The price of a product or service is the major factor in a potential customer’s purchase decision.
In the competitive world of e-commerce, where customers have more choice than ever before, price can be a deal-breaker.
Choosing the right pricing strategy for your e-commerce store is vital, and you’ll need to test out a few ideas before deciding which will work best. Are you going to base your prices on production costs? How about market forces, or customer value?
This article will take you through the pros and cons of five common e-commerce pricing strategies. You’ll also learn how to identify your ideal customer, study consumer behaviors, and strengthen your USP.
How to pick the best e-commerce pricing strategy
Only 21% of shoppers start their research moments before a purchase. The others spend much longer visiting different sites and comparing prices. The right e-commerce pricing strategy can influence search engine optimization (SEO) and comparison engines, and drive savvy shoppers to your site.
There are several popular strategies, as we’ll see shortly. But in e-commerce pricing, there’s no such thing as one-size-fits-all. You need to figure out what appeals to your target market, and pick a pricing strategy that fits your business.
Choosing a pricing strategy isn’t only about profit. It’s also about how you want to be perceived by customers: as a discount retailer, a high-end brand, or something in-between? There are e-commerce pricing strategies to suit all business models, and you can even combine a couple of them to maximize your appeal.
To start with, you need to pay close attention to customer behaviors and online shopping habits, and gather data on how people prefer to browse and buy. Analytics software will help you identify key customer traits and pick a pricing strategy to match, while a digital operations platform can measure its success.
Refine your ideal customer profiles
An ideal customer profile (ICP) is a hypothetical description of the type of company you want to sell to. You’re describing a business that’s highly likely to buy your products, stay loyal, and recommend you to others.
To build this profile, you need to pick out certain characteristics of your ideal customer. An ICP typically contains “firmographics” such as:
- Company size and background
- Company revenue and budget
- Type of industry
- Geographical location.
An ICP should not be confused with a buyer persona, which describes the individuals within the company you’re targeting, defined by demographics such as role, function, seniority, and income.
As well as increasing revenue by targeting the right customers, ICPs also help align your pricing strategy with current and future customer needs. All departments or teams should have a shared understanding of who the ideal customer is.
Here are some steps toward creating an ideal customer profile:
Identify ideal traits
Your ideal customer should already be in a position to buy your product, both in terms of desire and financial resources. Ideally, you want them to be a profitable, growing business, and hot on networking so that they can extol your virtues to others.
New e-commerce companies can use market data to inform the profile, while mature businesses will already have lists of customers who rank highly for value and loyalty.
Research your target market
Harness data from existing customers with whom you’ve had successful interactions, and figure out what makes them a good customer and a good fit for your business.
Invite them to chat about why they value your services. Be honest about your reasons for asking; let them know that you intend to improve and that their opinions are invaluable. You could also offer an incentive for taking part.
Don’t forget to look at negative feedback, too! Think about times when the interaction didn’t go so well, and analyze customer data to find common themes.
Build a behavioral profile
Using this data, it’s time to identify patterns. You want to look for information about the type of high-value customers you want to attract.
Build a profile of their needs, responsiveness, and emotional connection with the brand. It’s also useful to add in their preferences, such as which communication channels they prefer, and which social media they use.
You should now have a clear picture of your ideal customer’s environment, pain points, and requirements. Use your ICP to assess new prospects, by running them through a checklist to find similarities with happy customers.
Solidify your unique selling proposition
In a crowded marketplace, it’s difficult for any e-commerce business to be truly unique. But the key is to make at least one aspect of your service sufficiently different from your competitors. This is your unique selling proposition (USP).
A USP is the thing that makes your brand or product stand out, and gives customers a reason to choose you over someone else. It’s a way of communicating your values, and showing customers how you (and only you) can offer this particular benefit.
For example, you could sell handcrafted goods, limited-edition items, or simply a greater choice of products than your competitors. Other ideas include supporting a charity with your profits, or committing to an ethical supply chain.
When all departments have a clear understanding of the USP, it’s easier to decide on a pricing strategy. If your particular service cannot be obtained anywhere else, you can charge a premium price. But in most cases, you’ll have to take competitor pricing into account.
Study customer behaviors
Customer behavior refers to both their buying habits, and the factors that influence the decision to buy. Analyzing these habits and beliefs will help you align your business with the customer’s mindset.
The digital world means that customer behaviors are changing at an increasingly rapid pace. There’s a demand for more speed—from efficient websites to next-day delivery options—bringing challenges for retail inventory management.
People have embraced online shopping for convenience, but also for lower prices. Customers are much savvier about finding deals, and are likely to abandon a purchase before checkout if they spot the item cheaper elsewhere.
That said, there are some behaviors that never change. For example, setting prices at $9.99 instead of $10 is still an effective concept in enticing customers, and having an attractive e-commerce website will give a high-quality, trustworthy impression.
Psychological pricing has several applications in e-commerce. For instance, if you offer two similar T-shirts at identical prices, consumers will find it difficult to choose, but if one is slightly cheaper than the other, they are more likely to pick the cheaper item as it seems like a comparative bargain. Similarly, placing premium products near cheaper options helps create a clearer sense of value for customers.
