Product pricing isn’t as simple as picking a number. Ask too much for your products and services, and people will stop buying. Ask too little, and your profit margins will fall off of the scale. Your customers may also assume your product is of poor quality. Finding the right price balance – or equilibrium – is key to pinpointing your eCommerce pricing costs and optimizing business profit.
There is an endless number of ways to configure pricing for your online business. However, some pricing strategies can leave revenue on the table and even damage the way your customers view your brand. As an online business, finding the right formula for your eCommerce pricing is essential to your business’s success.
How to Price Your Product: The Best Ecommerce Pricing Ideas of 2020
Choosing the right product pricing model for your business isn’t black and white. Ultimately, a business brand will have to do their homework. Consider things like production and operational costs, competitor pricing, and revenue goals. Even then, creating a price point for your product isn’t strictly math. It has everything to do with your brand’s reputation, your consumer base, and the types of products and services you offer. Start by researching your industry, customers, products, and competitors. Then read our detailed guide for the most effective eCommerce pricing ideas of 2020.
Cost-Plus Pricing: Use a Markup Percentage
Cost-plus pricing, also called Keystone or markup pricing, is one of the most straightforward product pricing strategies for online retailers. In this method, a fixed percentage is added on top of unit cost – or the cost to produce one unit of your goods. This final number is the selling price point for your product.
In this eCommerce pricing concept, a person looks solely at the unit costs and ignores pricing that may be set by competitors. This may pose challenges for businesses because it does not take external factors, such as market drive and competitor pricing, into account.
The cost-plus pricing model is used most often by retail companies (e.g., clothing, jewelry, sporting goods, etc.), which offer different items. Then, various markup percentages are applied to each product. Other businesses, such as software development services, won’t find this pricing model to be the best fit. This is because the value of their product/service is often much higher than the cost to produce.
Competitive Pricing: Outprice Your Competitors
The practice of competitive pricing involves creating a product pricing structure based on your closest competition. This means examining what others are charging for similar goods or services. The result narrows the gap between product cost and profit, essentially requiring a higher volume of sales.
Competitive pricing has the power to influence price-conscious consumers to purchase your products over similar ones. However, this “race to the bottom” could be unfavorable to your product margins (and we all need to pay bills, right?)
Competitive eCommerce pricing strategy could be useful when negotiating with suppliers for lower costs per unit while actively promoting special pricing. However, lower prices mean lower profit margins. The need to sell a higher volume than competitors could be difficult for smaller retailers to sustain.
Value-Based Pricing: Consider the Consumer
Value-based pricing is an eCommerce pricing strategy that emphasizes product or service appeal over similar or competing products. Success in this pricing strategy takes a deep understanding of your customer base and the perceived value of your products or services.
This type of pricing is valuable because it ensures that your customer base is happy paying the price you are offering for the value they are receiving. This model prevents businesses from short-changing themselves while creating an experience that best aligns with consumer expectations.
Although value-based product pricing is generally considered a win-win for businesses and consumers, it isn’t uncommon for online retailers to shy away from this technique. Accomplishing value-based pricing means building a strong relationship with your consumers, identifying demographics, and conducting in-depth market research and analysis on their interests, motivation to buy, product concerns, and preferred products from competitors.
MSRP: Let the Manufacture Set Your Price
As the name suggests, MSRP (manufacturer suggested retail price) is an eCommerce pricing model that involves pricing your products based on manufacturer recommendations. MSRPs first came to use to help standardize price points across multiple retailers and locations. MSRP product pricing is used most often when pricing highly standardized products (i.e., appliances and electronics).
As a retailer, MSRP can save yourself time by using a manufacturer-provided MSRP to price your products. On the other hand, retailers that use MSRP pricing aren’t able to compete with others in the industry that retail those same products.
Psychological Pricing: Offer a Perceived Value
Have you ever walked into a store, completed your shopping, and wondered just how you managed to spend your budget so quickly? It’s happened to everyone, and there’s a good reason why.
