The Ultimate Ecommerce Pricing Strategies
Remember the last time you visited your favorite shop? Well, if yes, let’s remember those moments together in detail.
Probably, you went into the store, gazing through the stalls briefly, touching few of the items for the feel of the texture of it and suddenly you found your loved one, a t-shirt, a skirt or a shirt or whatever. You quickly hold it on and place over your body on whatever you wear to get the quick feel of owning it. Then your brain implicitly reminds you the only step between holding that thing in your hand and owning it, which is actually buying it, i.e. paying for it. Then, right away you try to find the price tag, and flip it around and check how much it costs.
You start to feel the chasm between the stalls and your wardrobe. It costs a lot, and you’ll need to save from this and that and that to actually buy that right away. It’s not a bargain, it’s not a deal etc. so you give up, and probably leave the shop after few similar repetitions of this.
This is a quite common offline shopping story and the example here was mainly for the apparels, but if you ever think that things flow differently in ecommerce, while shopping online and necessarily for apparels but for another product category, leave that thought there, you’re wrong!
Actually, in online shopping environment, in ecommerce, the prices are even more apparent and you don’t need to twist the tag or something but it appears in front of your eyes right away along with the product name, its descriptions etc. Therefore, the online pricing of the product becomes one of the most crucial qualifiers when you start browsing that product in an ecommerce site.
That’s why we’ve collided all of our ecommerce pricing knowledge in to one big resource for the purpose of helping you to cover every single of ecommerce pricing strategy in one place.
Your customers really care about your online pricing.
For all sizes of ecommerce companies from all around the world, online pricing really matters. Period.
To emphasize that even further, let me share some bold findings to better guide you on how much you should care about your ecommerce prices:
• More than %60 of online shoppers worldwide considers ecommerce pricing as the very first criteria affecting their buying decision. In emerging ecommerce markets, consumers care about online prices even more.
• Around %90 of ecommerce shoppers are quite fluent about hunting deals and invest time for that before deciding on the web-shop where they will shop. This time for ecommerce price comparison is measured to be around 10 minutes per every item purchased.
• Price Comparison Engines are a key part of ecommerce marketing stack, as they constitute around % 20 of ecommerce traffic for all sorts of product categories. Obviously this ratio is even higher for product categories where online prices are even more important, and the shopper persona is naturally more price-sensitive, for example, in consumer electronics ecommerce.
That’s why it’s wise to say that ecommerce companies of all sizes from all around the world should dedicate the much required focus on their online pricing management operations and take it as a team sport, rather than leaving it under the management of a few people in a company or a department.
When taken seriously, and managed properly, companies all sizes would actually see that, online pricing can act as a marketing tool and it can have a major influence in product page conversion rates.
Now let’s see how you can start caring about your ecommerce pricing in your site as much as your customers do – or even more – depending on your market positioning and start getting most out of pricing.
1. Cost-oriented ecommerce pricing
Any ecommerce company active in any product category should at least be aware of its costs and at least should have cost-oriented pricing as one of its ecommerce pricing strategies (rather a simplistic one) under its belt.
This ecommerce pricing approach requires the company to be able write down its unit product costs for each of its products in its portfolio, and then set a target profit margin for each of those products and price the products as the sum of the unit costs and the target margin.
It may sound and seem too obvious but it’s really shocking to see how so many ecommerce companies lose track of its unit costs and fail to even apply this strategy and completely miss the balance between its unit costs and product prices.
The main reason behind this miss is that the unit cost that we are talking about here, is not a given in any business environment, and it should be deducted in parallel with the operations within the company. In other words, the unit product cost is not only the cost that an ecommerce company pay for the supplier of that product on a unit basis but it’s actually more than that. Oversimplification of this calculation can trick ecommerce companies to take that supplier cost as the sole cost of the product and price on top of it. Such a calculation will ignore all associated operational costs that an ecommerce company have in order to deliver that product to its end-customer.
There are many overhead expenses that an ecommerce company carry to remain on the ground and also to grow. To reach to the correct unit product cost, an overhead operational cost per unit should be added on top of the unit supplier cost of that product.
The following part, i.e. the target profit margin requires simple math at the online price calculation part. You should be adding that on the total unit cost. However, again, here the crucial part is to come up with the right profit margin that will maximise the total profit gained for the ecommerce company. The target profit margin does not depend on the will of the company at all, it rather depends on the market and the buyer personas. For example, if the product is in the luxury category, than the buyers are maybe not after low online prices really, so, a fatter profit margin could still hold valid. However, the same approach would yield 0 sales in consumer electronics industry. There, the profit margins are totally slim, and player with relative expensive online prices does not have much of a chance in the market.
To conclude, we can tell that there are 2 risks that come with the cost-oriented ecommerce pricing approach: An ecommerce company can either undervalue its products or totally lose its competitiveness depending on both the cost calculations and profit targets. That’s why cost-oriented pricing should be the basis for other strategic online pricing approaches and should be applied together with them.