5 e-commerce pricing strategies to choose from
Based on the information above, we’ve compiled a list of the five best e-commerce pricing strategies to choose from. Any one of them may benefit your business needs immensely.
1. Cost-based pricing strategy
Cost-based pricing is one of the simplest strategies, with prices based on the cost of the product or service being sold. Take the basic cost of production and add a profit percentage, resulting in the total cost. So if a product costs $15 to be manufactured and shipped to you, and you want to turn a 20% profit on it, you would simply add $3 – making the final price $18.
It’s appealing because it covers production and overheads, and virtually guarantees a profit. This strategy has the benefit of predictable turnover, while stable prices can win trust, especially if you’re transparent about your pricing.
Cost-based pricing is divided into two types: cost-plus pricing and break-even pricing. The first is a simple method where a fixed percentage (or markup) is added on top of the production cost for one unit.
In break-even pricing (or target-return pricing), you determine how many units you must sell to break even, instead of marking up each individual unit.
Risks of cost-based pricing
The issue with cost-based pricing is that it doesn’t recognize demand or competition. This means your prices may differ hugely from the market rate, so you could end up with products being sold for too much or too little.
The strategy could also lead to inefficiencies in supply, manufacturing and distribution. Since you’re passing those costs on to the customer, you may not concern yourself with streamlining processes and could miss opportunities to reduce costs.
Additionally, a cost-based pricing strategy largely ignores consumer behavior. If you don’t pay attention to customers and their changing requirements, you won’t be able to tailor your offering to meet their needs.
For example, the state of the economy, social trends, and personal circumstances can lead customers to change their buying habits. A more flexible pricing strategy could help you maintain awareness of fluctuations and respond accordingly.
2. Market pricing strategy
A market pricing strategy sees companies fix prices based on the cost of similar products on the market, rather than demand or production costs. After analyzing competitor products, the retailer sets a higher, lower, or matching price.
This flexible strategy allows you to amend prices according to market demand. If your products or services closely match those offered by your rivals, a market pricing strategy can be effective and relatively low-risk.
You could decide to make your prices lower than average to attract cost-conscious new customers. This works well if you are able to reduce production and overhead costs to avoid shrinking your profit margin.
If you set a higher price than your competitors, you’ll need to justify the cost—usually by offering extra features or simply better quality. Similarly, if you match the retail price of the competition, you can set yourselves apart by using clever marketing techniques that show your USP.
Market-based pricing is often used for cell phones and vehicles, where there’s not too much difference between available products. Another example is Disney+ and Netflix, whose plans are very similarly priced.
Obviously, this strategy means it’s essential to monitor your competition and be aware of what’s happening in the market at all times. Amazon, for example, reassesses its prices every 10 minutes to ensure they are always the cheapest.
Pricing intelligence involves gathering as much data as you can about competitor pricing decisions, and using it to assess current and future demand. You need to look at:
- Your main competitors and who they sell to
- Patterns relating to how prices change
- Customer reactions to different prices
- Stock replenishment and new products
- The use of promotions and codes
This data can be used to inform your own pricing decisions and steal a march on the competition.
Risks of market-based pricing
Market-based pricing is not without its downsides. It assumes your competitors have a sure-fire strategy, and that you should follow their lead. But if they get it wrong, then you’ll get it wrong too!
If a large portion of the market uses the same strategy, the market will eventually lose touch with consumer demand as prices stagnate. Businesses risk becoming complacent, which leads to missed opportunities for expanding your customer base.
Although low prices can drive sales, too much focus on cost-conscious customers can have the opposite effect. And getting into a pricing battle can lead you to set prices way too low. Customers will then always expect the best price, but it may be unsustainable for your business.
Market pricing also focuses on competitor data, rather than customer value. We’ve already looked at the importance of knowing your ideal customer, and making sure you add value to their lives, so it makes sense to market your products as valuable and desirable, not just cheap.
This will give you better long-term growth, instead of the short-term thinking involved in trying to undercut rivals. If you think you’re justified in offering a lower price, tell your customers exactly why your prices are fair.
3. Dynamic pricing strategy
Dynamic pricing is a proactive strategy where businesses adjust their prices according to changes in market demand. It aims to find the optimum price point at any time, and is particularly suitable for a fast-paced environment like e-commerce.
Prices are based on variables such as competitor pricing and how much a customer is willing to pay at a specific time. This strategy is also known as surge pricing, demand pricing, or time-based pricing.
Dynamic pricing is common in hospitality and tourism—think “happy hour” at a bar, or seasonal fluctuations in airline prices. You will usually require some level of automation to ensure a fast response to market changes.
For instance, if your supplier gives you a discount, you could quickly pass this saving on to your customers by offering the item at a lower price for a limited time only. Or you could run a promotion with the purpose of shifting unsold stock, and target specific customers via an e-newsletter.
With a wide range of products, you can sometimes risk a loss-leader strategy, where you cut prices on one item and sell others at a higher price. Selling items below market value can encourage customers to buy more overall, and gives opportunities for upselling and cross-selling.
