It’s safe to say that almost everyone who is and have been involved in
A good pricing strategy is essential for your
Why? That’s easy, it helps you to understand the point at which you can maximize your profits on the sale of your products or services.
There are a number of factors that you need to take into consideration before deciding on your pricing
In this article, we will teach you the ultimate pricing strategy guide that will help you navigate this tricky landscape and help you pinpoint exactly, what your product/services are worth.
What is a Pricing Strategy
If you don’t base your pricing on any strategy, chances are that you might have set it inaccurately. Finding a balance between both factors will ultimately give you more room to scale.
The concept is simple, you’ll lose customers if you price your products too high, and if you price too low, your profit margins will decline and you might end up leaving the impression that your products are of poor quality.
The key is balancing between both ends of the spectrum.
Why is Pricing Important?
The price you determine for your products strongly impacts your profit. We live in a world driven by value and in most cases, buyers determine value by assessing the product’s price, especially during online purchases where the buyer cannot physically touch or feel the product.
And here is the data: according to PWC research these are the main reasons why customers visited an ecommerce website:
- 61% to compare pricing
- 23% to participate in promotions
- 41% to look for coupons
One thing you cannot deny, people are continuously looking for better prices, and when they notice that one store offers a more affordable alternative, they will most likely visit the website.
Secondly, you can see that shoppers are getting more savvy, where they would hunt for deals and promotions. An average online shopper will visit at least 3 websites before making their purchase. A good 86% of first time online shoppers also mentioned that it’s important to be able to see and compare prices from different sellers.
Let’s dive deeper into which Pricing Strategies would suit your online store!
First approach – Cost-based
What is Cost-based Pricing?
Cost-based pricing is a method in which a fixed quantity or a percentage of the total cost is added to the cost of the product to determine its selling price. It is known to be one of the most intuitive ways to set a price.
The logic is simple. After calculating the costs of a product for your business, all you need to do is to add on the profit margin you want to achieve.
For example, if the cost of Product “A” is $50 and the margin you would like is 100%, all you need to do is to price it at $100.
How do you do Cost-based Pricing?
To do cost-based pricing, there are two main things you need to consider
- The costs
- The margins
Any type of cost-based pricing strategy begins with calculating the costs attached to the product.
One of the main benefits with
To achieve accuracy with cost-based pricing, you have to make sure not ignore any type of costs attached to the product.
This includes all cash and non-cash costs that are included in the product cost subtotal. You need to consider the amount you are spending on your management
What are the Advantages of Cost-based Pricing Strategy?
Simplicity. It allows a store to set prices without in-depth customer or market research, but still ensures a minimum return on each product sold.
Not only that, it can act as a buffer when a certain project or plan grows beyond initial expectation or the original scope. With cost-based pricing, there’s always a sense of comfort attached, as you know that you are covering your costs and gaining some profit on all the work that you are putting in.
What are the Disadvantages of Cost-based Pricing Strategy?
However, there is also a possibility that the price is higher than what customers are willing to pay, resulting in less profit than what you can potentially earn with a better pricing strategy.
Second approach – market-oriented
What is Market-oriented Pricing
With more than 12 million online shops in the world, you cannot just rely on cost-based pricing to determine how you should price your products.
With more than 12 million online shops in the world, you cannot just rely on cost-based pricing to determine how you should price your products.
How do you do Market-oriented Pricing?
In order to do market-oriented pricing, you need to know how you compare against your competitors. The best way to do this is to take advantage of a price tracking tool which will give you data about your competitors’ prices and assortment, without needing to visit all their product pages every day. With HotProducts.io, you would definitely be able to have this element taken care of.
With this feature, you will be able to benchmark your prices among your competitors. There might be a chance that you have set your prices way too low. If that is the case, you can make your margins bigger and keep your competitiveness. If on the other hand, if you discover you are pricing too high, you may decide to lower your prices to start attracting more visitors from price comparison engines and higher conversion rates. Also, you will know when your competitors are out of stock. When it happens, you can try to boost your sales with an extra boost in your advertising campaigns.
If this is your first
An understanding of your USP will help you to figure out where you stand in comparison to your competitors, and where you aim to stand in the future.
It’s always a good idea to understand what your competitors have to offer, and at what price. After researching your competitors, you now have a bigger and better picture, which makes it 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. Which is why HotProducts.io helps you make a better, more informed decision with our price analysis.
What are the Advantages of Market-oriented Pricing Strategy?
Market-oriented pricing strategy helps to avoid price competition that can damage the company. If market-oriented pricing is combined with cost-based pricing, not only will it help keep the costs in mind, but it will also take note of where the current competition stands.
Additionally, there are many ways to automate your competitive pricing analysis, to make it even more efficient for you. The bottom line here is that if you make sure to do your own competitor research before customers do, you’ll be able to stay a step ahead of them.
What are the Disadvantages of Market-oriented Pricing Strategy?
For companies with smaller revenues, market-oriented pricing might be more difficult to implement, as you require resources, such as tools, money, and staff to implement it.
Also, with the market-oriented pricing strategy, you are relying on the assumption that competitors have priced their products correctly. That’s why it’s always helpful to use this pricing strategy together with some other pricing strategies, such as cost-based pricing strategy.
Now that you know well where you and your competitors are, why don’t you take a look at the customers?
Third approach – Consumer-Oriented
Last but not least, you have to look at your customers to set your prices.
What is Consumer-oriented Pricing?
