How to choose the best e-commerce pricing strategy
In this competing world of e-commerce, where consumers have more alternatives than ever before, the price can be a deal-breaker. Choosing the best pricing strategy for your e-commerce shop is essential, and you’ll require to test out a few thoughts before determining which will work fine.
Are you going to base your prices on production costs? How about market dominance or consumer value?
This Sales Insight will guide you through the pros and cons of common e-commerce pricing strategies. You’ll also discover how to recognise your ideal buyer, study customer behaviours, and establish your USP.
There are several popular approaches, as we’ll see soon. But in e-commerce pricing, there’s no such thing as one-size-fits-all. You need to decide what appeals to your target market and pick a pricing strategy that fits your business.
First, you need to pay close attention to consumer behaviours and online purchasing habits and accumulate data on how people window-shop. Analytics software will help you distinguish key consumer traits and pick a pricing strategy to match, while a digital operations platform can measure its success.
Define your Ideal Customer Profiles
An ideal customer profile (ICP) is a vague description of the type of firm you want to sell. You’re describing a firm that likes to buy your products, stay loyal, and suggest you to others. To build this profile, you need to pick out specific features of your ideal consumer. An ICP typically contains “firmographics” such as:
- Organization size and history
- Organization revenue and estimates
- Type of business
- Geographic location.
An ICP should not be mixed with a buyer persona, representing the individuals within the firm you’re targeting, defined by demographics such as role, function, seniority, and income.
Solidify to your Unique Selling Proposition (USP)
A USP is a situation that executes your brand or product attain out and gives consumers a purpose to choose you over someone else. It’s a way of expressing your values and revealing to consumers how to offer this appropriate benefit.
Top Five E-commerce Pricing Strategies:
Here is a list of the best e-commerce pricing plans to choose from. Any one of them may profit your business demands immensely.
1. Cost-based pricing policy: Cost-based pricing is one of the most straightforward strategies, with prices based on the cost of the product or service being sold. Take the essential worth of production and add a profit percentage, resulting in the total cost.
So, if a product costs Rs. 2500 to be manufactured and shipped to you, and you want to turn a 20% profit on it, you would add Rs. 500 – making the final price Rs. 3000.
It’s appealing because it covers production and overheads and virtually guarantees a profit. This strategy benefits predictable turnover, while stable prices can win trust, especially if you’re transparent about your pricing.
Risks of a cost-based pricing: The issue with cost-based pricing is that it doesn’t recognise demand or competition. This means your prices may differ hugely from the market rate so that 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.
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 fees. Then, after analysing 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 can 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 competition’s retail price, you can set yourself apart by using clever marketing techniques that show your USP.
Risks of market-based pricing: 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.
If a large portion of the market uses the same strategy, the market will eventually lose touch with consumer demand as prices stagnate. As a result, businesses risk becoming complacent, which leads to missed opportunities for expanding their customer base.
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 every day 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 to shift 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. On the other hand, 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 a cost-based 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 see competitors’ sites to compare prices.
You might find that savvy customers delay purchasing because they know a price drop is imminent. However, 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.
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 costs of the different products.
The method is commonly used to sell tech ware, such as bundling a laptop with accessories, or beauty products, such as a complete skincare set. Of course, the customer would buy things anyway, but selling them in a bundle offers convenience and the pleasure of getting a bargain.
Risks of a cost-based pricing: If you’re going to offer bundle pricing, be careful to create suitable bundles. You could decrease the value of certain products if you don’t helpfully package them for the customer.
Some customers prefer to make their own decisions. For example, 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 cannibalisation, causing a drop in sales. When you sell two items together and 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 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 fee 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.
Risks of a cost-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 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.
“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.”
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