Ecommerce Pricing – 8 Strategies That You Need To Know For Perfect Ecommerce Pricing in 2022
While pricing is one of the most effective driving forces for consumer purchase decisions and sales for an Ecommerce store, we believe that the pricing strategy could become a matter of success or failure.
To be precise, the quality of your product and customer support wouldn’t matter in this competitive market if you can’t set up a perfect pricing strategy.
In this read, we’re going to explain 8 of the most pricing strategies that you must know for the future.
Let’s begin with what Ecommerce pricing strategy is.
Ecommerce Pricing Strategy
In a nutshell, an Ecommerce pricing strategy is a thought-out and well-defined plan that a brand or company leverages to price their products in such a way that it increases their sales while still being competitive in a dense market.
Based on the factors like product type, demand, and competition, there are multiple pricing strategies that could be implemented.
Here is a list of the 8 best strategies that you can leverage for effective Ecommerce pricing.
#1. Cost-plus/Cost-based Pricing Model
#2. Competition-Based Pricing Model
#3. Value-Based/Customer-Based Pricing Model
#4. Price Skimming Model
#5. Loss Leader Pricing Model
#6. Dynamic Pricing Model
#7. Premium Pricing Model
#8. Bundle Pricing Model
Lucky for you, we’ll discuss these Ecommerce pricing strategies further in this read.
9 Strategies You Need To Know For Effective Ecommerce Pricing In 2022
1. Cost-plus/Cost-based Pricing Model
Cost-plus or cost-based pricing strategy is the most straightforward pricing strategy which adds up a fixed percentage margin on the cost of products to generate profits.
In simpler words, it is more of a business-focused pricing strategy than the customer.
It is a very common pricing strategy that is widely used by new or smaller stores; mainly because the simple formula makes the calculations much efficient.
Suppose you’re an online brand selling shirts. To implement the Cost-plus strategy, you’d first need to gather up all the aspects to determine your cost.
Here’s an example
- Materials: $5
- Labor: $10
- Fixed costs: $20
- Total cost: $35
Now you can’t sell your product for $35.01 because the true cost per product isn’t involved here which includes shipping charges, customer acquisition, and taxes, etc.
In general, ecommerce stores have a profit margin of around 50% – 100%. Therefore, to achieve 50% profit, you need to price a shirt at $70 because here, the true cost per product is included.
Pros Of The Cost-plus/Cost-based Pricing
- Popular for its ease of calculation.
- Easier to set up and track the performance of the business.
- The perfect option for new and small ecommerce stores.
Cons Of The Cost-plus/Cost-based Pricing
- Despite its ease of implementation, there are high chances of making mistakes – ultimately resulting in loss.
- The profits would decline if the material cost gets higher but the product price remains the same.
- It gets tougher to maintain the cost-plus model as your store gets bigger.
2. Competition-Based Pricing Model
Competition-based pricing is yet another straightforward strategy to price your products. However, unlike the cost-plus model, you need to research your competitors and their pricing habits for similar products as yours.
Now based on your competitors’ pricing, set up and average price for your product. However, you need to make sure that you don’t go below the average as this would prompt a race for lower prices between the sellers.
Use the following formula to implement a competition-based pricing strategy effectively.
Profit = Average competitor prices – Cost of the Product
Here’s an example
- Average selling price from competitors: $15
- Your costs: $8
- Your potential profit: $7
Pros Of The Competition-based Pricing
- Gives you an advantage over the competition by luring their customers with lower prices.
- A great option for new stores trying to tap into the market.
- Different pricing apps can make your competitor’s research easier.
Cons Of The Competition-based Pricing
- Going lower with the prices can prompt a race to the bottom between sellers, which means there is no winner.
- If you can’t continue to lower the prices, you’ll start losing customers.
- Can’t work in the long term as the costs get higher.
3. Value-Based/Customer-Based Pricing Model
Value-based pricing is comparatively complicated than the Cost and competition model as it focuses on the value that you’re providing and how much a consumer is willing to pay for a product.
In simpler words, it is an Ecommerce pricing strategy that is more customer-focused and business.
Technically, the value-based customers compare the quality of your products with how fair your prices are.
For example, people would generally not be willing to pay a high amount for costume jewelry because they know it is made with cheap means. However, the same customers have a clear idea that a ring from a brand like Tanishq would be way costly because of its premium quality and diamonds; thus, they’d happily pay a high price for it.
The idea here is to choose smart pricing depending upon the perceived value of the product.
