Competitive Pricing

7 Revenue-Generating Ecommerce Pricing Strategies

A sound pricing strategy is crucial to eCommerce business success. Poor pricing strategies can result in missed opportunities to acquire new customers, competitive prices with lower profits, or, at worst, high prices that are too steep for your ideal prospects.  

This blog explores how the correct pricing strategies can impact your business and how competitive pricing influences consumer behaviour in eCommerce and impacts your market share.

From small businesses to enterprises, we'll take you on a journey through the ins and outs of competitive pricing.

What is an eCommerce pricing strategy?

An eCommerce pricing strategy helps you determine how to price products to drive sales and revenue. The type of products you sell may require you to combine different pricing strategies to achieve maximum results. As you're going about this, you'll want to think about premium pricing, economy pricing, and most importantly, your profit margin.

eCommerce businesses evaluate three main criteria when determining their pricing strategy:

  • Product type - they'll consider cost, psychological pricing, variable costs, sale price, production costs, bundle pricing, and different prices for different types of users.
  • Demand for the product - they'll evaluate higher profit, their pricing model, right price (for the right segment), similar products, potential customer (understanding their needs and pain points), the impact of low price (or economy pricing)
  • The level of competition for that particular product or product group - they'll consider product price, premium price, new market challenges, long-term impact of their pricing method, and the total cost of a product across its entire lifecycle.

What pricing strategies are there?

When it comes to pricing strategies, no one solution fits all. Let's look at the eight most common pricing strategies and how eCommerce enterprises and small businesses can apply them to their specific needs.

  1. Competitor Pricing
  2. Value-based Pricing
  3. Price skimming
  4. Market-based Pricing
  5. Penetration Pricing
  6. Dynamic Pricing
  7. Cost-Plus Pricing

Competitor Pricing

Using competitor pricing, you set a price for your products or services based on what your competitors charge. According to this pricing strategy, the competition has already figured out the correct price point.

In general, prices of similar products reach equilibrium quickly on most markets. A newly-launched eCommerce company that sets prices the same as its competitors can cut down on the trials and errors of price-setting.

Suppose you own a store that sells home goods to Millennial moms. Investigate your competitors in that market and see how they price their products.

  • Are they undercutting you?
  • Can you upsell or cross-sell bundles to eat into their margins?

You can build competitive intelligence by conducting this type of research and uncover opportunities to beat your competition online.

If your pricing cannot compete, you can add social proof badges to your website, such as "189 people have bought this product" or create urgency by stating "only 4 left in stock" to sway consumers who are hesitant to purchase.

By offering multiple photos or videos of your product, you can also differentiate your product from your competitors.

In addition, well-written descriptions with accurate specifications and FAQ can help reassure consumers.

Value-based Pricing

Value based pricing is often referred to as "customer-based pricing" and sometimes "psychological pricing" because the price of a product or service is determined by how much consumers believe it's worth.

A value based pricing strategy is based on how consumers perceive the value of the product instead of production costs, market price, or competitor prices.

Consider a scenario where you sell organic beauty products with high-quality ingredients sourced from local farmers. You'll find that consumers are willing to a high price for ethically sourced and higher-quality ingredients if you communicate this on your website.

Marketing segmentation makes this strategy more effective. Use browser notifications to remind your opted-in database of your products' value. In addition, you can target a similar potential customer to your product pages using lookalike audiences on social media platforms like Facebook advertising.

Value-based products don't always imply luxury.

Consumers value different things. Value-based pricing may also take into account how you treat your workers or how much of your proceeds go to charity. Knowing your customers and what they care about is the key to creating a value-based pricing strategy.

Consider doing user research and surveys first to understand better who your customers really are, their behaviour, and what they're willing to pay more for before implementing this pricing model.

Price skimming

Price skimming involves reducing the initial price of a product over time. This pricing strategy is common in consumer electronics. Even companies like Apple and Samsung use this strategy for the release of their newest smartphones and laptops.

The desire for the latest tech gadget will be high among many consumers, but that doesn't mean that eCommerce consumer electronics stores can't profit from older models. Segmentation is again crucial here. Each consumer has different preferences and affinities.

Discount-seeking customers can be targeted with emails, web push notifications, app pushes, and Google, Facebook, and Instagram ads to get them to your site and buy last year's models. Similar marketing efforts may also be used to target customers who are most likely to purchase new products.

Price skimming is an effective strategy for online retailers as product release cycles are getting shorter, and it keeps them from getting stuck with products they can't sell. They can target tech lovers with high price items, push low price items to discount seekers, and see their revenue grow.

Seasonal sales

What else can price skimming be used for? Seasonal sales. You'll notice that full-ticket price items go down as one season transitions into the next.

The use of price skimming allows you to re-engage existing clients and entice them back to your website with specific, personalized offers based on their past purchases and real-time browsing behaviour.

Market-based Pricing

In market-based pricing, companies set prices based on similar products on the market. Afterwards, the company evaluates how well its product compares to its competitors.

