Anyone who is just starting out in the ecommerce world spends a lot of time thinking about pricing. Am I setting my prices too high? Or should I make them cheaper? How do I ensure that I’m making the most of my sales without sacrificing margin? There are no easy answers to these questions but understanding the basics of price setting can help.
Armed with a little knowledge, some sound strategies, and a willingness to experiment, you can start getting the most out of your pricing. In this article, we'll explore the basics of price setting, define the key terminology, and provide some tips for optimizing your pricing. Let's get started!
First things first: you need to know your terminology. Let’s define some key terms.
Cost: The amount of money it takes to produce and ship your product to your customer.
Price: The amount of money a customer pays for the product.
Gross Margin: The amount of money you make after subtracting your costs from the price you sell your product for.
Profit margin: The percentage of profit you make on each sale, calculated by dividing your profit by your price.
Markup: The amount you added to the cost of a product when setting the price.
Price elasticity: How sensitive customers are to changes in prices.
Value Pricing: Setting a price based on the perceived value of a product to the customer, rather than its cost.
Bundling: Selling two or more products as one package at an appealing discount.
Loss leader: An item sold at a price below its cost to attract customers.
Floor price: The lowest price a retailer will accept for a product.
Target price: The price the retailer hopes to reach for a product.
Net price: The final price a customer pays for a product, considering any discounts or coupons.
Discount: A price reduction or a promotional deal that encourages customers to make purchases.
At its core, price strategy is about understanding and managing the relationship between your costs, your prices, and the value of your products to customers. The goal is to maximize profits while still appealing to customers. A pricing strategy helps you understand where to set your prices and how to structure them in order to optimize profits. It also allows you to adjust your pricing as needed in response to changes in the market or customer demands. Getting this delicate balance right is a complex process, which is why ecommerce store owners need to be strategic in their approach.
If you don’t have a clear pricing strategy in place, it can be challenging to know where to start and how to compete against other stores with similar products. The bigger players in the market have an advantage when it comes to pricing strategy because they can afford to take risks and experiment, while smaller sellers have less room for trial and error.
Without a strategic approach, you may find yourself struggling to get customers to buy your products, or you may be leaving money on the table by pricing too low or too high. In e-commerce, having a flexible pricing strategy that can adapt to different geographies or product categories can be a significant advantage. For example, pricing for the same product may need to be different across different regions due to variations in supply and demand, local competition, or differences in the cost of doing business. Likewise, different product categories may require different pricing strategies. By taking a little time to determine how best to set your prices, you can skip some of the guesswork and start to benefit from a sound pricing strategy.
One of the most important things to remember as a small business owner starting out in the world of ecommerce, is that what works for others may not work for you. If you compare your pricing to that of more established players in the market, you may feel like you’re at a disadvantage. But don’t despair – it takes time to grow your business and reach a stage where you can take more risks with your pricing.
In the meantime, you can start developing a pricing strategy that will help your store grow and become profitable. Luckily for you, business owners have debated pricing strategies since the dawn of commerce, and they have come up with a few tried and true methods to optimize your prices. Here are some of the most popular pricing strategies used by ecommerce stores.
Cost-plus pricing refers to setting your price at a markup that will cover all your costs, plus an additional amount for profit. This is a straightforward approach that works especially well for businesses selling a lot of products with relatively low costs.
For example, imagine you buy products from a supplier for $10 each and then add a 30% markup to reach your selling price of $13. This way, you can guarantee that each item will generate a $3 profit. This strategy is often the first one that businesses use when starting out in ecommerce because it's the simplest.
Price skimming is a strategy used to maximize profits by setting high prices for new products and then gradually reducing them as the market becomes saturated. This is often used when a business has a fresh and innovative product that has no direct competitors, allowing them to charge at a higher profit margin.
As more products enter the market and competition increases, the prices are reduced until they reach a level that is competitive with other stores. This strategy might be useful for specific items that are in high demand, but it's not suitable for products that already have a lot of competition.
Penetrative pricing is the opposite of price skimming. With this strategy, you set your prices lower than the competition to gain market share as quickly as possible. This allows you to quickly gain a foothold in the market and then later increase your prices, once customers are hooked on your product.
This is a popular strategy for businesses selling products with a very low cost of production, as they can make up the difference in volume. It's important to remember, however, that this strategy should only be used if you can afford to set your prices lower than the competition without sacrificing your ability to stay afloat.
Value-based pricing is a strategy that focuses on the perceived value of your product. This means setting a price based on what customers are willing to pay, instead of what it costs you to produce it. This strategy works especially well for unique items that have a high value but low production cost. Think of a designer handbag or a limited-edition pair of sneakers. If people see your product as something exclusive and valuable, then you can charge a price that reflects its perceived value.
If you're selling a product that's already in the market, then the most straightforward strategy is to price your product at a level that is competitive with others. This strategy works best when the products are similar and there is a lot of competition. You can research what your competitors are charging for similar items and adjust your prices accordingly. If you can capture a portion of the market by offering competitive pricing, then you can still make a profit while providing customers with a good deal.
Dynamic pricing is a strategy that uses algorithms and analytics to automatically adjust pricing based on factors like supply and demand. We often encounter dynamic pricing when it comes to online booking systems for travel and accommodation.
Think of a hotel room that costs $100 per night, but the rate increases to $150 when there are no other rooms available. This allows businesses to set prices that are constantly changing to maximize profits. You can set prices higher during peak seasons or when demand is high and lower them when there is less competition. This strategy requires a lot of data analysis, but it can be incredibly effective if you have the resources to implement it.
Bundle pricing is a strategy based on the idea that customers are more likely to purchase products when they are offered as a package or bundle. For example, a clothing store might offer a bundle of three shirts for $50 instead of selling each shirt individually. The customer perceives this as a better deal than buying one shirt for $20, and the store makes a higher profit by selling more items than the customer originally planned to buy. Bundle pricing can be effective for businesses that want to increase the average order value of their customers.
When it comes to setting prices for your ecommerce store, it's important to consider your costs, the value of your product to the customer, and the prices of similar products offered by your competitors. By using a combination of these strategies, you can optimize your profit and revenue while still providing a fair price to your customers.
Remember, setting prices is an ongoing process that requires monitoring and adjusting as needed. It's also important to consider the overall customer experience, as a higher price may be offset by exceptional customer service or a unique product offering.
By understanding the basic language of pricing and implementing strategies to optimize your profit and revenue, you can make informed decisions about the prices you set for your ecommerce store.