In today’s ultra-competitive online world, pricing is a make-or-break factor. Therefore, you as an online business owner have to get it right. In this post, we will help you with the following 5 practical eCommerce pricing models or strategies:
- Cost-plus pricing
- Value-based pricing
- Competitor-based pricing
- Psychological pricing
- Loss-leading pricing
As you should know that the goal of correct pricing is to maximize profit AND sales. The aforesaid methods will exactly help you to achieve this goal.
Price of a product is a major factor affecting the success of any business. So, pricing decisions are always critical and need to be taken carefully. And when we talk about online businesses, the matter becomes a bit more interesting and complex.
But, before proceeding further let’s understand how online business works.
What Are Pricing Models?
Pricing models are the models which are used to set prices for a product or services. Consider these models kind of like machines. Input data & you would get perfectly crafted product prices.
The objective of any pricing model is to increase margin & sales simultaneously.
Why Pricing Matters?
Whether it’s a physical store or an online marketplace, prices can be used as effective marketing tactics.
As per a study,
- The price of a product is the most important factor affecting the buying decisions of 60% of the online customers.
- More than 90% of the online shoppers invest time to search for the lowest price of the product they require.
- More than 20% of the traffic of major e-commerce websites comes from various Price Comparison Engines.
In the online platform, the customers are not in face to face contact with the sellers. They do not know details about the seller. The quality and price of the product of the seller lure customers to buy that product. The price of a product can either boost the customers’ interest to buy the product or can make them shift to another seller or even another website. Hence the seller in an online market has to choose the right strategy to set the most appropriate price that will lure customers to his product and at the same time will yield a good mark up.
How Does Online Business Work?
As we know, selling a product requires a marketplace where the seller and the buyer can interact. Traditionally we were accustomed to physical stores where we had to go physically in order to buy a product. Though selling through physical stores exists today, but with the advent of technology, the online marketplaces have emerged.
There are a number of e-commerce websites that provide an online platform facilitating the sellers to sell their products online. Some of the e-commerce giants are Amazon, eBay, Target, Etsy, Walmart, Aliexpress etc.
Now let’s talk about how e-commerce market operates. Generally, most of the e-commerce websites do not have their own stores nor the products that are sold on these websites are owned by them. They only provide an online platform or marketplace where the products are displayed and are offered for sale to the visitors at these websites. The products belong to different sellers who have registered in the websites as online sellers and want to sell their products through these e-commerce websites.
The Key Elements Of eCommerce Pricing (On Marketplaces)
A normal customer will simply pay the price displayed against the product on the website. But as a seller, you need to know how pricing mechanism actually works in an online platform.
The price that a customer pays for a product on an e-commerce website is the amount that the seller of that product sets and charges for the product. This amount may or may not be inclusive of shipping charges. Such amount is collected directly by the e-commerce website through its payment gateway. Out of this amount, the e-commerce website deducts some portion under different heads and pays the remaining amount to the seller on every sale. The amounts that the website retains are in respect of marketplace fees and taxes charged on the marketplace.
Marketplace fees include:
- The commission charged by the e-commerce website on order item value.
- Shipping charges incurred by the website for safe delivery of the product to the customers’ place.
- Collection fees i.e. fees charged for cash collection or payment gateway on every sale.
- Fixed charges, if any, charged by the marketplace on every transaction.
To conclude, the amount ultimately collected by the seller on the sale of a product is calculated as
Selling price and shipping charges paid by the customer – (Marketplace fees + Tax on marketplace)
TOP 5 ECOMMERCE PRICING MODELS AND STRATEGIES
There are numerous eCommerce pricing models. However, there is no one surefire method that suits every kind of product, business, or market.
Certain key factors such as the needs of the target market segment, competitive and pricing strategies of rival firms, selling and distribution cost and the value your product provides to the consumers are worth considering while pricing your product apart from the traditional determinants of cost and desired profit margin.
Let’s discuss some internet pricing strategies:
1. Cost Plus Pricing
This is the simplest pricing approach for online products. Here the selling price of a product is set at cost plus a certain profit margin. The seller first calculates the costs incurred to make or acquire the product. The desired profit percentage is added to the cost to determine the selling price.
For example, if your product cost (including online marketplace costs) is $50 and you need 20% profit margin, the selling price will be $60 [i.e.120% of $50].
This model ensures that you are recovering all your costs and earning some profit for your business. Hence the seller needs to be efficient enough in measuring, estimating and defining the costs and desired profit. The correct ascertainment of these two values will facilitate setting the right selling price for your product.
How To Do Cost Plus Pricing?
Cost-based pricing begins with ascertainment of cost. Calculation of cost includes the cost of material and labor used to manufacture the product, operating costs, cost of promotion, finance costs and fees charged by the e-commerce website towards commission, shipping, and other charges. You need to take into account all cash and noncash costs in order to ensure that the cost is correctly determined.
You need to add to the cost of your product the desired profit margin. Thereby you will arrive at the price you should charge from your customers.
2. Value-Based Pricing
Though cost-based pricing is a popular strategy, it has become outdated. This is because it completely disregards customers’ perspective.
In today’s competitive world, customers do not care about your cost and profit. They only focus on what value your product serves to them when they use it. They pay what they think about its utility. Overcharging will reduce your customer base. And on the other hand undercharging will result in erosion of profits for the business. Hence you need to estimate what is the value of your product for your target customers.
