Ecommerce: How to Price Your Products

No surprises here! Your end goal is to make money with your ecommerce store! Well, that's all fine and dandy but it's not always easy to decide how to price your Ccommerce products in a way that will maximise your profits whilst being fair to your customers.

Product pricing for your ecommerce store can be the most powerful tool in your toolkit when it comes to improving your bottom line but a fine balance is always required - and determined by the products you’re trying to sell.

So, first things first, you should evaluate the factors that make up your product mix:

How many items are in your product line?
Do you have more than one line of product?
What kind of variety do you stock in each product line?
How do customers relate to your products?

After completing this task you should consider which pricing strategy will best suit your business.

The most popular pricing strategies for ecommerce stores are:

Cost-plus pricing

E-commerce companies can benefit from cost-plus pricing, which involves adding a markup percentage to the cost of acquiring or producing a product. This strategy ensures that each sale contributes to covering costs and generating profits. E-commerce businesses should consider all costs associated with the product, including sourcing, packaging, warehousing, shipping, and marketing. By analysing and adjusting the markup percentage, e-commerce companies can maintain healthy profit margins while staying competitive in the market.

Competitive Pricing

Given the highly competitive nature of e-commerce, competitive pricing is crucial. E-commerce companies should analyse their competitors' prices to determine their own pricing strategy. While undercutting competitors can attract customers, it's important to consider the overall value proposition. Factors such as product quality, customer service, shipping times, and return policies should be factored into the pricing decision. By finding the right balance between price and value, e-commerce companies can stand out and attract customers in a crowded market.

Target Return Pricing

Target return pricing involves setting prices based on a specific profit goal or return on investment (ROI) target. To implement this strategy, you need to have a clear understanding of your costs, sales volume projections, and desired profit margins. By estimating the number of units you expect to sell and calculating the costs per unit, you can determine the price that will allow you to achieve your target return. Regularly monitoring your sales performance and adjusting prices accordingly is important to ensure you stay on track with your profit goals.

Value-Based Pricing

Value-based pricing is particularly effective for e-commerce companies. By focusing on the perceived value of the product to the customer, rather than just the cost, e-commerce companies can set prices that align with customer expectations. To implement value-based pricing, e-commerce companies need to thoroughly understand their target market, identify the unique benefits their products offer, and effectively communicate that value to customers. This strategy works well for e-commerce businesses that provide high-quality products, unique features, exceptional customer service, or a personalized shopping experience.

Psychological Pricing

Psychological pricing techniques can be powerful tools for ecommerce companies. The use of pricing strategies such as odd pricing (e.g., $9.99) and bundle pricing can influence customers' perception of value and encourage purchases. Ecommerce companies should experiment with different psychological pricing tactics to determine what resonates best with their target audience. Additionally, scarcity tactics (limited-time offers, limited stock) can create a sense of urgency and drive conversions.

Alternative or Less Frequently Used Pricing Strategies

Pay What You Want

The pay-what-you-want strategy (PWYW) has been around for a while but has not been used widely in ecommerce. The PWYW strategy allows customers to choose the price they are willing to pay for a product or service. While this strategy may not always result in significant profits, it can generate goodwill, increase brand awareness, and encourage customers to engage with your brand. PWYW works best when customers perceive your products as valuable, and they understand the costs associated with producing or delivering them. It can also be combined with incentives, such as offering additional products or services once a certain price threshold is reached.

This strategy does not have to be implemented throughout your ecommerce store – it can be limited to a few products or a few categories that seem the best fit.

Free

Yes, free!! Offering products for free can be an effective strategy to attract customers, create brand awareness, and drive engagement. There are different ways to implement this strategy:

Loss Leader: Offer a popular or essential product for free to attract customers, with the intention of upselling or cross-selling additional products or services.
Seasonal Promotions: Use free products as promotional items during specific seasons or events to increase traffic and generate interest in your offerings.
Consumable Products: Give away a component of a product for free, knowing that customers will need to purchase additional parts or accessories exclusively from your store.
Basic vs. Premium Versions: Offer a basic version of a product for free and charge for premium features or an upgraded version. This strategy can help you attract a larger customer base and upsell premium options to a subset of customers.

Name your Price

A variation of the PWYW model, where the price has to exceed a threshold to get the product. This threshold price is not shown to shoppers to allow them to name their own price, rather like an auction.

