e-Commerce means business, and having a business entails investment, in which the primary factor is money. For e-commerce, money equates to investment, pricing, and profit. For this article, we will focus on pricing and how to do it right in e-commerce.
Pricing in e-commerce is not a simple task, yet a crucial factor in your online business’s success. It might take a lot of commitment and time to master the right strategy to keep your prices competitive in the market, but with the help of unending learning and the right tools, it will all be worth a try.
A Beginner’s Perspective
Veteran online business owners have their strategies in coming up with the right pricing for their products. But if you are on a beginner’s level, formulating your pricing plan might be a bit tricky. You need to anticipate the contents of the cost that you collect when selling even a single item. Then, calculate your prices that consumers will undoubtedly go for without compromising your profit margin. Once you understand that it is the most critical factor that helps consumers decide, you will definitely work your way to ace your pricing strategy.
Pricing Strategy: The Basics
Pricing strategy is a technique wherein a seller formulates a plan on boosting the conversion rate. It consists of a set of methods or rules that applies to the seller’s listing. Without it, the business is running without a guide. Hence, it has no direction to go and can lead to failure. A pricing strategy will ensure that you input the correct pricing based on a carefully calculated amount that is not too high or too low.
There are various types of pricing strategies. Each one applies to specific scenarios where it fits the most. Below are five of e-commerce’s most popular styles used today.
Cost-Based Pricing Strategy
This strategy is essentially devising a price for your listing by putting together the margin that you wish to have for each item and its cost. Also, don’t forget to include shipping expenses when computing. Moreover, you should foresee marketing costs because if not, you may sell an item without gaining anything.
In formulating a cost-based pricing strategy, you must remember to consider two elements: the total amount that you gathered when making a sale, and your target profit margin. Let us use an example to explain better how this strategy works.
Let’s say that you sell women’s garments through an online store. And, this month, you are focusing on selling breathable shirts. You will dropship, so there is no need for you to include production costs to your computation. Dropshipping means that you are buying your products from a manufacturer or supplier.
Let’s say you spend $5 to purchase your items from the supplier and $2 to have the goods delivered to your buyer, which equals $7. Additionally, you include $5 for social media advertising to gather more audience to your online store and score a conversion. Overall, it took $12 to get a product, complete a transaction, and deliver it to the buyer. So far, all are pretty straightforward.
Next, you have to allocate the specific amount that you want to sell your item. You can sell the shirt at $15 minimum and $20 max. Even at both prices, you still have a profit.
Pros of Cost-based Pricing Strategy
- Simple, uncomplicated
- Best for beginners in e-commerce
- No need for in-depth knowledge and training
- There is a sure profit.
Cons of Cost-based Pricing Strategy
- Not customer-based, but business-centered
Competition-based Pricing Strategy
The competitor-based pricing approach is a bit more complicated than the first type but has a higher potential for online sellers on all levels. The competitor-based course emphasizes finding data about the competitors in your category.
When formulating your prices under this strategy, you must research other brands under the same niche. List all prices that competitors place on their products. The price comparison should also include those in the high-end boutiques and thrift stores.
Once you are confident in using this strategy, utilize your research to formulate your listing prices. If you have reliable research, a competition-based plan can really be essential.
You can look at each competitor’s account (in a marketplace, such as Amazon) or website one by one. But, it will take you a considerable length of labor and time to do such. There shouldn’t be any problem if you have extra time on your hands, but if not, you can use a repricer to analyze data for you and adjust your listing prices to the most profitable ones. Additionally, you can use an Amazon seller calculator to have a detailed perspective on knowing if you profited or not.
Pros of Competition-based Pricing Strategy
- Helpful in ensuring that your prices are within the current market rate
- The prices you place are just for your business and your consumers.
Cons of Competition-based Pricing Strategy
- Risk of putting up a price lower than your competitors to gain customers
- Challenging to play around with prices when multiple brands have similar prices
Bonus Tip: Instead of lowering your prices to meet your competitors, it is best to innovate ways to attract customers.
Value-based Pricing Strategy
This pricing strategy works for online businesses that want a long-term, measurable approach to price their listings. The value-based pricing approach goes around the idea of understanding the value that you are offering your customers through your products and puts specific costs on them accordingly.
To formulate a value-based pricing strategy, you must put together all aspects of the cost-based pricing strategy and the combination pricing approach. It is to calculate the value carefully you can get from a product, which needs proper knowledge as the idea of value might be quite abstract.
Now, identify your baseline to begin forming your plan. A baseline is the least price that you can list your items. Next is to take note of the specific costs for the following: sourcing the product, shipping expense, and your forecasted marketing expenses to attract more potential customers. Put together all those numbers, and that makes your baseline price.
To make the value-based pricing approach more effective, use the idea of the competition-based strategy through data gathering and market research. Be patient when assessing your primary competitors and what products they have that are similar to what you offer. Make an easy-to-understand list so that you can refer to it every now and then efficiently.
Bonus Tip: When making a list, including the median price in which your competitors put their products. It will help you have a margin price and will assist you in pricing your products better. You just need to put all your competitors’ prices together for a particular item. Then divide the total amount by the number of costs you included in the list.
Let’s use the example we have above. You have 20 competitors who are in the same category as you. Of these 20, 15 sell the same shirt as what you listed. Write down the 15 prices and add them together. Once the total amount is available, divide it by 15. There, you have your median price.
Now, you have two numbers, the baseline, and the median competitor price. For example, the baseline is $10, and the competition median is $30. You can then put your pricing between $15 to $30 and ensure that you will gain something regardless.
However, it is still best to know when and where to use the prices on your website or account, depending on the value to give to your customers.
Pros of Value-based Pricing Strategy
- Gives the best just treatment to both the online business and its customers
- Boosts customer satisfaction and loyalty
- Increase conversion rate as repeated purchases as likely to happen
Cons of Value-based Pricing Strategy
- Challenging to establish the correct value
- Expertise and vast experience in e-commerce is preferable
Increase Your Insight, Do It Right
Now you have an idea of the three types of pricing strategies typically used in e-commerce. Your next step is to keep increasing your insight on your business through research, do it right, and earn more. Keep in mind, though that everything in e-commerce is fluid. Trends change and prices follow with it. You have to always be in a game on mode to keep your costs competitive in the market.
Moreover, you know your business and how it works more than anyone else. Be just with pricing your products and veer away from the idea that you need to increase your prices to earn more or to keep it at the lowest to attract customers. Online shoppers are now wiser. They know that pricing is not everything, so pump up on other aspects to make them buy from your store. Try offering free delivery services or create promo bundles. Nevertheless, ensure that it does not affect your profit.
Still, as pricing is the first thing they look at when looking for items to buy, make sure you do it right today. Earn more, and succeed tomorrow!