Top ecommerce Pricing Strategies with Pros & Cons - Time to Enhance Your Revenue
This article is written by Mr. Vivek Khatri, Founder & Director of Emizentech. Since 2013 he has been actively involved in overall product strategy, engineering, design, and product teams within the organization.
Emizentech is an ecommerce development service provider that works to change the ecommerce landscape with their Magento web development and domain expertise. Their clients are located worldwide and across industries.
After you cross the final hurdles of manufacturing a new product, pricing is the next decision to make. For many consumers, price is the first consideration when shopping. It determines your project margins, too. Fortunately, there are multiple pricing models to consider that meet consumer expectations while also giving you the revenue you need.
Pricing determines the future of your products and is a tool of more dynamic competition. The price of a product is a decision that touches on multiple other areas of operation, too, starting with marketing. It's a lengthy and delicate process to get an ecommerce customer to hit the buy button on your storefront or website. Naturally, we want to give every reason and convenience to help get them there.
Things seem simpler in ecommerce while you set up your store, decorate it with products, and start to market to your future customers. If you move ahead using impractical or superficial strategies, you might still manage to get some traffic—but then, your leads fail to transform. Why?
In many cases, the answer is price.
Fortunately, there are multiple techniques you can use to increase your conversion rates instantly with deeper product pricing strategies.
Experimentation is Important
Online business development includes loads of experimentation and analysis to discover the best pricing strategy for your business. Simply choose a target for each campaign, start small with the pricing changes you make, and evaluate the outcomes. The chief goal is to understand who you are focusing on and why.
Just like customers benefit from all the advanced technologies today, an online brand should hold the latest and the best strategy, tactics, tools, and pricing structures for ultimate success. Build each of these into your business plan, and you’ll more easily hit the sweet spot of traffic-to-conversion transformations.
Build Your Strategy
For any brand selling online, when pricing is seen as a “boring” task, it usually fails. When taken seriously and managed smartly, it’s effectively your secret marketing tool.
The strategies below are not mutually exclusive. You aren’t required to pick one and cast the others aside. In fact, as with other growth and marketing strategies, they perform the best when integrated with a mixed strategy.
Start by defining your business needs, objectives, and interests. Next, decide which of the pricing approaches would perform well with your goals. Finally, test them out and analyze which bring you closest to your goals.
Ultimately, pricing is a dynamic task, and it requires constant effort to fine-tune and optimize it as your brand flourishes.
Top Ecommerce Pricing Strategies
Let's check out the strategies you can test, mix and match to boost your online sales and revenue:
● Anchor Pricing
Offers that show the old price next to the new one work magnetically on customers. Using anchor pricing—or a “normal price” crossed out next to the “sale price” deal—helps buyers make the call on a product they’re eyeing while still providing them an opportunity to make comparisons.
The original price becomes a reference point in consumers' minds, which they later anchor to make a favorable decision to buy the product listed on sale. One more way you can reap the benefit of this pricing structure is to place a higher-priced item intentionally beside a cheaper one to attract the customer's attention toward the latter.
Pros: This will trigger an automatic response for the consumer to grab a great deal.
Cons: Consumers can find competitive prices anywhere on the internet, and if they find your anchor price to be unrealistic, it may lead to a trust-break.
● Loss-Leader Pricing
Loss-leader pricing refers to selling products at a loss to attract customers to buy more expensive products further in the funnel. The cost of the loss is covered when the customers buy the later items, sometimes including those that are required to make the initially sold product functional. The additional products can be bought in the same transaction or later on.
Loss-leader pricing can be utilized to enhance the average order value by tapping consumers’ desire to buy a related product along with the low-priced deal.
Pros: This pricing structure is usually best if you sell products that frequently come with additional or complementary purchases, leading to a natural boost in overall sales.
Cons: Just like overusing discount pricing, when you apply loss-leading prices excessively, people will expect more bargains from you and they might wait indefinitely to purchase add-on items.
● Discount Pricing
Consumers love coupons, sales, seasonal pricing, rebates, and other related discounts. You can use any combination of these for added pricing strategies, especially for events-based or holiday-related marketing.
Pros: These tactics are best for pulling large traffic to your e-store or marketplace listings, especially to sell old stock or out-of-season inventory while attracting price-sensitive customers groups.
Cons:If used too frequently, you could acquire the identity of a bargain brand and consumers might “wait out” bargain pricing on your products.
● Cost-Based Pricing
Also known as cost-plus pricing, breakeven pricing, and mark-up pricing, this strategy adds a fixed percentage margin to the cost of producing each product.
Cost-based pricing is one of the most straightforward and basic strategies for smaller or new ecommerce brands since the formula is simple to calculate.
Pros: It’s easy, and your accountant and finance team can assist you quickly in setting a cost-plus tracking system to ensure a profit on the products you make and sell.
Cons: If not done correctly, your business can miss out on optimal profits. Furthermore, if the costs of materials increase unexpectedly, but the products are priced the same online, you’ll lose out. You could recalculate your costs, but doing that too often or upsetting a balance that’s working could deter current customers from shopping for your products.
