5 steps to picking the right pricing strategy for your eCommerce store
Pricing strategy is arguably the most important step for anyone entering the eCommerce space. It’s one step, that, if done well, can make your eCommerce business a success. If done poorly, your eCommerce business may falter.
Yesterday, I came across a statistic quite jarring.
There’s an estimated 24 million eCommerce sites globally. Even more revealing was that only about one million have sales exceeding $1,000 per year.
eCommerce, as you and I both know, is growing. But there’s plenty of room for improvement, even for the experts. For newcomers it’s not too late. If you want a piece of the $4 trillion global share of the marketplace, you have just as good of chance as anyone else.
Every business at some point has had to ask what to charge for their products or services. You wouldn’t just put any random number, would you? If you did, you might not be making as much money as you should.
You are asking yourself what pricing strategy should I use for my eCommerce business. Given a number of variables at play, it’s not that easy. But by answering some key questions and putting perspective into your business, you can identify the best pricing strategy for your eCommerce store.
Fair warning: It’s not an exact science, and it’s not an art form, either. Pricing strategy will change based on common variables, like your product, your audience, or your goals. But I promise that with a little due diligence, you will find a pricing strategy that works.
Step 1: Know your competition
Remember the numbers earlier? There’s no shortage of competition online. If there’s no local competition to your product or service, I bet there is online.
When looking at your pricing strategy, it’s important you keep a pulse-reading on your competition. It’s important you know who else is out there, because a potential customer could pull out their phone and find a similar product or service and its cost in a matter of minutes.
Shopping around for budget-conscious customers is simpler with eCommerce — which is a good thing and bad thing for your business, depending on your pricing strategy.
I’ll get more into this in a minute, but pricing strategy is not something you should set it and forget it. You’ll want to make a plan to regularly review your prices. Quarterly or monthly reviews are a good start. Should your costs change, the economy change, or your competitor change their prices, you may need to review your pricing strategy.
If you are in a particularly volatile market, you may need to review your pricing strategies more frequently.
Step 2: Ask what you want to be known for
Every brand has an identity.
You know Walmart as the low price leader.
You think Whole Foods and you think higher prices, better quality food.
How do you want your brand to be known?
Do you want to be known for the lowest price? Do you want to be known for the highest quality?
Here’s the fun part: You get to decide. Even better, there’s no wrong answer as long as you make that choice and you stick with it.
One particular example that lives rent free in my mind is Bombas. I admittingly love Bombas socks. Compared to the average sock, Bombas are quite expensive priced at $12 per pair. But when I buy Bombas, I show that I have bought the illusion that I’m getting a higher quality sock than the $3 comparative.
Take it slow here. Part of the skill here is getting inside the mind of your target customer and learning how they assign value. Think about your purchasing habits. You see a cheaper cost and you probably assign it with lower value. On the other hand, you probably assign higher priced products to have better value.
Think about wine, for instance. Where better do we assign value based on price than wine? There’s the $15 bottles of Cabernet Sauvignon, and then there’s the $25 bottles. Is there really much different in the quality between the $15 and $25 wines? I think not. Wine enthusiasts, shame me all you want. Point is, customers associate higher prices with increased value.
Decide what you want your reputation to be and use that to decide your pricing strategy. You have freedom to play with. Use it to your advantage.
Step 3: Know your costs
I hope this isn’t news to you. You have permission to make a profit.
You’re not in business for charity. You don’t want to make a misstep setting a profit margin and lose money based off of low margins. Unless you have money to blow, you can’t afford to underprice your product or service.
To make profit, you have to know your cost and charge more than that for your product or service. To make that initial profit, you need to calculate a profit margin. But you can’t set a profit margin until you first know your costs.
You might have a lot of costs involved that need calculating in this equation. Primarily, two types of costs are involved — fixed and variable. Fixed costs don’t change. Think employee salaries, utilities, and website hosting. Variable costs change. Think inventory, marketing costs, and logistics.
Do a little math here and get a number that closely represents the cost of your product or service. Then you can begin to think about pricing, and too, profit margin. Your profit margin will depend on your pricing strategy, and likely your product or service, and industry. For a reference point, the clothing industry has a typical profit margin of 4% to 13%.
Step 4: Be careful to not underprice your products
It’s easy to set your price under your competition. If you have decent profit margins and have some flexibility to go low on the price, you have a competitive advantage to generate a lot of attention.
Fair warning, though: Once you go low, your options become more limited. Should you set the lowest possible price, you diminish the profit margin you are eligible to make. Not only that, but you may signal a decreased value in your product to your customers. Even more, you limit your opportunity to generate new buzz around your product or service after customers fleet to another alternative.
