Pricing is among the major driving forces that can convert a user into a customer or make them leave the store. Online buyers compare stores on several factors. Price is also a key factor for users who want to place orders where a product price is lower but justified the quality.
For any store, it is mandatory to select a pricing strategy that seems to be realistic and justified. Following are some of the eCommerce pricing strategies you can consider applying the one that best resonates with the nature of your product, service, and business model.
Value-Based Pricing
It is a more customer-centric pricing strategy. It takes the customers’ willingness to pay into consideration when setting a product price. It requires extensive research about a price that seems to be realistic and reasonable for the end consumers. Understanding customers’ expectations is difficult when you have to deal with so many cost factors. It will require you to ignore the product costs and competitors’ prices, as your end goal will be to remove buyers’ regret after placing orders in your store. To succeed with this strategy, you need to spend more time and energy understanding a price range the customers are willing to pay.
It can be applied in two forms.
Good Value Pricing – Here, you set the price according to its quality. Customers are willing to pay more for a high-quality product but become judgmental when a low-quality product is showcased. Add prices according to the value it delivers to the customers. You can apply this technique to products having unique selling propositions and an identity. Customers will be willing to pay more for the additional value as they stop comparing it with the available options.
Value-Added Pricing – It works by evaluating the perceived value of an eCommerce product. There is a fixed price of an item, for which the customer is not going to spend more. It has a defined set of features and quality, which cannot be elevated further. Sellers often have an idea about consumer perception. It applies to the usual products, where you are left with no room for improvement.
Value-based Pricing: Pros and Cons
It can help you increase brand value by setting a price according to its quality and uniqueness, setting a better perception of quality. As a result, you get higher profit margins and customer loyalty. Your customers are paying what they already had in mind. So, they are not going to regret their decision and stay loyal to the brand.
Following value-based pricing has several disadvantages too. It puts you into a niche market, where few people are willing to pay the higher price for your premium quality products. You remain restricted to a community of loyal customers. Additionally, producing high-quality products may incur higher production costs as well.
Partial Payment Pricing
Partial payment pricing is the modern pricing technique that allows customers to pay an upfront fee and schedule the remaining amount in monthly installments. It was once confined to a payment method, but the increasing inflation has stopped people from shopping for expensive items in cash. It is the reason; online stores are using this strategy to make the products affordable for the end users. They don’t need to pay the lump sum.
Any eCommerce website can implement a feature that automatically creates a schedule for partial payment and monthly installments for users. Tools and extensions like Magento 2 Partial Payment help merchants initiate layaway payment options and increase conversions. Such extensions have rich features to create a complete payment plan along with customized plans.
Partial Payment: Pros and Cons
It provides convenience to customers they have not experienced before. If they were unable to think about purchasing a product, they can now get it without paying its full amount. Using different tools, you can provide a customized plan as well. You get higher sales and conversions. Stores can earn more by charging a fee for the layaway option. Customers are willing to pay extra if they are given the freedom to pay in parts.
Using partial payment on your eCommerce website has certain limitations as well. It may consume lots of your administrative time as well. It also comes at a higher cost because more of your finances will be stuck in recovery.
Cost-Based Pricing
It is the commonly used pricing strategy by most eCommerce stores. It is focused more on the customer. Pricing starts by accumulating the cost incurred in acquiring, sourcing, manufacturing, and making the store available for sale. Once you get the cost, add a profit margin that’s why you want to earn from it. Here, the price is not set according to the market and competitive trends. The seller may want the customer to enjoy low pricing as all the major costs are covered and the store is getting a profit margin too. There is no need to raise prices for no reason.
It can be applied in two forms.
Cost-plus pricing – It is the basic type as discussed above. It represents the true form of a cost-based pricing strategy. However, the profit margin is added as a fixed percentage of the cost. For example, you can apply a straight 20% profit on a product that costs you $20. Adding the profit i.e. $4, you get a sale price of $24. You keep selling it regardless of the competitor’s pricing. They may either be selling at a lower or higher price, but don’t need to bother as you have a unique selling proposition.
Marginal-cost pricing – it is a refined form of cost-based pricing where a marginal cost is carried forward to calculate the selling pricing of a product. The cost incurred in making a product available is set aside, whereas the marginal cost – the cost of producing an extra unit of the product – is considered. It helps an online business charge customers according to the difficulty in arranging products. The variable cost also gets covered in this strategy.
Cost-based pricing: Pros and Cons
It sets you free from complex calculations, market analysis, and revising the pricing again and again. It follows a simple pattern and proves to be the basic model of the eCommerce fraternity. To start an eCommerce store, the strategy can do well in making sales. However, to survive in a competitive market, this is not going to help you a lot.
Competitor-Based Pricing
As the name suggests, competitor-based pricing is all about keeping an eye on the competition and adjusting the prices accordingly. In the eCommerce world, you often have to face cut-throat competition. Despite providing the best quality products, you may still fail to get orders because your competitors may be offering almost similar products at the lowest possible rates. To survive in such a rival market, you must have to consider this pricing strategy.
It can also be followed in two different ways.
Price matching strategy – It requires you to match the competitor’s prices at any cost. Being a beginner, lowering the prices may seem difficult for you, but it may be the only way to go further. At the least, you may start getting orders and improve on the costing techniques. It is one of the effective strategies to penetrate the market regardless of the monopoly created by the giants.
Price leadership – This technique helps you lead the competition by setting prices a bit higher or lower than the competition. To break the rivalry, you either become part of the usual things happening around you or provide relief to customers to lead the competition. Either way, you can make revenues coming into your store. However, following this rule applies to products where quality also matters the most to the end users.