Dynamic pricing can be combined with market pricing to increase your competitive power. As well as broadly aligning prices with your competitors, you can still be agile enough to take advantage of market fluctuations.
Risks of dynamic pricing
Dynamic pricing does come with risks, such as alienating customers with ever-changing prices, being drawn into a price war, or not responding quickly enough to market changes.
If customers see a different price every time they visit your online store, they won’t know whether you’re a discount retailer or a high-end brand. They may start to distrust you, and visit competitors’ sites to compare prices.
You might find that savvy customers delay making a purchase because they know a price-drop is imminent. Those who did buy from you might be annoyed to discover that if they’d waited a little longer, they could have gotten the item cheaper.
Dynamic pricing also requires time and effort to achieve the right results. You’ll need to monitor market conditions constantly, and make sure your website is quickly updated to reflect the latest prices.
Larger retailers will benefit from automating the process, although that comes with a cost too. For long-term sustainability of this strategy, consider repricing software that detects competitor price changes and market changes, and adjusts your prices instantly.
4. Bundle pricing strategy
Bundle pricing is a common strategy where retailers sell several complementary products as one package. The bundled price is usually lower than the sum of the individual prices of the separate products.
The method is commonly used to sell techware, such as bundling a laptop with accessories, or beauty products, such as a complete skincare set. These are things the customer would buy anyway, but selling them in a bundle offers convenience and the pleasure of getting a bargain.
Other common uses of bundle pricing include mobile devices with an integral data plan, fast food meal deals, and batteries sold with children’s toys. As well as set packages, some retailers offer choose-your-own bundles, perhaps pointing out that it’s cheaper to buy all three books in a trilogy than to purchase them one at a time.
Although each item is technically sold at a discount, bundle pricing can actually increase revenue as it simplifies the buying experience and leads to larger-volume purchases. Customers typically see the value of a bundle as greater than that of individual products.
Risks of bundle pricing
If you’re going to offer bundle pricing, be careful to create the right bundles. You could actually end up decreasing the value of certain products if you don’t package them in a way that’s useful to the customer.
Some customers prefer to make their own decisions. If an accessory is only available as part of a bundle they don’t want, those customers won’t buy it from you. And those who need the main product but not the add-ons might resist buying the whole package.
Bundle pricing can also lead to product cannibalization, causing a drop in sales. When you sell two items together, but also offer them separately, more of them will be sold at a discount via the bundle, meaning lower profits for the individual product.
Finally, when you bundle products and sell them at low cost, you might find it harder to sell them individually or at their original prices in the future. Make sure you’ve factored this in when choosing what items to bundle together.
5. Consumer-based pricing strategy
A consumer-based pricing strategy is when a company sets prices according to customers’ perceived value of its products and services. It aims to ensure that customers are willing to pay those prices based on the value they receive.
This is a customer-centric strategy that relies on ongoing research and customer communication. It’s also a great way to build brand awareness and loyalty by giving people what they actually want.
The two components of a consumer-based strategy are good-value pricing and value-added pricing. The first involves a combination of quality and service at a fair price. An example would be budget airlines offering no-frills flights—customers expect less value, but are happy to pay a price that reflects this.
Value-added pricing means attaching extra features to make your product stand out. You add value, and charge more for it in return. For example, flying with a premium airline costs more, but customers are willing to pay for the enhanced experience.
Consumer-based pricing also gives you flexibility to offer different pricing for different customers. Using segmentation data, you can discern who’s likely to buy what and when, and set prices accordingly. You’ll need to pay close attention to things like shopping habits and social media use.
Personalized communication is an important part of knowing your customer and showing that you care about their individual needs. Offer targeted discounts and promotions; message them when a favorite item is back in stock; and keep an eye on who’s clicking your ads and emails.
Risks of consumer-based pricing
Measuring customers’ perceptions of value is not an easy task. These perceptions are subjective, and will vary for different customers and circumstances. Rapid changes in the market and in customer behavior will also affect the data, so you can’t take your eye off the ball.
You’ll also have to justify your prices against those of your competitors, which means ensuring your USP pulls its weight. It’s best to tell customers just why your products are the best in terms of value.
Because there is so much research and analysis involved, a consumer-based pricing strategy takes a while to get going. And you could lose money if you focus solely on what customers want without factoring in manufacturing, shipping costs, and marketing.
Get your pricing strategy right
Each of the e-commerce pricing strategies we’ve shown you have their risks and rewards, so it’s worth looking through them carefully to see which is the best fit for you. In some cases, it’s possible to combine elements of different strategies, such as market-based and dynamic pricing.
Before you implement any e-commerce pricing strategy, you should carry out testing to gain insights into consumer behavior and get an idea of the price points people are comfortable with. But take care not to alienate customers by showing different prices for the same product, as this can lead to mistrust—it’s better to test your methods across different product categories.
The correlation between pricing strategies and customer experience cannot be overstated. Get it wrong, and customers may never use you again. Get it right, and you’ll inspire customer satisfaction and brand loyalty both before and after conversion.
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