Ecommerce: How to Effectively Price your Products

The ecommerce world can be tough so getting your pricing strategy right will be one of your most important tasks. Get it right and potential customers will be all too happy to open their wallets and buy. Get it wrong and it could be "Good night Vienna"!!

Do you actually know how much your products are worth - and just how low would you be willing to price your items in order to compete with rivals?

If you truly want to be successful in ecommerce it should all start with an effective pricing strategy. By applying various pricing approaches, your business will be more efficient, profitable and sustainable in the market.

Why do potential customers visit your eCommerce website?

According to PWC research these pricing-related reasons are the main ones:

61% to compare pricing
23% to participate in promotions
41% to look for coupons

This research informs us that potential customers are most often looking for good prices and when they notice that one shop is offering a promotion or coupons they take a look at its website.

It found that comparing prices of websites is a powerful and emerging trend in ecommerce markets. 90% of people say they do research online looking for offers. The rate is higher for some more sensitive categories of products like electronics and others that are considered important purchases for a family on a tight budget.

In order to price effectively, let's look at some ecommerce pricing issues/strategies:

Margins Matter

Let's get one things straight - the lowest price doesn't always win the sale. If you get into a pricing battle with your competitors you could end up pricing your products so low that you are actually losing money.

Even if you are selling in larger amounts you may still not be making a profit. If this is the case, consider finding a cheaper supplier or adjust your product offerings to include more profitable items.

If you get involved in a pricing battle expect this to have a detrimental effect in the long term too - your customers will always expect a lower price and this becomes unsutainable over time.

Some ecommerce retailers decide that by slightly underpricing their products on launch, they can hopefully help boost repeat purchasing. On the face of it this might seem like a good idea but it's not always sustainable when trying to scale your business.

In order to decide whether this pricing strategy is right your business, you will need to evaluate what the average lifetime value of a customer is and whether it’ll be worth the risk in the long run.

If you’re selling products that consumers buy on a regular basis, such as detergents or tea bags, you’re much more likely to see success from using a low margin pricing strategy.

What's your USP (Unique Selling Proposition)?

It pays to be different. If you trade on this fact your customers will be willing to pay what you are asking.

You will need to determine your value proposition and know your target market - what is it you offer that is unique or particularly beneficial to your customers? It could be excellent customer service, free next day delivery or simply that you sell something that cannot be found elsewhere.

Price competition is at an all-time high and this might mean that you have to think outside the box to create a marketing or promotional strategy that is unique.

Shopify owner Ricky Padilla donates $1 to fund clean water projects every time someone purchases coffee from his ecommerce shop Brown Water Coffee. Perhaps you could appeal to your customers' sense of charity?

Once you've defined your USPs, it's time to show them off by displaying them prominently on your home page. Increasingly brand values are a big influencing factor on purchasing decisions, so these are essentials to consider when deciding on your pricing strategy.

Loss-Leader

This pricing strategy involves selling an item below market price in order to entice/encourage customers to buy more overall. This gives you opportunities to upsell, cross sell and to increase the average total basket value.

It might be that this strategy doesn't make a huge difference initially but it should certainly stimulate customer interest - both in new and returning customers. The value of customer acquisition may outweigh the value of the transaction. The end goal is to sacrifice losing money on one item in order to make a profit on the rest of the products sold, e.g. cheap cereal, expensive milk.

Offer Incentives

So, you now know your margins and are pricing accordingly? Good, now it's time to offer incentives to further motivate your customers to buy. Limited time pricing is a good way of doing this, e.g. purchase today for 20% off.

It might be that you have a surplus of products to sell so offering 2 for 1, 3 for 2 etc. can help you offload some of those products. Another incentive is buy one, get another at 50% off. In reality the customer is only getting a 25% discount but 50% off has already registered with them.

If you are savvy with your incentives this allows you the ability to garner attention to your products, and build a reputation for having good deals, without badly affecting your margins. Be mindful though that you could give yourself the unwanted repution of a discount retailer.

Seasonal sales and regular discounts can effectively increase conversions and using bundle pricing is another powerful sales strategy for eCommerce. Research carried out at the Harvard Business School found that video game company Nintendo actually sold more products when they were bundled together, as opposed to selling components individually.

Whilst bundling might be a great way to sell stock, it could have a negative impact on the sale of individual products if the bundle is taken away, as customers feel they're not getting the best value for money.

Diversify Product Offerings

In order to offer diverse and popular products ecommerce store owners must first understand their market demand/trends.

If you have a clear idea of what your customers most want this gives you the opportunity to sell and generate profit from diversified products. When in doubt, give your customers multiple options to help them decide what they want.

Dan Ariely conducted an MIT experiment to test the effects of product and pricing diversification and found that giving a customer more options influences their choice and their perception of a ‘good deal.’

Specifically, one unattractive option can emphasise the benefits of other options, helping the consumer decide on an option that best suits them. Online retailers can offer bad options to emphasise the good, driving customers to act based on perceived value.

Test your Ecommerce Pricing Strategy

You want to know what works and what doesn't work so it's important to measure and test the success of any changes you make to your ecommerce pricing. Ideally, every change should be tested and validated using an analytics tool.

Did your "Summer Sale", for instance, increase your conversion rate, or are the newly introduced product lines generating greater profits than older stock?

Value-Based Pricing

People are different and value things differently. From your point of view as an ecommerce business owner, the important thing is to find out what your customers are willing to pay. You need to learn how your customers are making their purchase decisions in order to create a calculated price.

Value-based pricing ensures that your customers feel happy paying your prices for the value they’re getting. Pricing according to the value your customer perceives in your product prevents you from short-changing yourself whilst creating an experience for customers that’s most in tune with their expectations. You’ll also strengthen your brand name, build better customer relationships, and ultimately improve your bottom line.

Customers that are happy to pay for the value they receive are loyal and buy from you again. One study found that increasing retention by 5% can increase profits by up to 125%.

In order to introduce value-based pricing you will need to:

Create Buyer Personas using:
- Market research
- Feature and product preference analysis
- Price sensitivity analysis

Conduct Market Research to see what customers value most about your products

Gauge Value Through Feature and Product Preference Analysis

Conduct Price Sensitivity Analysis

Analyse Buyer Persona Data

Adjust Your Marketing Material accordingly to emphasise the value you are offering

Psychological Pricing

Psychologically pricing products is still an effective way of "tricking" your customer's brains into registering a lower price. This is a great way of selling your products for slightly more than you might usually consider, without having any negative influence over your customer's decision making.

Psychological pricing is used by some of the world's biggest online retailers, including Apple, who use the perennial method of not rounding up their prices to put their products into a different price column.

Apple will use a price of £899 for instance and in a customer's mind, this is much closer to £800 than £900. Researchers have found that over time this is a proven way of getting customers to buy more, without actually reducing prices.

What will work best for your ecommerce business?

It may have become urgent that you take a fresh look at your pricing strategies.

These strategies will of course depend on the nature of your business and the products you sell but if you’re still not certain how to effectively price your products, we recommend testing out the various pricing strategies mentioned here to see which is most appropriate for you.