April 11, 2023
6 ecommerce pricing strategies
The success or failure of your business is related to the definition of your pricing strategy. It sounds easy, but believe, pricing is a complex and time-consuming process. However, to simplify the process, we list the aspects that you should consider.
The 3 C's
Always start by considering the 3 C’s of pricing - Consumer, Competition and Costs.
Consumer
Knowing your customer well and understanding their perceived value is key to a viable long-term pricing strategy that fits the needs of your audience.
Competition
To get to the optimum point of your strategy, you should check what your competitors are doing. This process is known as benchmarking.
At this point, try to understand why the competition trades the product/service for a certain price and what they offer that that is unique.
Be careful! Selling at a lower price than the competition is not a solution. This decision can negatively affect your business. Remember that the RRP has to cover your costs.
Costs
Everyone knows that costs are a major criterion for the financial health of your business.
However, a product’s total cost is not only the production costs, it also includes indirect costs such as rent, physical facilities, employee salaries, marketing costs and so on. A complete overview of the costs helps you establish higher profit margins.
If you are launching your business, you should consider external financing, through third party investments like government grants. External investment can be essential to establishing long-term plans and bearing all launching costs of a brand/product.
Price elasticity
During the lifetime of your product and your business, you may need to change its price. With this changeover, your target audience may react positively or negatively, impacting your profits and revenues.
Although, before any price adjustment, you have to consider their elasticity. Products that experience changes in purchasing patterns after pricing changes are elastic, examples of such products are cars, mobiles and other types of technology.
6 pricing strategies
For pricing your product / service, it is important to know the main pricing strategies, applying the one that best suits your positioning.
1. Penetration pricing
In this approach, products come to market at lower prices. The goals are to establish market share, build customer relationships and reach maximum return.
Consider that in the long run, this strategy may prove to be unviable, given the potential increase in fixed and variable costs.
The solution is to gradually increase profit margins through a customer retention strategy, leading to brand awareness and building a loyal customer community.
2. Skimming pricing
On the opposite side, we have skimming strategy. This is usually addressed to innovative consumers. For example, this is Apple's pricing strategy.
The main goals of this perspective are:
- Recover costs
- Support the product maturity stage
- Predict consumer acceptance of the launched product
Note that the success of this model is related to the product life cycle and applies to products that are in their introduction and growth stage.
3. Captive product pricing
This perspective focuses on selling complementary products, where its profit margin is higher than that of the main product.
Typically, the core product is fixed at a lower price. The goal is to engage with more customers, pushing complementary product sales. Therefore, profit margins derive from the sale of the complementary products, taking advantage of repurchase flow. The trading of razor blades are a good example of complementary products.
Cross and up-selling actions are based on this type of pricing strategy. If your business involves an online store, these actions are crucial for an optimized user experience.
4. Value-based pricing
Any business needs to be consumer focused. Value-based pricing take this mantra to the highest level. In this strategy, pricing is defined by taking into account the value that consumers are willing to pay.
For this model to succeed, companies have to be in touch with the needs and desires of their customers.
5. Cost-based pricing
Costing is the first step in pricing a product/service. Although, cost-based pricing is determined by the sum of the costs and the addition of a profit margin.
While this approach is really simple, it does not consider competitors or market demand and can result in pricing that is out of line with market prices and consumer needs.
6. Psychological pricing
Taking into consideration aspects that, in the subconscious, lead to the purchase is strategic in RRP pricing.
One factor that influences decision-making is the “nine-digit effect”. A good example of this is the perception that consumers have when they buy a product for €99.99 or €100. They typically perceive that buying a product for €99.99 is a better deal.
The anchoring bias can also be impactful on consumer decision-making. Price anchoring is based on the influence that the first information received by the consumer has on their decision-making process. Colors and typography are key in this heuristic.
This type of tactic requires a deep understanding of the target audience and their pains and objections.
3 steps to set your product's price
Keep in mind that your value proposition has to be consistent with the strategies mentioned above.
However, before you define your pricing strategy, consider the following points:
1. Market fluctuations
The price at which a product is marketed must adapt to market fluctuations, becoming more receptive.
In this regard, the first step in the price-setting process is to consider:
- Geographical characteristics of your target audience
- Fluctuations in demand
- Inventories
- Competitive environment
- Changes in prices and costs
2. Define your buyer persona
A buyer persona is the creation of “ideal customer” for your business. Its definition has numerous advantages, such as enumerating and predicting factors and objections that influence the buying decision process of your consumers.
In this sense, the RRP of your product/service should match your buyer persona.
3. Analyze previous data (If possible)
If your business has historical data on previous pricing strategies, you should analyze it. Your price should be set with the goal of improving your metrics.
Let’s wrap things up
There is no doubt that pricing errors can result in significant losses and even commit your company’s business. Once the pricing strategy is implemented, it is essential to monitor purchase patterns, as well as to pay attention to possible market rejection. It only remains to remember that the brand’s value proposition must be aligned with the consumer's needs.
The planning of the pricing strategy should include at least: 1) competitive analysis; 2) costs; 3) buyer personas; 4) profit margin; 5) industry specifications.