● Value-Based Pricing
Value-based pricing targets the maximum amount a customer wants to pay for your product. Value-based consumers look for fairness and quality in pricing more than anything else. Customers like this need to know that your products are of the best quality, and/or aligned with other values like being eco-friendly.
Pros: Value-based pricing can be applied to all sorts of products. It also helps you understand the value of what you sell according to the larger market. If your customers are willing to pay more than you charge currently, then you could develop a new line of products at a higher price.
Cons: It can be hard to get value-based messaging right. You need to spend time reviewing studies and target groups to come up with the best price that keeps consumers happy.
● Competition-Based Pricing
Competition-based pricing relies on providing better prices than your competitors. This starts, naturally, with comparing your costs to the cost of similar products so you can make pricing adjustments accordingly.
Pros: Competition-based pricing can give you an easy leg up over your competitors by attracting their customers over the question of price. It’s also a good option to lure in cost-conscious customers.
Cons: This pricing strategy could also result in a "race to the bottom" if your competitors try to do the same. Both brands cutting costs could make your product look less desirable or valuable, too.
● Consumer-Based Pricing
In every aspect of ecommerce, customer-based everything should come first.
When pricing your products, consumer-based pricing starts by answering the following two questions:
- Who are my customers?
- What value do I reveal to my customers?
The answer to these questions together will bring a heightened self-awareness for any brand.
You should then segment your audience, separating them into groups that focus on matching the right product(s) of interest to the right cost. Utilize real-time data along with purchasing history to recognize customer segments in your audience.
After you’re finished with segmentation, you should be able to identify each group’s willingness to pay (WTP) for your products. You can carry out WTP research yourself, or get assistance from professional ecommerce experts.
Pros: There’s no better way to increase profits while still meeting your customers “where they’re at.” This model is also good for customer loyalty because customers feel like prices really “speak” to them since they’re matched perfectly to their WTP.
Cons: This pricing model requires an existing database of purchase prices from your target customers. Doing this kind of research yourself presents an upfront cost for your brand.
● Dynamic Pricing
This one is all about flexibility! Dynamic prices can increase or decrease at any point in time because of continuous changes in demand.
Sometimes referred to as surge pricing, dynamic pricing is used in examples like ride-rental apps (responding when there’s a rush of customers in the areas that need a lift).
Pros: With this pricing strategy, you can lower prices to increase sales if transactions fall down to a specific volume. Also, you can increase prices for greater profit when you notice a sales spike. This can help you balance the operational costs of higher production of your products, too. Moreover, you can merge dynamic pricing with competitor-based pricing to make your prices even more competitive if your competition updates their costs.
Cons: It could lower your conversions if prices are changing too often. If your customers notice that a fall in price will eventually come, they are more likely to wait before buying.
● Premium Pricing
The price of a product communicates its value. This is a strategy that is generally used to price valuable, high-cost or luxury items. With premium pricing, the goal is to communicate that your brand or products are something out of this world.
Pros: This ecommerce pricing strategy can be a profitable approach when you sell to audiences who can afford to buy your product. With enhanced targeting, you have lower ad prices since you are not targeting the general market.
Cons: Premium pricing restricts the potential customers that you target. If your ad campaigns and brand messaging target the wrong audience, then this leads you to window shoppers (visitors that don't convert into paying customers).
● Market-Based Pricing
Since you aren’t the only player in the market, you will need to be aware of your competitors’ pricing. And in the world of ecommerce today, where so many transactions are now happening across state and national borders, you have more competition than ever.
Consequently, brands selling direct to consumers online should consider market competition in their pricing. Consumers care more about the price than anything else in most cases, and also compare prices easily when shopping online.
Pros: An added benefit of market-based pricing is that it sometimes offers you exclusive price increase opportunities where you can maximize profits while still clutching a competitive edge.
Cons: While conducting a competitive-pricing strategy, that do_**_esn’t mean lowering your costs and undercutting your competitors repeatedly, or else your margins could become unsustainably small. Racing to the bottom is good for no one.
● Price Skimming
This is an ecommerce strategy where an initial price of a product decreases with time. It is widely used for tech products that become obsolete or less valuable as new technology is rolled out. As newer product models cover the market, the older one becomes cheaper to buy.
Pros: This is a good ecommerce pricing strategy for the brands that manufacture high-demand products, seasonal, or technology items. As time goes on, customers will want newer products, but you can still benefit from placing old products on sale to attract budget shoppers.
Cons: Skimming is not a good ecommerce strategy for smaller or newer ecommerce brands without the required reputational capital.
● Penetration Pricing
This is an ecommerce pricing strategy where a business gives a new product below-average pricing to introduce it for the first time. Businesses utilize this strategy when they are launching a new product.
Pros: It is implemented easily, maximizes the customer base quickly, leads to higher inventory turnover, and promotes operating efficiency.
Cons: It is not a good strategy for generating high profits, and may damage the image of the company over time or trigger a price war.
Wrapping Lines
The question has surely come to mind: “Which pricing strategy should I choose?”
Above are just a few ways you can price right to get people to tap the "buy button" in your online store or marketplace listings. If you test, identify, and then adhere to the most effective ecommerce pricing strategy for your business, the investment that you make will never go to waste.
You can also get the assistance of a top ecommerce development company to get help in your business journey towards success.