Knowing what ecommerce pricing strategies to adopt isn’t so simple. Ecommerce businesses have it tough when it comes to pricing. In a retail store, your products might not compete with similar ones and customers don’t have the time or convenience to shop around. They are also often loyal to particular brands.
In an online store, not only can you compare similar products with one click, but you also have the entire internet to explore for better deals. Market places like Amazon and comparison websites make it easy for shoppers to weigh up all their options from the comfort of their sofa.
So how do you set a price where you can remain competitive, but still achieve the profits you want?
Ecommerce pricing terminology
Before we explore the different strategies, let’s take a look at some of the terminology involved with ecommerce pricing strategies.
Variable Costs
The direct costs associated with producing a product and getting it to your customer. E.g. manufacturing or packaging costs.
Fixed Costs
The costs that don’t change each month and come with running your business e.g. internet or rent expenses. Also known as overheads.
Markup
The percentage you add to your cost of goods sold (COGS) to get your selling price.
Margin (Profit Margin)
The difference between your selling price and your cost price – the profit left over to cover fixed costs.
Pricing your product to make a profit
When setting your price, the first step is to calculate all of the costs of that product. You want to make 100% sure you aren’t selling at a loss.
As per the terminology, your variable costs will be everything that goes into producing your product and getting it to your customer. These costs will vary depending on the number of units you produce and sell (hence the name). It will include things like:
- Product costs
- Manufacturing costs
- Shipping costs (Typically inbound shipping is included in your landed cost COGS)
- Packaging costs
- Affiliate commissions
Adding up these costs will give you your cost of goods sold (COGS). Whatever that amount is, if you set your price there, your business will be making a loss. Remember that you also have to cover your fixed costs!
Now that we know what price you can’t go below, how do you arrive at the correct price for your product? You can use one of the following strategies to determine your price:
Cost-plus pricing
As the name implies, in this strategy you start with your COGS price and add a markup to it in order to get to your selling price. As an example, if you want to markup your cost price by 50% and your product costs €10, then you will need to add €5 (50% of €10) to it to get a sale price of €15.
The benefit of this strategy is that you are assured of a profit for each sale you make. It is also relatively simple to calculate.
The associated cons with this method is that you aren’t factoring in any competitor pricing or even what the market is prepared to pay for the product. If your manufacturing or shipping costs are too high, your product is going to be overpriced and will affect your sales.
Value-based pricing
Again, as the name suggests, this strategy uses the perceived value of your product in the eyes of your customer and prices accordingly. The manufacturing costs for a pair of sunglasses can be incredibly low, but if you are a well-known fashion designer you can charge way more than an unknown brand. This is because of brand equity where a brand is perceived to have a higher value or reputation than its competitors.
The benefit of value pricing in e commerce is that you aren’t limited to using cost as your basis for pricing. The issue is that you need to know what the perceived value in your product is and this would come with time and money to do the necessary market research and build a strong brand.
Psychological pricing
If you’ve ever walked past a store with a big “SALE” sign in the window, you’ve been exposed to psychological pricing. Everything from removing a cent or two from the price (e.g. €20.00 to €19.99) to offering limited time promotions or discounts is psychological pricing.
Playing mind-games with your customers can and does work, but just be careful not to over do it. As mentioned above, customers are able to do price comparisons very easily when shopping online and if they see your product is marked down from €50 to €40 while all the competitors are charging €40 when it’s not on sale…they can feel cheated and it can tarnish your reputation.
Dynamic pricing
Any e commerce retailer that doesn’t offer Black Friday sales or up their prices when oil prices rise is going to suffer. Dynamic pricing is the strategy of continually changing your price when external factors influence the cost of sales. It is also used when trying to sell slow-moving products or for increasing prices during periods of high demand.
The difficulty of dynamic pricing is that you continually have to be monitoring your costs and competitors. Spending too much time adjusting your pricing can mean you aren’t spending enough time on your business. It also becomes confusing to customers and can turn them off.
Bundle pricing
Bundling together certain products to offer them at a discounted price is what this strategy entails. If you sell kitchen appliances, bundling together a kettle, toaster and microwave might be a good strategy to target new homeowners. Or offering 4 shirts for the price of 3 is a good way to lower your inventory while still making a profit.
The issue with bundle pricing is that it may devalue your other items if customers wait to buy in bulk or perceive your non-bundled offering as too expensive.
Conclusion
Pricing is crucial to an e-commerce business and there isn’t a one-model-fits-all pricing strategy. Many businesses find it better to have a broad pricing strategy and tweak it throughout the year. By understanding the different strategies available to you though, you can know how to best leverage them to maximize your profits.
As ecommerce accountants, we’ve worked with many online sellers in Ireland helping them with their business model and pricing. Talk to us if you’d like to discuss yours.