Think, if you wanted to draw more attention to your eCommerce, you might consider a special discount. But if you already priced your eCommerce at your lowest, you cannot afford to go lower. You will have a much more successful journey pricing your eCommerce right the first time, then having discount opportunities at your disposal when you need them.
Reflecting back on a previous point for a minute. Just because you set a price doesn’t mean you have to keep it at that price forever. Listen, markets change. In the last year, the economy changed and changed again. Costs change. Make it a priority to review your pricing and make changes as necessary.
Step 5: Pick your competitive pricing strategy
OK, here’s the big moment. It’s time to pick your pricing strategy.
Setting the right prices for your product or service is a balancing act. Low prices aren’t always ideal, as it may lead to steady sales without any real profit. Likewise, high prices may price out budget-conscious customers.
By this point, you have done your homework. You know your operating costs, your revenue goals, and competitor pricing, to name a few. But now you have to take your math and apply human psychology to it.
Numbers tell one story in pricing strategy. Human behavior tells another.
Dissecting human behavior and its relationship to pricing may be the most complex part of setting up your business for eCommerce. Some pricing strategies may appeal to the greater majority than others do. Below are some of the more popular pricing strategy examples with a brief explainer of how they work.
The best way to sell a $2,000 wristwatch is to put it next to a $10,000 wristwatch. This is an example of a common psychological pricing strategy called anchoring. Anchoring relies on a tendency to use the first piece of information offered to guide a purchasing decision.
For example, if you were asked to estimate the worth of a home, how would you come up with that number? Chances are you’d likely pull anchor information based on what you know from other homes to derive your calculation. That’s anchoring.
Another example of anchoring, is pushing an initial price up against another offering. I found this on display when browsing Netflix plans. Netflix’s three plan options — basic, standard, and premium — show what you get for a little more. Yep, this is anchoring.
Penetration pricing is a marketing strategy used to attract customers to a product or serve at its initial offering. Think along the lines of a limited-time sale or introductory offer.
Penetration pricing prioritizes low prices as a way to generate consumer awareness. With this strategy, your goal is to capture a share of the market and maintain a portion once prices rise back to normal levels. You might like this option if you offer a subscription-based service.
If you offer a premium product or service, you rightfully might charge a premium price. Premium pricing involves intentionally pricing your product or service higher than your immediate competition.
With this strategy, you intend to propose the illusion that your product is of higher quality than the rest. Luxury brands are some of the main adopters of this price strategy. This strategy works best when coordinated with a marketing plan strategically designed to help push that illusion.
Premium pricing will naturally result in high profit margins, if successful. It also may accrue a high quality brand reputation, should you deliver on the promises. Premium pricing does have its drawbacks, though. One in particular is an inability to sell to a mass market who may be priced out. It also may make your brand vulnerable to price undercutting from your competition.
People sometimes group premium pricing and price skimming together, even though each possess its own unique qualities. Premium pricing is setting a price higher than immediate competition and keeping it there, while price skimming is setting a price higher than immediate competition and lowering it.
Price skimming enables you to lower your price to generate a buzz to audience segments you may not target in your initial offering. To execute price skimming, you will charge the highest initial price to your first customers. Then, as demand is satisfied and competition enters the market, you will lower your price to attract another, more budget-conscious segment of the market.
Everyone knows a white chocolate macadamia nut cookie pairs too well with a 6-inch cold cut combo. Subway gets it, and has mastered the process of price bundling. Price bundling is a strategy used to combine products into a comprehensive package for one all-inclusive price.
Price bundling may be in your best interest if you have one product selling well and another not selling so well. Subway sells a lot of cold cut combos but not too many white chocolate macadamia nut cookies by themselves. But bundling the cookie with the sandwich does quite well.
Sometimes it’s difficult to sell lesser-known products. A well-executed price bundling strategy can help generate some attention to your less prominent offerings.
The Bottom Line
Great products and services have great prices. They have prices that are progressively developed and guided by feedback and analysis.
Price is more than just a dollar amount. Price is an assigned value, and involves mathematical equations and human behavior analysis. In the end, your customers will make the decision whether or not the dollar figure you assigned matches up with the value they have in mind.
Winging it may seem like an enticing option when picking your price. But don’t be afraid to get your hands dirty here. Listen, only a fraction of eCommerce stores broke the $1,000 sales threshold. If there were one simple thing that could make your eCommerce store successful, would you take it? Of course you would.
What pricing strategy will you try? Write to me in the comments.
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