Pricing is by far the most important lever impacting the profitability of your business. Price customers pay varies based on their demographics and psychographics, purchase timing, and channel used to buy.
There are several strategies for how e-commerce businesses should price their products, all of which are based on two types of reasoning, cost and value metrics, and the other is psychological metrics.
How to price your product
Here are the thirteen most popular pricing strategies.
#1 Cost-based pricing
The cost-based pricing strategy takes each product's cost, including overheads and adds on the desired markup percentage. This is not a sophisticated pricing strategy as it does not consider competitive pricing and consumer's willingness to pay. It could devalue your product if it is too lows or make it less competitive if it is too high.
#2 Competitive pricing (market-based pricing)
Competitive pricing enhances the cost-based pricing model by considering the pricing of your competitors and pricing your product a bit lower to capture greater share. Armed by vital competitive pricing intelligence, you could marginally lower your prices than the competition, or if your prices were too low, you could raise your prices to just below your competition's price. This strategy can therefore be used to not only increase sales but also to increase profit margins.
#3 Dynamic Pricing
Dynamic pricing is a highly profitable flexible pricing strategy that enables the online seller to set an optimal price in response to real-time competition and demand changes. Dynamic pricing is market-oriented pricing powered by dynamic pricing and repricing software which collects competitor prices and adjusts your prices in real-time against market price or demand fluctuations. Since the process is automated, you need to set a minimum price limit to avoid getting into bidding wars.
#4 Consumer-based pricing/Value-based pricing
Value-based pricing strategy or perceived value pricing strategy considers the differentiated emotional value of a product in the consumer and market's eyes. It is set between what you want to earn on a sale and what your customers are willing to pay by considering the brand, product features, audience demographics, and market position. It works best for known brands and allows profit maximization, but it is complex and challenging to implement.
#6 Penetration pricing
#7 Price discrimination or segment pricing
First degree: Consumers get charged the maximum they'd be willing to pay for a product, like at an auction or bidding site.
Second degree: Consumers are offered a lower price if they buy a larger quantity.
Third-degree is the most common price discrimination technique, which charges a different price to different customer groups based on the time (month, day, or time of day) or place of purchase (physical store, website or marketplace).
#8 Loss leader pricing
Loss leader pricing involves selling one or more retail products below cost as bait to attract customers to your online store where they could end up buying other products or the necessary accessories at profitable prices.
The loss leader pricing strategy can help steal share in highly competitive niches, drive traffic to your store or create demand for profitable accessories or consumables by selling the hero product like selling a game console or printer below cost and charging full prices for games and printer ink.
#9 Discount pricing or promotional pricing
Discount pricing is an effective strategy to increase sales and boost brand awareness. While discount pricing reduces per-unit profit, it increases overall sales revenue by making the product more competitive. It drives increased traffic, attracts a broader demographic, and captures a greater share. However, overusing this strategy can dissuade customers from buying at the regular price and diminish your brand's perceived value.
#10 Price skimming
A price- skimming strategy involves setting a high price when launching a new or must-have product and then decreasing the price over time when demand falls or when substitutes become available. The price-skimming strategy works best for known brand and products that have a unique innovation, style or features compared to the competition, like a new patented drug, designer fashion or technology products like an iPhone
It helps increase profit and the perceived value of the product.
#11 Lead Generation Pricing Strategies [Intermediate]
Lead generation pricing strategy is about excluding the price from your product page. Instead, it encourages potential customers to ask your sales team to get back to them with more information.
This works for highly customizable products where the price differs by the amount of customization or during a product's pre-launch. Instead of announcing the price upfront, the customer is asked to request the price.
#12 Premium Pricing
A premium pricing strategy is used to elevate and support a brand's image. Pricing your product higher than the competition helps create luxury and high quality. This creates high expectations, and therefore it works best if your business and product can meet the high standards, or it may increase returns and negative reviews.
#13 Psychological Pricing
Psychological pricing takes advantage of the instinctive way we make buying decisions for certain kinds of products. It integrates sales tactics with the price to encourage customers to spend more than they intend. Three of the most popular pricing strategies are:
- Charm pricing or Odd number pricing. The practice of setting prices lower than a whole number because customers will see an item priced at $9.99 as $9 and not $10 even though it is only a cent short.
- Artificial time constraints. This is a practice of creating urgency and the fear of missing out, for example, "50% off one day only sale."
- Innumeracy. This strategy takes advantage of our ignorance of fractions and math. This is why "buy one get one free" (BOGO) sells more than "50% off whey you buy two" even though both options are mathematically identical
Here are five steps to creating the right pricing strategy
- Define your business goals. Is your goal to increase profits, grow market share, increase the transaction value, attract a new segment, or launch a new product?
- Analyze the pricing in your market to understand the context in which your product or service will compete.
- Understand your target customer's reason to buy and the perceived and the real value your product or service brings to them.
- Assess your competition pricing structures. Are they setting high prices but offsetting these with discounts and sales? Are they bundling products or selling at below-market averages? Use pricing software to track prices as it will allow you to monitor competitive pricing in real-time to inform your pricing strategy.
- Use the analysis to create a few pricing options that suit your business in relation to your competitors and customers. Test your options and develop a pricing structure that works for your business.
Create your pricing strategy
Every business situation is unique; a pricing strategy that works for another business may not be as effective for your business. You will have to test several approaches and create a hybrid that works for your business.