This model has been successfully used in the travel industry by Priceline, where availability of airlines, hotels, and travel dates is based on the named price. This strategy can also work well for online retailers that are selling the following:

Products of imprecise value: Your products can be sold at a wide range of prices and still generate a profit. This could include one-of-a-kind artwork, where it is sometimes difficult to assess the value.
Products of high perceived value: The perceived value of the product is much higher than the cost of purchasing it, prompting the consumers to name a higher price. This can apply to books, music and antiques.
You have defined price ranges: Gift sites where NYP can be a guide to show products that are within that price range. "Not-on-the-high-street" uses this strategy. Online retailers are able to use price discrimination in combination with this strategy to increase their profits.

Flat Pricing

Flat pricing is a strategy where a limited number of prices are used for all product offerings, best exemplified in highstreet Poundland shops where every product is priced at one pound. This strategy works well if your site sells a wide variety of (and similarly priced) products Flat pricing is simple to manage, easy for consumers and can result in healthy profits.

Subscription pricing

Subscription-based pricing models are gaining popularity among ecommerce companies. By offering subscription plans, ecommerce businesses can provide customers with convenience, regular deliveries, and personalized experiences. Subscription pricing works well for ecommerce companies selling consumable products, personalized curated boxes, or products with recurring usage. It can help ecommerce businesses build customer loyalty, secure recurring revenue, and reduce customer acquisition costs.

Personalised Pricing

This is a relatively new strategy where specialised yield management algorithms are used to personalise the price offered to each visitor to your website.

Most of the personalised pricing is done in real-time by analysing a variety of factors like customer loyalty, device used by the shopper, customer preferences, history of purchases etc. It's best suited to you if:

You introduce new products regularly: This makes personalised pricing more effective as repeat customers see the new product and the new promotional pricing to reward their loyalty, or it encourages new customers to make a first purchase.
You have wide profit margins: Products are sold with good margins, allowing you to offer discounts at any time. For example if the product is sitting in a shopper’s basket for a few days, the retailer might offer a discount or lower the price to encourage the shopper to complete the purchase.
You have repeat customers: Customers know that they will be rewarded with personalised pricing and promotions based on their loyalty.

Some Advice About Amazon

When competing with Amazon, it's important to approach pricing strategically. Here are some considerations:

Differentiate on Value

Amazon often focuses on competitive pricing, but you can set yourself apart by highlighting additional value propositions. This includes providing detailed and accurate product descriptions, high-quality images or videos, exceptional customer service, and reliable fulfillment processes. By emphasizing the unique value you offer, customers may be willing to pay slightly higher prices for a better overall experience.

Focus on Niche Markets

Amazon caters to a wide range of products and customers. By identifying a specific niche market or specialized product category, you can position yourself as a specialist and charge premium prices. Niche customers often value expertise, unique offerings, and personalized service, allowing you to command higher prices.

Emphasize Brand and Reputation

Amazon's marketplace is vast, but it lacks the personal touch and individual brand recognition that smaller ecommerce stores can provide. By building a strong brand identity, focusing on quality, and creating a loyal customer base, you can differentiate yourself from Amazon's mass-market appeal. Customers who prioritize quality and brand reputation may be willing to pay higher prices.

Enhance Customer Experience

Amazon's scale can sometimes result in a lack of personalized experiences. By offering a seamless and user-friendly website, providing personalized recommendations, implementing loyalty programs, and delivering exceptional customer support, you can create a customer experience that Amazon may struggle to replicate. Customers who value personalized interactions and superior service may be willing to pay more for a premium experience.

Leverage Unique Products or Exclusivity

Amazon's catalog is vast, but there may be niche or specialized products that are not widely available on their platform. If you offer unique products, limited editions, or exclusive collaborations, you can justify higher prices due to scarcity or exclusivity. Highlighting the exclusivity and special features of your products can attract customers who seek distinct offerings.

Summary

Remember, pricing strategies should be tailored to your specific e-commerce business, target market, product offerings, and competitive landscape. Continuously monitor market trends, customer feedback, and performance metrics to make data-driven pricing decisions and optimize your profitability in the ever-evolving e-commerce landscape.

The Ecommerce Pricing Guide

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