambling to make ends meet.
Knowing there’s no one-size-fits-all when it comes to eCommerce pricing strategies is a double-edged sword. For one thing, you’ve got a lot of options at your disposal. Unfortunately though, you may choose incorrectly for your brand and target audience.
You need to arm yourself with the knowledge of the pros and cons of different eCommerce pricing strategies for your market and goals. Let’s explore.
The biggest factors influencing your eCommerce pricing strategy
Your target market, offerings, production costs, and competition are the most critical factors that will influence your pricing strategy.
Additionally, your pricing strategy won’t be set in stone. Market influences, time of year, supply chain issues, and particular campaign goals may require you to pivot pricing strategies for maximum ROI.
The bottom line is that you want to be flexible and roll with any punches the market will throw at you. But when you first begin creating and identifying the right pricing strategy for your unique brand, your target market and serving their needs should take center stage.
Start with these questions to nail down your eCommerce pricing strategy:
- Who is your target customer?
- What are their expectations for your brand?
- What’s the perceived value of your products?
- How are your competitors pricing their products?
- What are your production and overhead expenses?
- Shipping and handling costs?
- What is your intended profit margin?
- How will sales and promotions impact your bottom line?
Remember, the pricing strategy you choose isn’t a fixed rule. Depending on your objectives, you’ll want to revisit and adapt your prices as the market or your brand evolves.
Now that we’ve gotten your wheels turning let’s look at the top pricing strategies for eCommerce brands.
#1. Cost-plus pricing
Cost-plus pricing is a fairly simple pricing strategy for eCommerce brands. You take your product and add a markup to get the price you want to present to consumers.
Typically, the markup is a percentage of the cost of producing, storing, and shipping the product. The markup is intended to cover the cost of doing business (e.g., overhead and labor) and generate a profit.
The biggest advantage of cost-plus pricing is that it’s relatively simple and easy to understand. By starting with the cost of the product or service and then adding a markup, businesses can quickly and easily determine the price at which they need to sell the product to secure a profit.
Additionally, cost-plus pricing helps you make quick, informed decisions about pricing, which is incredibly useful in a fast-paced or highly competitive market.
Another advantage of cost-plus pricing is that it’s, for the most part, transparent.
Since you’re starting with the cost of the product and then adding a markup, you can clearly communicate to stakeholders (or customers) how you’ve arrived at the final price. This can help build trust and credibility since everyone can see if the price is fair and reasonable.
But there are a few cons to consider if you want to use cost-plus pricing for your eCommerce business.
Cost-plus pricing strategies don’t involve market demand. As a result, businesses using cost-plus pricing may find they can’t charge as much as they would like for a product since this strategy doesn't consider what customers are willing to pay. This can lead to lost sales and decreased profits.
Another disadvantage of cost-plus pricing is that it doesn't consider competitive factors. So, you may risk pricing yourself out of the market.
Also, you might risk higher profits over the long term because a cost-plus pricing strategy doesn’t leave room to consider the effects of volume discounts, economies of scale, and other factors that can affect profitability.
#2. Competitive pricing
With a competitive pricing strategy, you’re setting prices based on the costs of similar products or services your competitors are offering.
- Increased market share — You’re in a better position to secure increased market share and gain more customers.
- Increased sales — If you keep your prices in line with your competitors, you can increase your sales volume more quickly.
- Customer loyalty — If customers perceive that you’re offering the same or similar products or services at a lower price than your competitors, they may be more likely to choose you.
- Cost savings — You'll have lower customer acquisition costs and higher sales volumes.
Sounds great. But what about the drawbacks?
- Reduced profit margins — If you’re trying to match competitors’ prices, you might have to accept lower profit margins.
- Risk of price war — If your competitors are also trying to match each other's prices, it can lead to a price war.
- Reduced differentiation ability — When you’re focused on keeping prices low, it’s more challenging to differentiate your brand.
- Limited pricing power — A competitive pricing strategy can limit your ability to raise prices, even if your costs increase.
Keep in mind that competitive pricing is not the only way to compete. Providing a better quality, better service, or customer experience also drives sales, increases customer loyalty, and enables you to differentiate in a crowded market.
