Price is always one of the key factors which shapes consumer buying decisions, and one of the main battlegrounds on which online sellers face-off. Adopting a competitive approach to ecommerce pricing can help you gain traction in crowded markets, making your business stand out form the crowd while achieving sustainable profitability. In this blog, we’ll look at the most effective pricing strategies that you can apply to your products and services.
1. Cost-Plus Pricing
This classic approach involves setting your price based on production cost, with a fixed percentage markup. It's straightforward and ensures profitability.
- Transparent and predictable profit margins: Reliably knowing your margins can help in budgeting and forecasting.
- Simple and easy to apply: Reduces the complexity of pricing for vast product ranges.
This method essentially guarantees coverage of costs, but it’s not always in tune with market dynamics or consumer expectations. If competitors have lower sourcing costs or are willing to accept lower margins, a fixed cost-plus pricing model may be too rigid to compete.
2. Value-Based Pricing
For businesses focused on building strong brand loyalty, understanding the perceived value of their products is crucial. By perceived, we mean what customers believe a product is worth—something you can only determine through in-depth market research, customer feedback, and sometimes even trials.
Sellers can use this perceived value to set pricing, sometimes to great effect. If your website, promotions, and marketing campaigns are effective at convincing your audience of the high value of your offerings, you can then confidently price accordingly. Without that proactive basis shaping the perception of your products, you are essentially leaving the value assessment to someone else.
3. Dynamic Pricing
Dynamic pricing allows businesses to modify prices based on factors like real-time market demand, competitor prices, and other external factors. It is the most adaptable ecommerce pricing model.
- Highly competitive: Using market prices as a barometer for when to adjust dynamic pricing helps you stay ahead of competitors, by adjusting to changes more swiftly than they can.
- Maximizes profit: Raising prices during high demand and lowering them during lulls to increase sales are two ways to use dynamic pricing to increase profits.
Whether you automate dynamic pricing or make changes manually, it’s important to consider how you will alert your customers to changes, including letting them know about new prices (up or down) in advance. Being transparent about dynamic pricing models transforms price into a conversion driver, as shoppers may be more motivated to take advantage of short term deals.
4. Penetration Pricing
Introducing a new product or entering a saturated market? Penetration pricing might a good strategy to consider.
By initially setting prices lower than competitors, businesses can potentially gain a bigger market share more quickly. As the brand becomes more recognizable and loyalty grows, prices can then gradually increase. This strategy risks losing too much margin, but is often deployed to help establish a foothold in competitive markets.
5. Skimming
In the opposite approach to penetration pricing, skimming is about setting high prices for new products, especially when they offer new, unique features, or hold some kind of novelty/hype value.
- Maximizes initial revenue: Early adopters and enthusiasts often don't mind paying a premium to try the latest products.
- High prices can be a positioning win: Higher prices can position the brand or product as premium or luxury.
Over time, as the market gets saturated or the product loses the initial “it” factor, prices can then be reduced to cater to a broader audience. The risk here is alienating customers who bought at higher prices, potentially costing you their loyalty down the line.
6. Psychological Pricing
The classic pricing technique of offering an item for $9.99 instead of $10 demonstrates the power of perception. Prices ending in .99 or .95 are often perceived as being lower than the next round number. This type of strategy plays on consumer psychology to drive sales. Similarly, bundling products at a "discounted" price which is similar to what items would cost if purchased separately can make customers feel like they're getting a deal. In the bundling example, you are subtly making the case for your current pricing by showing how products complement one another, and gain in value as a set.
Great pricing strategy starts with understanding how customers perceive the value of products.
By understanding the various ecommerce pricing strategies, businesses can build on what they know about their customers’ preferences and beliefs about products. The goal isn't just to match competitors, but to carve out a unique space where your brand's value, perceived value, and pricing all align.
About The Author
Katy Ellquist
Katy Ellquist, Miva’s Digital Marketing Strategist, is an accomplished writer, marketer, and social media analyst who has created sophisticated content campaigns for a broad range of professional clients. She brings to Miva a complex understanding of ecommerce trends and techniques, building upon extensive digital agency experience and a prior role as direct liaison to Miva’s top accounts. Katy is a regular contributor to the Miva blog, covering essential ecommerce topics like design & development strategy, site optimization, and omnichannel selling, with the goal of increasing the actionable knowledgebase of the entire Miva community.
