Pricing is one of the most important and significant factors in generating more revenue for your eCommerce business. It is the process of figuring out how much to charge for the goods or services your business offers. According to studies, 1% increase in prices might result in a profit growth of more than 11%.
To optimize market penetration, you must determine the optimal price or pricing. Unfortunately, many businesses take a “set and forget” approach to pricing, failing to build a complete, research-based strategy for determining optimal price points. This mistake eliminates a big revenue opportunity and accounts for up to 18% of startup failures.
Optimizing your pricing plan to maximize revenue from each customer should be obvious. This leads to increased growth and profit. However, many eCommerce business owners fail to implement this simple concept effectively. So, how do you select the best price point for your product or service? First, you must choose the pricing strategy that best aligns with your revenue and organizational objectives. Let’s look at the five of the most effective pricing strategies and explain how to select the best technique based on the kind of business you run.
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Understanding the Pricing Strategies
A pricing strategy is a process used by an online merchant or retailer to price their products while accounting for production expenses and revenue objectives, such as average order value (AOV) or lifetime customer value. According to studies, Global eCommerce sales are expected to hit $8.09 trillion by 2028. eCommerce pricing strategies enable you to make informed judgments about pricing changes and recognize how those changes will affect and appeal to your intended audience.
Consider two popular pricing strategies: price skimming and cost-plus pricing (both of which will be discussed briefly in further detail).
- Price skimming is a method in which you begin by setting high prices — as high as the market can handle (collecting maximum income per unit early on) — and then progressively reduce eCommerce costs to attract a larger audience as demand falls.
- Cost-plus pricing is a pricing technique in which you add a margin to your total production expenses (usually a percentage).
For instance, an eCommerce development agency entering the CRM industry may conduct research and find that the maximum price they can now charge for their software is $80 per user (using the price skimming method). To increase their potential customer base, they will first draw in a few high-value clients before progressively reducing their pricing.
If they select a cost-plus pricing strategy with a 50% margin, they may assess the entire cost of manufacturing as $30 per user and hence set their price around $45 per user.
What are the Top 5 Pricing Strategies?
eCommerce web developers use a variety of pricing strategies to convey value to their target market and increase sales. Before deciding on a single strategy for the company, evaluate these five methods and how they might affect your profitability.
1. Competitive Pricing
Competitive pricing is a method that considers consumer behavior by determining a price based on what your competitors charge. It is simple and low-risk, but it doesn’t take into consideration how much your buyers think your products are worth. Simply put? You may lose money if you price your products excessively low in a “race to the bottom.”
Some apps can help you track competition pricing and set dynamic prices for your products. For example, a WooCommerce website with dynamic pricing features allow you to automatically alter pricing in real-time as a competitor’s price changes.
Pros
- Competition-based pricing can help you outperform the competition by attracting clients with lower rates.
- If you want to attract budget-conscious clients, this is an excellent alternative.
Cons
Unlike brick-and-mortar stores, customers can visit other eCommerce stores in seconds if they don’t like your prices.
- If you can’t keep lowering your costs to keep cost-conscious customers satisfied, you’ll begin to lose sales.
2. Cost-plus Pricing
The cost-plus pricing method (also known as markup pricing, breakeven pricing, or cost-based pricing) makes money by adding a fixed percentage profit to the cost of a product. Cost-plus pricing is one of the most basic and uncomplicated pricing techniques for new and/or small eCommerce businesses since the formula is straightforward and simple to compute.
The markup is usually a percentage of the entire cost and is intended to ensure that the company makes a profit on each transaction.
Pros
- Cost-plus is a common pricing technique since it is simple as long as your rates are higher than the genuine cost per purchase.
- Your finance team or accountant can immediately assist you in setting up a cost-plus tracking system to monitor your business’s performance.
Cons
- When employing cost-plus pricing, it is possible to make mistakes with the computations. If done poorly, your company may lose money on each sale.
- If material costs rise unexpectedly but product prices remain constant, you will lose profits.
3. Value-based Pricing
Value-based pricing is an approach in which you determine a price based on how much people perceive your products are worth.