Consumer-oriented pricing, also known as value-based pricing is a pricing strategy which sets prices according to the perceived or estimated value of the product or service to the customer.
Many questions might pop-up along the way- Who are my customers? What do they expect when they visit my store? What are their motivations when buying products? An understanding of your customer group is important before determining your pricing strategy.
How do you do Consumer-Oriented Pricing?
To benefit from the consumer-oriented pricing strategy, you need to have an understanding of your customers. Your customer groups might not all be the same. There may be some customers that carry out their fare share of internet research before selecting their preferred store. Or, there might be some customers who are looking for coupons or discount sales only.
These customers might be of great potential to your ecommerce store as there’s a great chance that they’re willing to contribute data like their email address for further reductions and discounts, which can be beneficial for your email marketing.
So, for this approach to work well, we can determine that you need to know your customers well, which means you have to know who they are and what they value about your product and what your Unique Selling Proposition (USP) is.
The truth is most of today’s customers are deal-hunters. We already analyzed the reasons at the beginning of this article, but there are still a proportion of customers that don’t care much about the price. This is mainly possible in luxury products. If your customers are among these last ones, you don’t have to force your customers’ attention to the price. So you should avoid deals and offers. What you have to do is focus on improving your brand, set a fixed valuable price and don’t move it if it’s not necessary.
Here are some tips to help you optimize your pricing strategy:
99 is better than 100. The biggest ecommerce companies use it, so why wouldn’t you? It’s shorter, and it looks smaller.
The same logic goes for pronunciations. A price that is pronounced shorter seems lower than a price pronounced longer. Thirty-six-twenty-eight dollars ($36.28) is worse than thirty-seven-one dollars ($37.01).
What are the Advantages of Consumer-oriented Pricing Strategy?
There’s no denying that with every step of
That’s why if you set a high standard when it comes to the products you are offering, there is a good chance that your profits might increase. Additionally, the customers can trust that your brand will offer them the value that they are paying for.
What are the Disadvantages of Consumer-oriented Pricing Strategy?
Consumer-oriented pricing may take some time and resources to determine. It takes time for you to understand your customers and study them. Only then you’ll be able to truly determine what they consider to be high value and what they are willing to pay for it.
Also, often the “high price equals high quality” concept might not be accepted by a segment of your customers. Additionally, you can’t afford to ignore your competitors, as they might start offering similar products for a much lower price, eating up your market share eventually.
Other Types of Pricing Strategies for Ecommerce
Product Bundle Pricing
As suggested by the name, product bundle pricing is the practice of offering more than one product for a single price. Normally this pricing strategy may be seen with socks, t-shirts, and underwear. Another notable industry where product bundle pricing has been famously used is the gaming industry. Where sales of gaming consoles are normally increased by including a game in the bundle.
Pros: Merchants often use this strategy to create a higher perceived value which can increase the volume of purchases, and lead to an increase in profits.
Cons: It may be more difficult to sell products individually after product bundle pricing, as customers might not be willing to pay higher individual costs for the products.
Free-plus Shipping Pricing
A free plus shipping pricing strategy is when a business offers products for free, and the customers pay just for the shipping. It is one of the most enticing marketing offers when selling physical products. Ecommerce entrepreneurs who are running their store with a free plus shipping business model generate profit by inflating their shipping prices to incorporate their sourcing and shipping fees.
With this pricing strategy, it is recommended to stick to products that are in the lower range ($4-$10). If you start to offer free-plus shipping on higher-end products your customers might become a bit skeptical. For instance, it might not be the best idea to sell a camera for free and then add a $100 shipping charge when customers check-out.
Pros: The unmissable keyword here is “free”. You will catch the attention of many customers using this keyword. Additionally, it will be a great catch to market through your social media platforms.
Cons: This pricing strategy might only be useful for products that fall in a specific price range, and therefore might not be applicable broadly to your product offerings.
This type of pricing is used when the marketer aims to connect to the customer on an emotional rather than
Pros: By reaching out to customers on emotional responses you might be able to trigger some impulse buys, through the perception of a bargain or deal.
Cons: If yours is a luxury brand, it may actually be harmful
Businesses use discount pricing to sell low-priced products in high quantities. Customers love discounts, deals, and offers.
Pros: This pricing strategy is useful for driving traffic and sales in the short term. Discounts are also used to reward high volume customers, repeat customers, and to build customer loyalty.
Cons: Customers might associate low prices with low quality, especially when they are not familiar with the brand name. Additionally, if you offer discount prices for too long, you might risk competitors matching your actions. This may
Pricing Below Competition
As the name suggests, this pricing strategy is based on using competitors data as a benchmark and pricing products below them in order to attract customers into your own store over theirs.
Pros: If you are able to negotiate a lower per unit cost with your suppliers, while at the same time focusing on cutting other costs, you’ll be able to steal customers successfully from your competitors.
Cons: If you are a small scale retailer and don’t have many resources, it can be a hard strategy to focus on, considering the low margins that you will be making.
Pricing Above Competition
Working in a similar way to pricing below competition, this strategy uses competitors data as a benchmark and consciously prices your products above them, marketing them as luxurious and exclusive to the customers.
Pros: This pricing strategy can end up giving customers an impression that your products are of high quality and more exclusive due to their price.
Cons: If your customers are too price-sensitive or have many other options available this strategy might not work out as well. Customers might also end up seeing you as overpriced if they find the same exact products that you are offering for much cheaper with competitors.
I hope this helped!