Finding the right ecommerce pricing strategy is crucial to your business's success. Ecommerce business owners require a product pricing model that maximizes profit margins while remaining fair to their customers. So which strategy is best for your business? Let's explore the different pricing models and see what each one brings to the table.
An ecommerce pricing strategy is a set of guidelines and rules followed by an e-commerce brand for pricing its products. An online store needs to choose a pricing strategy that keeps products priced fairly - not so high as to put customers off, and not so low as to result in losses.
There are many pricing strategies to use for your ecommerce business. The following pricing strategies are the most common:
Cost-plus pricing is a straightforward pricing model that is generally preferred by small companies and businesses that are just starting out. In the cost-plus pricing model, manufacturing, labor and overhead costs are considered to determine a selling price for the product. After adding up the costs incurred to source the product, your business's preferred profit margin is incorporated into the final price.
Cost-plus pricing is preferred by young online retailers because of how simple the strategy is. This strategy doesn't require you to perform extensive market research or to collect data about your customer's preferences. Cost-plus pricing ensures that the per-unit price for products does not invite losses, and instead guarantees a profit with each sale.
While cost-plus pricing is admired for its simplicity, the strategy has been criticized for being too business-focused. In cost-plus pricing, businesses factor in the total cost of production for determining the price but don't consider how willing customers are to pay the selling price.
The value-based pricing strategy is more abstract than other pricing models and is based on the idea of pricing your products depending on how much 'value' they offer your customers. Determining a product's 'value' is the abstract part, because your brand must decide which factors in particular to consider.
Value-based pricing is beneficial because, if done right, the calculations yield a final rate that is fair to both your ecommerce brand and target customers. In this sense, it's superior to the simple cost-plus pricing strategy, as a value-based approach encourages long-term customer loyalty.
The trickiest part of the value-based pricing strategy is determining the 'value' of a product. This is because how much your brand values a product to be can be highly subjective. Thus, with the value-based strategy, businesses must perform extensive research to determine the right cost. This can be done by analyzing competition price, setting a baseline, and performing market research.
As the name suggests, the competitor-based pricing strategy involves setting a price margin after analyzing how much your competitors charge for the same, or similar, products.
One key advantage of the competitor-based pricing strategy is that ecommerce brands don't have to perform extensive research about their target demographic. Your successful competitors will have already performed said research before pricing their products, and so it's a safe-call to take their prices as a rough figure to meet.
The main disadvantage of the competitor-based pricing strategy is the possibility of pricing wars with your competition where each brand tries to 'race to the bottom' of the price range. This is especially true for the launch of new, niche products because businesses are often experimenting with pricing said products. If you and your competitors keep reducing your prices to outdo one another, then all businesses involved may consequently experience losses.
In the price skimming strategy, ecommerce websites put a new product up for sale at a relatively high initial cost, and then gradually reduce the original price as demand declines.
Price skimming is a useful way for businesses to capitalize on a product's high demand in the early stages of its launch. Businesses that have a strong brand identity can especially benefit from price skimming, as their new products are often anticipated by consumers.
Price skimming comes with a fair share of cons and isn't encouraged for businesses that don't have an impressive demand curve. Pricing a product at high prices can put consumers off - if the items aren't highly anticipated, then customers may shy away from purchasing at all.
Moreover, price skimming can put off initial adopters of your product. If a customer pays a large sum of money for your product, only to see its price drop by around 40% after just a month, then this may discourage them from remaining loyal to your brand.
The loss-leader pricing strategy involves ecommerce brands intentionally pricing products far below the profit margin, selling them at a discounted price to gain customers.
Loss-leading pricing is great for getting customers in the door, which is important for building a loyal customer base and strengthening your brand identity. Moreover, selling one product at a loss can still bring profits in for your business if you can convince a customer to buy other, profitable products with it.
The obvious disadvantage of loss-leader pricing is that you're selling the products at a loss, which isn't ideal, to say the least. For the strategy to be worth it, loss leaders must acquire loyal customers, which is why 'cherry pickers' are a big problem for this model. Cherry pickers, also known as bargain hunters, are consumers that specifically look for low-priced products to buy as a one-off, with no intention of remaining loyal to the brand.
The anchor pricing strategy is based on the understanding that customers interpret pricing as relative. Consequently, in practice, it can prove easier to sell one product by comparing it to another.
If employed skillfully, the anchor pricing strategy can help drive sales and increase profits. Anchor pricing can even be employed by comparing two of your own products. Let's say you want to sell a 500mL energy drink, then anchor pricing can be utilized by comparing it to a 350mL variant. If there's say, only a 30cent price difference between the two sizes, then your buyer will be inclined towards purchasing the 500mL can to get the most value for their money.
The problem with anchor pricing is that market conditions and competitor prices are not in your control. For example, the 'anchor' could be a relatively lower price offered by a company such as Amazon, that your own prices may be unable to compete with. In this case, the anchor pricing strategy may struggle to drive sales.
As you can see, the pricing options that we've explored so far come with a fair share of drawbacks - some more serious than others. The best way to optimize pricing for your business is with the A/B testing strategy.
In A/B testing, a business sets two distinct prices for a single product. Half of your site's visitors can purchase the product at one sale price, while the remaining fifty percent of online shoppers are shown a different rate. This way, businesses can compare the performance of the two price ranges before settling on final, ideal pricing.
And you’ll always be testing your pricing. Rather than doing one test, you should always be testing. Many ecommerce giants like Amazon, Walmart, Nike, and more are always testing - and you should be too.
For Shopify store owners looking to optimize pricing, the Jika application is your best bet. Jika helps business owners perform A/B testing the right way, and provides ecommerce stores with a comprehensive monthly breakdown of the pricings' performance.
For hassle-free integration of Jika into your online store, simply install it from the Shopify App Store.
Deciding which pricing strategy to employ should not be taken lightly, as it is a vital factor in determining how much revenue your business brings in. This is why Jika is such a promising option - the A/B testing strategy we use doesn't only let businesses determine a good price for their product, but the best one.