Value-based pricing often leads to bigger markups and more profit than competitive and cost-plus pricing, making it excellent for scaling enterprises with a long-term strategy. The goal is to determine a reasonable price depending on how much customers value your goods.
Additionally, this pricing strategy is especially effective for companies with a loyal client base, such as those who sell luxury or status items, collectibles, or artwork.
Pros
- Value-based pricing can be applied to a variety of products according to the perceived value of the product.
- Value pricing also allows you to determine how valuable your products are.
Cons
- Value-based pricing might be difficult to implement correctly. To identify the ideal price point that keeps clients satisfied while not reducing sales, you must conduct studies.
- Furthermore, the perceived worth of a commodity can fluctuate over time.
4. Price Skimming
A popular strategy known as “Price Skimming” involves gradually decreasing a product’s initial price. Price skimming is common for electronic products that become less useful or obsolete as new technology is introduced. As newer product models become available, previous models become more affordable to purchase.
Customers of technology products such as smartphones, televisions, computers, and game consoles are known as ‘early adopters.’ These types of customers are eager to spend a premium on the latest model.
Pros
- Price skimming is an effective strategy for brands that sell in-demand items, technology, or seasonal things.
- Customers will most certainly prefer newer things as time passes, but you can still gain from offering last year’s products at a discount to attract budget buyers.
Cons
- Price skimming is not an appropriate strategy for newer and smaller online businesses.
- Price skimming is only effective if you can draw in “early adopters” and have dedicated customers.
5. Penetration Pricing
Penetration pricing, which is the opposite of Price Skimming, is best suited for a brand establishing an already competitive market. The strategy is to set low starting pricing and then boost them later. Discount codes and methods can also be effective in attracting new clients and increasing brand awareness.
The risk of Penetration Pricing is that it may harm your brand’s reputation, causing customers to undervalue your items or consider them as low-quality. New Relic, an observability platform for developers, is an excellent example of a company leveraging penetration pricing to increase market share.
Pros
- You’ll be able to establish a foothold or brand awareness despite earning less profit and revenue per customer than you would if you charged more.
- It can help you acquire prospective customers rapidly and gain market share in competitive markets.
Cons
- If you set a low pricing expectation in the market, you might not be able to raise prices later.
- There is always a chance that you will be unable to survive the period of unprofitability when prices are set so low.
How to Choose an Effective Pricing Strategy?
Knowing the many pricing strategies accessible to you is vital, but understanding how to apply them and select the best strategy for your online business is even more crucial. Let’s look at how to select the right pricing strategy to include in your eCommerce checklist.
Which pricing plan is optimal for your business is primarily determined by how you view your brand and what you imagine it to look like in the future.
- Are you looking to boost your profit margins or AOV?
- Do you want to retain existing consumers or acquire new ones?
- Do you want to get rid of extra warehouse stock?
- Do you intend to take your online business internationally?
Understanding your target demographic, what they value, as well as how much they’re prepared to pay for products, is critical to setting the optimal price and selecting an acceptable pricing strategy. Developing the proper eCommerce pricing strategy for developing an eCommerce store is significantly more involved than depending entirely on competitor-based pricing.
If your eCommerce business is expanding, consider employing an eCommerce pricing analyst to help you review your production costs, analyze customer and market behavior, and track your competitors’ prices.
Conclusion
Your price plan is one of the most important growth drivers you have. It assists you in establishing a price point that meets market expectations and, if you select the right strategy for your sector and company type, can incorporate revenue growth directly into your price tags. However, as evidenced by the rise of dynamic pricing, this does not mean that you must rely solely on one tactic.
As an online retailer of an eCommerce development agency, you should experiment with different pricing schemes to see which works best. The strategies listed above are an excellent place to start. You may also look into various providers to help you get started, for example, Shopify packages with various eCommerce pricing features to maximize your profit margin and increase brand awareness. To help you create a solid digital presence, Icecube Digital can help with effective eCommerce strategies. Connect with us today to learn more about how we can help you take your eCommerce business to the next level.