Competition-based Pricing: Pros and Cons
It helps you break the barriers of entering a competitive environment. In an eCommerce market where established businesses are making it hard for new entrants to sell their items, this strategy proves to be the most effective one. Make the potential customer take notice of your products with prices that seem affordable to them.
Besides so many advantages, the key drawback of competitive pricing is ignoring your product cost. It may not be viable for you to sell a product below a marginal price, but competition will make you do so.
Dynamic Pricing
Dynamic Pricing gives you the flexibility to increase and decrease profit margins based on demand and time-sensitive decisions. It provides better opportunities to earn more when a product is high in demand and retain customers when they are not willing to buy. A dynamic pricing model requires you to keep adjusting prices in real time as the demand rises or other events happen. It is used to accelerate sales in a short period. For example, you can offer a reduced price on the weekdays when fewer people think about shopping or speed up sales on Christmas and Black Friday. It may also include offering flexible pricing to the user groups. It is a fruitful technique for eCommerce retailers.
It can be applied in a variety of scenarios. Two among them are:
Group-based dynamic pricing – When you set a lower price for a specific group, it is called group-based dynamic pricing. For example, if you offer a flat 10% for students, senior citizens, and forces. The strategy can also be used to award the user groups you have created in an eCommerce website. Offer regular and loyal customers with subsidized pricing.
Time-based dynamic pricing – It is about setting tier pricing for different hours of the day or days of the week. For example, fast food restaurants often announce great midnight deals that are available for shopping after 12 AM. Similarly, an eCommerce store can reduce prices on Mondays and Tuesdays to keep the customers coming and shopping.
Dynamic Pricing: Pros and Cons
Dynamic pricing gives you more control over what to charge a customer. It gives you a better understanding of what works best in the peak and off-peak hours so that more products and offers can be announced to increase sales. Grab more market insights and collect customers’ data that show interest in reduced or higher prices.
The drawback of dynamic pricing is that you may lose regular customers. They are glued to your eCommerce store and its social media accounts and continuously chase the products. The fluctuation in price may click if you are making higher margins out of the products. If they have purchased the products at a higher price, they are more likely to regret that if they see reduced prices.
Price Skimming
Price skimming is the pricing strategy of the elites and risk-takers. It is the strategy of offering the highest prices of the newly launched products in your store. The main goal of applying this technique is to recover the investment as soon as possible. Setting higher prices will filter out the common men from your target customers, and get the real ones in your store. People who are willing to pay more for quality products will make your items outstanding. They believe expensive items bear premium quality. Prices tend to reduce as the product ages and becomes available in different forms and shapes by the competitors.
For any new product idea, price skimming is the most effective pricing strategy. You spend time on research and development and take the risk of producing a product that is not common and known to the people. Launch it with a higher price to make the most out of the product in a short period, and let others copy the concept later on. The time they would take in replicating the product, you would have made a fortune for yourself.
Price Skimming: Pros and Cons
The strategy helps get all the investment paid off soon after the launch. Return on investment usually takes years for an eCommerce business. Using the price skimming technique, you can shorten the time and get the investment back as soon as possible. It also helps you build a brand for a terrific launch and a flawless marketing strategy. You also get to know the customers who like to believe in innovation and are ready to pay higher for products of their interest.
Price skimming is confined to a specific segment of customers and one cannot apply it in a crowded market. Trying it in a competitive environment can harm the reputation of the brand and incur huge losses as well. Businesses that are already in the same business would like to replicate your idea to get the same higher returns you achieved. It may result in quick market saturation.
Bundled Pricing
Create a product bundle and price it all together and there you choose a bundled pricing strategy for your eCommerce business. Forming a bundle may require you to offer a lower amount of the total package to attract customers in buying more to save. It is one of the effective tools for maximizing revenue and average order value. A customer who comes to buy an item will like to buy a bundle and save money. Online stores that want customers to place orders of larger quantities can take advantage of bulk pricing. It is useful for wholesalers, distributors, and retailers as well.
There are various forms of bundled pricing. Three of them are discussed below:
Pure bundles – It requires selling all products in the bundle and restricting customers from buying separate items. It belongs to the wholesale eCommerce business as they are likely to sell items in sets, boxes, bundles, etc. Store owners can create tier pricing for the bundle quantity as well. For example, a shirt that costs $5 comes in a set of three at $13, five shirts at $20, and so on.
Mixed and matched bundles – it allows the creation of bundles with mixed and matched bundles. For any eCommerce business, it serves as an attractive deal for the customers to consider. Products from the same and different categories are clubbed into a bundle with discounts. The store gets a higher amount of orders and customers get all the required items in a bundle.
Bundle Pricing: Pros and Cons
This pricing strategy has proven effective in driving sales and revenues for an eCommerce business. Customers find the bundle to be a better deal and decide to buy more rather than relying on one product. Stores that are getting bulk orders get the opportunity to manage inventory with fresh stock. They know the products are about to sell, so they always have fresh inventory to serve the consumers.
A negative side of bundled pricing is the disappointment of a selected customer group. Some people prefer to buy an item they need rather than ordering a complete set of it. If you apply pure bundles to your store, these customers are never going to place orders. They may find other stores to get the only product they need.
Conclusion
Pricing strategy depends on several factors. One cannot blindly follow a strategy and implement it in his or her eCommerce store. Being a beginner, you must use the strategies we have discussed in this post. However, to make it work for your business, you must consider its implications as well. It is the nature of your business, target audience, and behavior that helps you distinguish a pricing strategy.