Psychological product pricing is a business practice of setting prices just lower than a whole number. The idea behind this eCommerce pricing model is that consumers will see a lower price and treat it as more economical than it actually is. An example is a product priced at $4.99. The result is a number conveyed to the consumer as 4 dollars instead of 5. The customer will then subconsciously treat the $4.99 price as much lower than a product priced at $5.00.
The power of psychological pricing is so high that MIT and the University of Chicago ran an experiment to test the fact. Researchers priced a standard women’s clothing item at $34, $39, and $44 – guess which one sold the most? Yes, that’s right, the $39 item outsold the same product priced at $34.
Psychological pricing triggers impulse buying and leaves buyers with a perception of value. On the other hand, pricing less than a whole number on luxury goods can hurt your brand’s perception (e.i. $999 as opposed to $1,000).
Discount Pricing: Create a Sense of Urgency
It’s not a secret that most people love a great sale. This is why we see so many coupons, rebates, seasonal, and incentive pricing all around us. Discount product pricing is one of the top business pricing methods used by 97% of retailers in all industries.
Discount pricing affects consumer emotions, cultivating a sense of urgency and a fear of loss. It can increase store foot traffic, offload stagnant inventory, and even attract new price-conscious consumers to your business. However, discount eCommerce pricing is not without its downsides. Slashing your prices too often can give you the image of a bargain retailer and even prevent consumers from purchasing your product at regular prices.
Lower prices may reflect a useful marketing strategy for new brands, the introduction of a new product or service, or referral incentives to get the word about your business.
Premium Pricing: Showcase Your Product’s Quality
Premium pricing, also known as “prestige pricing” or “image pricing,” is the practice of pricing products above the standard market value. As a result, consumers may perceive that your product or service has more value than other similar offerings. Although this eCommerce pricing model will dissuade some buyers, premium pricing proponents believe favorable perception based on pricing alone can bring in more revenue.
This product pricing practice is used frequently with brands such as Apple, Gucci, etc. Often, people already know that the quality of the product is good, and with reinforcement of higher costs, they expect that they pay a premium for this reason.
Premium pricing strategies create a “halo effect” on your business and offerings. This means consumers perceive that your products are of better quality due to their higher prices compared to competitors. However, depending on your target demographic and reputation, this strategy can be challenging to put into play.
Anchor Pricing: Create a Reference Point
Anchor pricing is another psychological product pricing technique online retailers are able to use to encourage favorable comparisons. Essentially, eCommerce stores will place the original price of an item next to its discounted price. This displays the savings a consumer could gain from making a purchase.
The reference points create what is known as an anchoring cognitive bias. Another way to implement this principle is by placing a higher priced item next to a lower-priced one, in which you want to draw attention. Online industries famously use this technique to influence the purchase of mid-tier products. Online retailers want to be careful; however, if your anchor price is unrealistic, it can breakdown the trust between consumers and your brand.
Loss-Leading Pricing: Encourage Transaction Value
Loss leading is a product pricing model that involves selecting one or more of your products to be sold at a lower cost. In many cases, this means at a loss to the retailer. Why would anyone do this? The loss-leading principle is a way to entice customers to your store that may not be familiar with your products.
The idea behind this eCommerce pricing method is that you will attract consumers with a desirably marked product. Your shoppers will then be encouraged to buy additional items. Other times a business may offer incentives for the purchase of exclusive bundles. While the retailer may incur a loss on one of the items, it ultimately benefits from the other products purchased at their store.
The benefit of this tactic is high for retailers. By encouraging your shoppers to buy additional/multiple items to receive a benefit, you boost the number of products sold and raise transaction totals. Like most discount methods, you should avoid using price slashing too often or your consumers will expect a bargain and will be hesitant to pay full price.
Choosing the Right Product Pricing Strategy
Deciding on the right eCommerce pricing model for your business is a balancing act. Not every product pricing strategy is going to work for your good, service, or company. Before you decide on and implement a pricing model, it’s essential to do your homework. Start by taking a look at your demographics, what your competitors are doing, and analyze all costs associated with creating and retailing your products. While many of these pricing strategies can do well on their own, you can also pair them together to best benefit your consumer.