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About E-commerce pricing strategy
An E-commerce pricing strategy is a plan or framework that you will use to price your products accurately. Different e-commerce pricing strategies can be used depending on the type of products and services you sell, the demand for those products and services, and how your competition operates.
Remember that costs will change as your business grows and scales, affecting your pricing strategy. Depending on your business model, your cost per sale may go up or down, and you may need an e-commerce pricing strategy to accommodate this.
The importance of having a defined e-commerce pricing strategy
The correct eCommerce pricing strategy is different for every business. And even as a business grows, it may need to adjust its approach. For example, a simple cost-plus pricing strategy emphasizes making a profit from each sale. Cost-plus works for the initial stages of an eCommerce business, but it might not be sustainable in the long run.
As your business grows, costs can grow exponentially, and the actual cost per order and acquisition cost can also increase. Therefore, you need an e-commerce pricing strategy to benefit you in scaling your business. There are several different pricing strategies used by eCommerce businesses that don’t hurt revenues in the long run.
Even if your eCommerce business is currently gainful, there could be opportunities to improve profits if you continue to reevaluate and improve your pricing strategy.
Create a pricing strategy that’s right for your business and your customers.
An e-commerce pricing strategy is often based on your target audience, what your ideal customers are willing to pay, and where they are currently shopping for similar products. The suitable pricing model will determine what buyers are ready to pay for your product based on factors such as brand reputation, demand, and competition.
Top 5 E-commerce Pricing strategy
Here are five different pricing strategies used by growing e-commerce brands.
1. Cost-Based Pricing
Cost-based pricing is also known as “margin pricing,” “break-even pricing,” or “cost plus margin pricing.” This eCommerce pricing strategy is based on two numbers: the total cost of making a sale and the profit margin you’re looking to make.
For example, let’s say you have an online t-shirt store. You buy the shirts from a third party, which are shipped directly to your customers. Since you drop ship, you don’t have to worry about production costs. For example, it might cost $3 to get a t-shirt from your vendor and $2 to ship to your customer.
But for the customer to find your store, you also had to spend $2 on social media ads. $3 + $2 + $2 = $7, so the total cost of making one sale is $7. To set your price, then add the markup you want on top of that. Let’s say you want a markup, or markup, of 50%. Then you would add .50 * $7 = $3.50 to the $7, and your shirt will cost $10.50.
2. Competition-Based Pricing
Competition-based pricing is a strategy in which you aim to offer better prices than your competitors. This means that you must constantly monitor the market and compare your prices with those of similar products your competition offers.
Today’s buyers will constantly be comparing prices, so spending time and effort researching your customers and defining a very tight competitive set is always a significant investment. And you don’t have to do it manually – monitoring the competition and adjusting your prices accordingly is a task well suited to a bot or some of the pricing platforms on the market. Many of these use AI to help drive the capture of related items.
3. Loss Leader Pricing
You know when you bring a coupon to the store and wonder how the supermarket can make money for such a low price? Well, probably not. They are probably applying a loss-leading pricing strategy. Other terms used for this are penetration pricing and discount pricing. Sales, coupons, and additional related rebates are popular and efficient pricing strategies in all industries.
Loss-leading pricing means you accept a loss on certain items, knowing that the initial purchase will result in additional expenses in your store. However, by attracting that first transaction, you’ve gained a new customer, and based on your calculated Customer Lifetime Value (LTV), your future spending will offset the loss.
This eCommerce pricing strategy relies on customer brand loyalty to make it work. An excellent digital commerce experience is essential to ensuring the customer is willing to buy from you again.
4. Dynamic Price
Dynamic pricing is exactly what it sounds like flexible pricing that adapts to customer behavior and changes in demand. The adoption of dynamic pricing will mean that your prices are constantly changing in relation to factors such as:
- offer and demand
- market trends
- Competition and industry standards
- Consumer expectations
By combining dynamic pricing concepts with advanced e-commerce strategies, brands can continuously maximize real-time profit margins. A word of attention is in order. However: if not executed well, dynamic pricing can lower your conversions as shoppers realize your prices constantly change. In addition, it can undermine confidence in general, and if customers know that fees may be coming down, they are likely to wait.
5. Price Skimming
Price skimming is a pricing plan in which the seller starts by charging customers the highest price for an item and gradually lowers it. This is a common strategy in niches where interest in new products and their perceived value are waning rapidly.
Price gouging is, for example, widespread in the electronics sector, where products tend to lose value or even become obsolete as innovative new technological developments are released. Another typical example is seasonal products, such as Christmas decorations, which will go on sale after the holidays. Price skimming is not a good fit for newer and smaller eCommerce businesses, and it doesn’t work if you sell everyday commodities or commodities.
Hence, choosing the right eCommerce pricing strategy will require trial and error and reassessment. While a simple cost-plus pricing strategy might help with initial growth, it could hinder your business in the long run as costs increase. Therefore, Picking the right pricing strategy depends on several factors, from how much your product costs to produce to customer demand.