As with price skimming, a market-based pricing strategy will allow a business to set prices higher when a new product is introduced and later align prices with market prices to remain competitive.

Penetration Pricing

Penetration pricing is often used by companies when launching a new product or service. It allows a new product or service to enter the market by setting a lower price. In addition, you can use it to raise awareness of your products or services to a large audience.

In the long run, the goal is to have customers become loyal to the product when the prices return to normal. One-month free or half price for six months are examples of penetration pricing. Among service providers, this is a common practice. To encourage user adoption and to nurture you into a loyal customer, they will offer benefits if you pay in full for the yearly price.

A penetration pricing strategy is often used by companies when launching a new product or service. It allows a new product or service to enter the market by setting a lower price. In addition, you can use it to raise awareness of your products or services to a large audience.

In the long run, the goal is to have customers become loyal to the product when the prices return to normal. One-month free or half price for six months are examples of penetration pricing. Among service providers, this is a common practice. To encourage user adoption and to nurture you into a loyal customer, they will offer benefits if you pay in full for the yearly price.

Penetration pricing is used by Canva, Grammarly, other technology companies, coffee, wine, and fashion subscription services. Their marketing strategy will offer customers free trials, no-hassle guarantees, different prices, and freemium versions of their products.

They'll use lead generation forms and surveys to collect consumer feedback about their product and service during this time. They'll use this information to reevaluate their prices and develop and roadmap new features over time.

They will then adjust their penetration pricing to value-based pricing or competitor-based pricing after they have improved their offerings, know users are hooked, and have expanded their market share.

Dynamic Pricing

Dynamic pricing is never fixed because it changes based on constant changes in demand. Airbnb and Amazon use AI-based dynamic pricing strategies because they recognize that these strategies can help them grow in highly competitive markets.

How does dynamic pricing work?

AI and machine learning technologies look for anomalies or events outside pre-set parameters. During the pandemic, you saw a surge in consumers buying toilet paper and disinfectants. Also, you probably noticed that prices dynamically shifted as these products became more difficult for companies like Amazon, Walmart, and supermarkets to source.

However, this isn't limited to crises. eCommerce companies and small businesses notice surges or drops in consumers' purchases seasonally too. Consider the demand for BBQ equipment in summer or the influx of wedding dress purchases in spring in the northern hemisphere.

Dynamic pricing allows eCommerce stores to change prices in response to real-time consumer behaviour. By combining competitor-based pricing with this strategy, eCommerce brands can respond at lightning speed to consumer and competitor behaviour changes. They can set premium pricing, bundle pricing, and adjust each product's price point based on consumer demand or market price fluctuations.

The drawbacks?

If you're changing SKU prices or monitoring competitor fluctuations manually or have a high volume of SKUs that need constant adjustment, this strategy may be beyond your current capabilities and hurt you in the long term. But that doesn't mean a business owner or their teams don't have options. For example, you can work with a price scraping service that can help you manage these changes and maximize your results.

Like with anything, too much of a good thing for your business could erode consumer trust. For example, assume you are selling everyday items to consumers such as shampoo, toothpaste, and paper towels. If your prices fluctuate constantly, you risk losing their trust, and they might switch to a competitor whose prices are more stable.

You can use web or app push notifications to notify your customers about price increases or decreases based on their preferences and affinities if you are changing prices dynamically. A discount-seeking or price-conscious customer, for instance, can be alerted that prices will go up on a certain date. Doing this creates urgency, shows you understand their priorities, their price point their comfortable with, and helps you set the right price to encourage them to act now.

Cost-Plus Pricing

In cost-plus pricing, the cost of producing a product is calculated, then a markup is added to determine the selling price. Many eCommerce companies employ this pricing strategy because it's relatively simple and does not require AI or machine learning.

In addition to direct labour, machinery, materials, marketing, and other fixed and variable production costs, there are indirect and hidden costs as well.

What are the most common mistakes eCommerce brands make with cost-plus pricing?

Sometimes, brands don't factor in digital costs into their total cost. These include can customer acquisition costs (CAC), advertising expenses, and logistics (free delivery on them if the consumer is not pleased with the product).

It's a good idea to consider your product's entire lifecycle, from manufacturing to delivery to potential returns, cash backs, and reshipping. This way, you won't overlook critical variables that can adversely affect your margins. For the price to be set correctly, it's necessary to consider all elements of "plus pricing" to make sure they're accurate and reliable.

Cost-price-plus pricing will help you decide when to set a sale price versus a premium price and diversify your pricing strategy for maximum results.

Conclusion

Price strategies for eCommerce need to be carefully considered. Understanding your customers, their shifting behaviours, materials, labour, and shopping costs are the key to creating a successful one. If you're a business owner and manage a pricing team, you must be able to see all the areas that impact your product and customer lifecycle and have the processes and tools in place to react quickly and take proactive measures when it comes to product price.

Contact Skuuudle to find out how we can assist your eCommerce pricing strategy and unlock new growth opportunities now and in the long term.

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