#3. Value-based pricing
Value-based pricing is a pricing strategy that sets the price of a product or service based on the perceived value it provides to the customer.
- Aligns the price of the product with the value that the customer perceives, which can make the customer feel like they're getting a fair deal.
- Increases the perceived value of the product or service, leading to increased sales and higher profit margins.
- Differentiates a product from competitors by highlighting the unique value it provides.
- Creates a loyal customer base, as customers will be more likely to return if they feel they received good value for their money.
- It can be difficult to determine the perceived value of a product, making it harder to set the right price.
- Communicating the product's value to your target customer isn’t easy, making it difficult to justify the price.
- Value-based pricing is one of the riskier strategies, as customers may prefer to avoid paying a higher price for the perceived value of the product.
- The actual value of a product may be hard to measure, so it can be difficult to know if the price is fair.
Additionally, it may not be feasible for some companies with less differentiated products to use value-based pricing strategies, so keep that in mind before you jump in with both feet.
#4. Psychological pricing
AKA perception pricing, this strategy involves psychological tactics that take advantage of how consumers think and behave, such as using odd prices (e.g., $9.99 instead of $10). Or offering a limited-time discount.
With this pricing strategy, you’d use tactics like FOMO, scarcity, bundle deals, or urgency to play on consumer behaviors and increase your sales volume.
Ultimately, you’re adjusting the price of a product to a desired emotional response.
Pros of psychological pricing for eCommerce include:
- Increased perceived value — By using certain psychological tactics, such as FOMO, businesses can make customers perceive a product as valuable and worthy of their hard-earned cash.
- Increased sales — Strategies like odd pricing or limited-time offers increase customers' sense of urgency to purchase, leading to increased sales in a short period.
- Increased profit margins —When you adjust prices to create certain emotional responses in customers, you can charge more for a product and increase conversions.
Cons of psychological pricing for eCommerce include:
- Perceived as deceptive — Some customers may feel misled and lose trust in the business.
- Not practical for all products — Certain products may not be well-suited for psychological pricing strategies.
- More difficult to implement — Implementing psychological pricing strategies is often a complex process, requiring businesses to have a good understanding of consumer psychology and behavior.
The best times to use this pricing strategy are for specific, limited-time campaigns. It's also crucial that you use psychological pricing tactics ethically.
#5. Dynamic pricing
Dynamic pricing is a pricing strategy in which prices are constantly adjusted based on various factors, such as supply and demand, competition, customer behavior, holiday sales events, and even the weather.
- Increased profitability —Since you’re adjusting prices in real-time based on demand, you can increase revenue and profits by charging more for products in high demand while charging less for those that aren't.
- Improved competitiveness — Dynamic pricing can help an eCommerce brand stay competitive by matching or beating its rivals' prices.
- Enhanced customer experience — Offering personalized prices to individual customers based on their purchase history or browsing behavior makes the shopping experience more engaging.
- Price discrimination — Charging different prices to different customers risks your brand being accused of price discrimination. This can be a sensitive issue and may harm your brand's reputation.
- Complexity and cost — Implementing dynamic pricing strategies is one of the more complex, costly strategies on this list and requires sophisticated technology and data analysis.
- Decrease in customer trust — Constantly adjusting prices can make some customers feel like they are being taken advantage of and may decrease confidence in the brand and reduce long-term loyalty.
- Legal restrictions — Some regulations may prohibit or limit the use of dynamic pricing. It’s essential to check with a legal team if you want to implement this strategy in a particular region or country.
Dynamic pricing can be effective for eCommerce. But it's essential to strike the right balance between profitability and customer satisfaction.
So, what’s the best eCommerce pricing strategy for your brand?
Ultimately, you need to experiment to determine the best pricing strategy for your business. You must consider your target market, production cost, and also the competition in the market.
An excellent way to start would be creating pricing experiments, testing different prices for your products or services, and monitoring the impact on sales, conversion rates, and customer satisfaction.
You can also use different strategies on different products or segments, which is an excellent way to optimize your revenue and profitability.
Or, ask the experts and save yourself a bunch of time.
Get in touch with the team at Lingble today for a free consultation.