Value-based pricing ensures that your customers are happy with what they are paying for your product in exchange for the value they derive from the product. This strategy assists in strengthening your brand image, enriching customer base, good customer relationship and ultimately improving your bottom line. This pricing model is the best one as it focuses upon the consumer need satisfaction but its practical application is a bit complex.
How To Do Value-Based Pricing?
Here customers are charged according to the value they get from the product. Thus the role of market research and analysis becomes crucial. You need to do the following:
- Point out who your target customers are
- Know what their need or requirement exactly is
- Ascertain whether the features and utilities offered by your product appeals to their requirements
- Know how essential your product is for them
- Understand why they should buy your product
- Know what price they will agree to pay for the value they get from your product
This definitely requires extensive and thorough research of consumer behavior and their preferences.
In value-based pricing, you cannot set a particular price and sit idle. You have to continuously monitor the market changes, changes in customer tastes and preferences and buying behavior.
Consumer feedback on your product is a key factor you should take into account and revise your price accordingly.
3. Competitor-Based Pricing
Sometimes in order to stand out from competition, you need to chase your competitors. You should analyze their actions & plan your strategies accordingly.
In any business, keeping track of the prices charged by competing products is a must. Competitor-based pricing simply means that you monitor what your direct customers are charging for similar products and set your price relative to that. Undoubtedly you should set same or lower price than your competitors. Otherwise, customers won’t buy your product and instead shift to competitors’ product.
This pricing model works when you are selling identical products as your competitors.
However, this pricing model has a serious downside. This may lead to severe pricing competition and ultimately erosion of profit of the industry. For example, you see that one of your competitors has set the price of his product at $500. So you set the price of your product at $480. Again that competitor may retaliate against your move and may set the price of his product at $450. Eventually, this will lead to a loss-loss situation where you as well as your competitor will lose the profit margin. Thus the industry will become unattractive due to no profit.
Hence this is not a permanent solution and should be used cautiously.
How To Track Competitors’ Prices?
As we know, there are millions of online sellers. Hence it is a practically impossible and time-consuming work to compare the price of your product with that of your competitors. But at the same time, monitoring competitors is indispensable. To solve this, Prisync is a competitor price tracking software for all sizes of e-commerce companies around the world.
With Prisync, you can automate the competitor price tracking operations and save time. It tracks prices and stock availabilities of products of your competitors whose URL you have added in it and sends notifications whenever any changes occur at your competitor. It is updated regularly and always gives fresh market data.
To know more about Prisync, watch this video.
4. Psychological Pricing
With the passage of time sellers have started reading the minds of customers so as to conclude how they perceive the price of a product. This can aid in developing a successful pricing strategy. This kind of pricing model is a part of neuromarketing.
These days, sellers are pricing their products at prices ending with the digit 9 or .99 instead of 0 or .00 are in vogue. For example, instead of pricing your product at $100, you set its price at $99 or $99.99. This gives the customer a feeling that the product is not priced at a three digit number i.e. it costs less than $100. By seeing it, the customer instantly perceives that the price is close to 90 and not 100. Numbers ending with digits like 7,8,9,etc. are also very interesting to listen or to read rather than numbers ending with 0. Hence the customer immediately gets tempted to buy the product. This type of pricing is known as charm pricing.
Charm pricing is certainly an effective marketing tactic. Through this, the seller can influence the emotions of the customers.
5. Loss-Leading Pricing
This is a risky and aggressive pricing model and is suitable for firms dealing with multiple products. A loss-leading product is one which is sold at a price below its cost but is sold in order to attract new customers to sell additional products to them. Here the seller sells certain products at a loss with a view to attracting customers.
Selling a product at less than its market value will entice customers to come to you for that product. The end purpose of this strategy is that the customers who are acquired will be offered additional products on which the firm earns sufficient profit to cover up the loss incurred in the loss-leading products.
Example: Gillette company’s razor pricing:
Invest in a base product by selling that product for very low prices or even giving them away for free and then sell the related product at higher prices to cover up the prior investment.
Accordingly, the Gillette company sells its razor at a very low price or even for free. It knows that customers will have to buy blades for replacement in razors.
The biggest threat of using loss-leader strategy is that the customers may buy only the loss-leading products from the seller and may not buy other products of the firm.
Apart from the pricing strategies discussed above, there can be many other strategies. For example, a discount pricing strategy is a very common one. You can offer attractive discounts on your products to acquire market share.
Similarly, subscription-based pricing model can be used to sell products (like furniture) on subscription (like $10 per month) instead of an outright sale.
Price, as a significant component of the marketing mix, is a key weapon in the hands of a business through which it can prosper or even ruin itself. You can dictate the demand for your product by adjusting the price of your product as per the need of the hour.
The pricing model you select should be flexible enough to allow alterations as and when required.
No single pricing strategy can be regarded as best for all kinds of businesses for all time. Hence it is up to you to use a pricing strategy that best suits the requirements of your business and its environment taking into account the following considerations
- Nature of your product and business
- Cost of your product or service
- Who are your customers
- Whether they are price sensitive or quality sensitive
- How they perceive the price of products and services and how it affects their purchasing decisions
- Where do you want to see yourself in the marketplace
- What are the pricing strategies of your competitors and how are they positioned in the marketplace
- What profit you desire taking into account the market conditions
Recommended further read: How do you price your product?
Recommended online store builder: Shopify
So, what do you think of the aforesaid eCommerce pricing models or strategies?. Please comment below.