A great way of doing this is by finding out the lowest price you can sell your product for and the average price as well. Now you can add USP (Unique selling proposition) to the sale price and boost the value of your product for the consumers.
Pros Of The Value-based Pricing
- Value-based pricing can be implemented on any kind of product.
- You can always add a new line of products with higher prices.
- It is the best option for experienced stores that promote customer loyalty.
Cons Of The Value-based Pricing
- Not a very easy model to implement as it requires tons of research and experiment.
- Not suitable for beginner stores.
- The perceived value of the product can change over time; therefore, you need to make constant changes.
4. Price Skimming Model
Price skimming is yet another straightforward pricing model where you decrease the initial sales price of product over time.
Now there are typically two ways of implementing this strategy. First, in the case of obsolete products. For example, tech products become less expensive when new models or technologies are introduced. You can decrease their initial prices and boost their sales.
Another way to implement Price skimming is by creating a sense of urgency. For example, giving an exclusive offer on a product. Here you introduce a product at a high price to leverage the fact that it’s exclusive or new in order to maximize the profits immediately.
Pros Of The Price Skimming
- A great strategy for those who’re selling highly demanded products.
- Works for all Ecommerce stores that want to maximize profit from the Get-go
- Perfect for Ecommerce store selling tech equipment.
Cons Of The Price Skimming
- Not a great option for newer stores.
- Works only if you have a loyal customer base.
- Not an option for those who’re selling everyday products or commodities.
5. Loss Leader Pricing Model
A loss leader is a simple Ecommerce pricing strategy where you sell your products at a loss. The entire idea behind having such prices is to entice customers to purchase your offerings.
The loss in this case is covered up by selling other offerings at expensive prices.
Here’s an example. Suppose you’re selling razors with free sample blades at a loss. However, when a customer returns to purchase new blades for the razor, they get it at premium prices.
Pros Of The Loss Leader
- A great strategy to make customers make an initial purchase.
- A great way of earning brand loyalty.
- Increases customer’s lifetime value (LTV).
Cons Of The Loss Leader
- You’ll be at a loss if customers do not make second purchases.
- Not recommended for newer stores.
- You need to ensure an epic shopping experience in order for customers to make other purchases.
6. Dynamic Pricing Model
Often referred to as Surge pricing, Dynamic pricing is an Ecommerce strategy in which prices do not remain constant. Instead, these prices keep on changing based on the rise and decline of demand.
The pricing model of Uber and Careem is a perfect example of a Dynamic pricing strategy.
Pros Of The Dynamic Pricing
- You can boost sales anytime by decreasing the prices.
- When the demand is up, you can maximize your profits by increasing the prices.
- Can be combined the competitive pricing model in order to outstanding the competition.
Cons Of The Dynamic Pricing
- Since prices are constantly changing in this pricing model, there are chances that your conversion rate will significantly go down.
- Changing prices every now and then is quite time-consuming.
7. Premium Pricing Model
You can tell this one with the name. The premium pricing strategy is when you’re selling high-end, premium-quality products. In simpler words, you’re sending out a message that the price of your products caste out their values.
Some great examples include designer dresses and high-end tech products.
Pros Of The Premium Pricing
- With proper audience targeting, you’ll have to spend lower ad costs and have a higher ROI.
- Since you’re targeting rich individuals, premium pricing is a highly profitable strategy.
- Being premium means that your products are used by famous people as well, who can turn out to be a free referral.
Cons Of The Premium Pricing
- The number of your customers is limited.
- If you target a wrong market, you’ll have to bear heavy losses.
- Higher prices mean that your customers would expect the same value from the products.
8. Bundle Pricing Model
The bundle pricing strategy is a simple one. As its name suggests, you bundle up a number of products to make a kit and sell it off at highly competitive prices – creating high value for the customers and profit for you at the same time.
It is a perfect approach if you have a store on a third-party platform such as Amazon.
Pros Of bundle Pricing
- You can increase your average order value for the customers.
- The shopping experience gets better as your customers can purchase everything they need in a single transaction in a handy way.
Cons Of The Bundle Pricing
- The profit margin with bundle pricing is comparatively lower.
Brace Yourselves For The Future
Now that you know about the 8 most effective pricing models, it’s time to select the perfect pricing strategy for your Ecommerce business.
Note that the pricing strategy for your Ecommerce business depends highly upon the factors such as the type of product, size of your store, and its credibility.
If you’ve enjoyed the read, check out our other Ecommerce related guides such as the ‘Big Cartel Vs Shopify’ and ‘How To Pause/ Close Your Shopify Seller Account’ to raise your knowledge on the subject.