2. Market-oriented ecommerce pricing
An ecommerce company, like any other company from any industry, is not alone doing business in its market. There are tons of companies active in the same industry, around 12 million to be more exact. As part of this 12 million, each company active in any country in any product category directly competes with several direct competitors.
Therefore, an ecommerce company can not only focus on its costs and the desired profit margin and ignore the market competition while pricing its products. As we explained at the beginning of this post, consumers care heavily about the online prices and they compare the prices versus competitors. This makes clear understanding of market pricing position for any ecommerce company a must.
In such a crowded and dynamic market, it’s impossible to build this clear understanding of the competitive landscape. Automated competitor price tracking solutions are the key to success for any size of ecommerce company by notifying companies about the online price drops over at competitors, and letting them to adjust their own online prices that will bring both competitiveness and profitability. (the sweet spot here is the proper mix of cost-oriented pricing and market-oriented pricing.)
Market-oriented ecommerce pricing, and competitive ecommerce pricing as a result does not necessarily always force ecommerce companies to undercut their competitors and lower their online prices till the whole margin disappear. The major and often neglected benefit of market-oriented pricing with solid competitive pricing intelligence is that it sometimes shows companies exceptional price increase opportunities where the price might be really low versus the competitors. This mostly happens when a company has cost advantages versus its competitors, and thanks to competitive pricing intelligence, these gems in the whole product assortment, can be identified and a price increase can be applied while still holding the competitiveness.
It’s always a smart approach to be aware of what your competitors have to offer, and at what price. After monitoring your rivals, you now have a bigger and better picture, which enables you to set easier for you to determine your own pricing. You can for instance, make an assessment based on the competition and in-turn raise or lower your prices, or stick to what your competitors are offering.
Armed with the proper solution, you can both increase your profit margin and stay competitive at the same time.
Below you can find three different ecommerce retailers selling the same LE CREUSET 27cm Signature Oval Casserole, Marseille Blue. The first one is the most competitive in terms of price, selling it at £171.08. The second retailer sells the same item at £210.00 same as with the third retailer. So, in that scenario, the first e-commerce retailer can detect that opportunity through competitor price tracking software (you can see how to detect it on the image) raise the price just below its competitor by setting it £200. This move will bring increased profit margins that lift up the balance sheet and still let the product be the most competitive one in the market.
The preview of a competitor price tracking software:
The first retailer marked with red on the dashboard:
The second retailer marked with blue on the dashboard:
The third retailer marked with green on the dashboard:
3. Dynamic pricing
Market-oriented competitive pricing can also be taken into the auto-pilot mode by applying dynamic pricing. By setting the competitive price change updates as the internal price change triggers (by means of notifications), companies can achieve a more sustainable and actually unbeatable competitiveness.
In basic terms, dynamic pricing is a pricing approach that enables you to set flexible prices by taking into account your costs, targeted profit margins, the demand of the market and your competitors’ prices. In other words, you’ll be able to set the optimal price at the right time in response to real-time demand and competition status, while taking into account your business goals.
Having tons of data is great. But, the crucial thing is to convert data into actionable insights. Fortunately, there are dynamic pricing and in the market that help you to generate recommendations from the data that you’ve collected from competitors. Then, the technology lets you calculate optimal prices through that you’ve set based on your competitors’ prices, market demand and costs.
Once the optimal price rules are set, then you can enjoy the rest! The repricing engine works all day and your prices will be changed according to the fluctuations in the market and ,of course, based on the rules that you’ve set. With the mix of competitive intelligence and repricing ability, your business can gain a seamless competitive advantage in the market. As you’re able to react to every single move in the market, your prices will always stay competitive or optimized.
4. Consumer-oriented ecommerce pricing
In every aspect of ecommerce, customer-centricity should come first above anything else, and pricing decision making is not an exception to that.
To offer perfectly tailored price-points to its shoppers, any ecommerce company should be easily and clearly answering these 2 questions:
• What is my shop’s unique selling proposition? – Do I mostly deliver a hard to find value and satisfy my customers, of do I deliver them a value that can be found elsewhere at the right price points?
• Who are my customers? – How do their minds work while shopping my products and is it their heart or their mind speaking while buying my product?
The answer for both of these questions will actually bring a solid self-awareness for the ecommerce company when it comes to its customers. From that point onwards, a company can easily tell whether a slim margin is a must for its shop, or how significant the placement of the prices next the product pages is and many similar pricing decisions.
Obviously, for companies that remain mostly at the value-oriented end of the spectrum, higher profit margins with weak pricing visualisation (more emphasis on other elements associated with the product) and communication would work. Because those shoppers will be buying those products with their emotions rather than their rationale. – with less calculations or comparisons. However, for companies retailing products that are mostly commodities which you can find elsewhere and the key part becomes the competitive advantages in consideration.
5. Bundle pricing
Product bundling as a price strategy is fairly simple. You sell a range of products together for a combined price. This is different to customers simply adding various products to their bag separately because it plays on the psychological, economic idea that consumers will be more likely to make the purchase when there’s a significant perceived value.
By improving the value of what you’re selling, you’ll sell more and make your customer’s happy.
For example, many products require accessories. Some are mandatory (like a lens cap on a camera that usually comes with the camera), but some are highly desired, but optional, like a tripod for a camera.
Bundling products of a similar nature is a great way to increase your average order value because customers are likely to be looking for similar things. Someone buying a DSLR camera is likely going to be interested in buying a different lens or a tripod to go alongside it.
6. Penetration pricing
Penetration pricing is an e-commerce marketing strategy business use when they’re highlighting a new product or service or wish to enter a new market.
It works in a simple way, where they set their prices lower than their competitors in the hope to increase their market share of customers. Usually, this practice only happens during the initial offering and is meant to allure customers to their store, as opposed to their competitors.
7. Price discrimination
Price discrimination is a tailored approach to pricing where an identical item could have different prices. It works on three different degree levels:
- First degree: Consumers are charged the maximum they’d be willing to pay for any given product. For example, auction or bidding sites, where one customer might pay lots more for a similar item, based on what they’re willing to pay.
- Second degree: Consumers can choose their price discrimination. For example, they might be offered a lower price if they buy a product in higher quantity.
- Third degree: Products are priced differently based on customer segments.
In essence, it involves taking customer data including their behavior and perception, segment customers based on that data and then generate prices specific to each segment.
Dynamic pricing is a type of price discrimination and is an approach whereby eCommerce store owners change the price of their products based on a number of different factors. The difference between price discrimination and dynamic pricing is the outside vs inside influences and the basis on which prices are changed.
Dynamic pricing affects everyone in the same way. Price discrimination could affect me differently to the way it affects you because of our own personal buying habits.
Look at the original article to see the best use cases of price discrimination.
8. Loss leader pricing
An ecommerce loss leader pricing strategy involves setting one or two of your products to be sold at a lower price – a price that actually puts you at a loss – in order to get your customers through the door (or on your website).
You do this in the hope that once they’re on your site, they’re more likely to buy your other (normally priced items).
An electric toothbrush is a great example of a loss-leader product. This electric toothbrush costs £99
Although we do not know the manufacturing costs for these toothbrushes, we can assume they make most of their profits on the replaceable toothbrush heads.
When you think about an electric toothbrush, you don’t tend to buy them often. And so brands can afford to sell them at a loss because they know they’ll easily recoup their lost profit costs form the toothbrush heads which need to be changed much more regularly for great oral hygiene.
So if you want to implement a loss leader strategy and are worried, consider whether you have any add-on products where people would need to come back to your store to make a further supplementary purchase.
8. Price skimming
In its simplest terms, ecommerce price skimming is the art of setting high prices for your products during an introductory phase. What this means is that businesses are able to leverage the “newness” of their product and maximize their profits from the get-go.
What you need to remember about price skimming is there are consumers out there who want to be the first ones to get hold of a product. They like the feeling of exclusivity. In some ways, it makes them feel as though they’re part of a special club.
If you want to implement price skimming, then you could think about using phrases such as “exclusive offer” or “limited availability”, “be the first to get your hands on” within your marketing copy to make sure you highlight the need for consumers to take action right away.
Apple is one of the best examples of price skimming used most effectively. During the run-up to a new iPhone release, there are sufficient rumours before the announcement even happens.
Once it’s time for the actual announcement there has already been enough excitement drummed up that increases the buyer’s appetite for a purchase.
You’ll have seen the news, where wannabe iPhone owners would camp outside the store to be one the first to get their hand on the newest model. Others would pre-pay for their model weeks before they even get the phone.
Conclusion: You should really care about your online prices.
To repeat, pricing fails when it’s taken as a department’s or a person’s dull role within an ecommerce company. When taken seriously and handled in smart ways, it turns into a secret and very effective marketing tool.
The approaches that we shared here are the 3 core pricing approaches and as you might have also felt, they are not necessarily mutually exclusive. In other words, you do not actually choose one and apply one and neglect the others. Contrarily, like most the marketing and growth strategies, they work best when applied hand in hand with each other. (like, competitive market-oriented pricing together with correct unit cost calculations.)
Finally, pricing is not a static task, and it requires ongoing effort to optimise and fine tune it as your ecommerce company grow. Like any other ecommerce operation that you need to run, there will always be room for improvement and it’s not going to be an easy operation but fortunately you have quite enthusiastic folks like us that look forward to helping you out with your online pricing strategies to help you achieve sustainable price competitiveness and profitability.
image source: gust.com/launch/blog/startup-pricing-strategy-concepts