5 Best E-Commerce Pricing Strategies for Online SMEs
Do you price your products based on the expectations and perceptions of your target market and in a way that brings in fair profits?
It’s easy to compare products and prices online. Consumers can select which store has the best deal with only a few clicks. To stand out, it’s important to offer the most value to your potential customers. A way to achieve this is by using the right e-commerce pricing strategies.
An e-commerce pricing strategy is a plan designed to price your products or services. Several factors affect how you can determine the best pricing strategy to use, including:
- business and revenue goals,
- the perceived value of your products,
- the way you position your brand in the marketplace, especially in terms of marketing and advertising,
- input costs,
- current market conditions,
- target customers and
- competitors’ pricing strategies.
Given the above factors, there’s no one-size-fits-all approach to setting price tags on your products. Instead, it requires a mix and match method to figure out how you can offer the most value while generating enough profits at the same time.
E-commerce pricing strategies
There are several pricing strategies for e-commerce that you can employ, such as:
Cost-plus pricing is the most basic pricing strategy, making it an ideal option for e-commerce beginners. Its main goal is to price your products based on your target profit instead of how much your customers are willing to pay.
It also follows a straightforward formula: simply add together your total production costs plus the markup. A markup is the amount you add to your base price to cover overhead expenses and generate profit.
Selling Price = Total Production Costs (1 + Markup)
Value-based pricing focuses on how much your customers believe your products are worth. Contrary to the business-centric nature of cost-plus pricing, this strategy has higher mark-ups and is more lucrative.
Though value-based pricing is more profitable, it’s also trickier to implement. You’ll need to conduct a lot of market research and analysis to determine your customers’ perception of your products and the price tag they’re willing to put on them. In addition, your e-commerce store should have unique selling propositions (USPs). What makes your business different from the competition?
For example, a cruelty-free and all-natural skincare brand can sell its products at higher prices than competitors selling chemical-based products.
As the term suggests, competition-based pricing considers the pricing strategies of your direct competitors. You need to research the prices of all similar products — from the most expensive to the lowest. From there, decide if you want to sell above or below the benchmark, or follow the average price.
Selling your products above the benchmark can result in higher profits but fewer sales. On the other hand, selling below the benchmark can bring in more sales but low to zero profits.
Bundle pricing works by selling complementary products together for a rate lower than their individual prices. By using this strategy, you can increase your average order value (AOV) because your customers purchase two or more products in a single transaction.
For this to work, make sure that the products you combine in a bundle are all useful to consumers.
Dynamic pricing is a flexible pricing strategy because it lets you adjust your prices based on real-time market demands. If you’re interested in using this strategy, you must use dynamic pricing software to automate the process. If not, setting prices manually can be too time-consuming and prevent you from keeping up with your competitors.
What is the purpose of a pricing strategy?
The purpose of an e-commerce pricing strategy is to figure out how you can justify the prices of your products. While it’s crucial to know how you can make profits, you must consider first your target market’s reactions.
For example, if you market your brand as a high-end jewelry boutique, and your prices are lower than what your audience expects, then your pricing strategy can leave an impression that your products are not as high-end as you present them to be.
“How customers perceive the price is as important as the price itself,” Harvard Business Review (HBR), a renowned general management publication, stated in an article.
Gathering enough data based on factors influencing perception can help you build effective e-commerce pricing strategies that appeal to your market and your bottom line.
Get insights from the experts
Collecting, processing, analyzing and interpreting data to set up prices based on your customers’ perceptions are critical for the profitability of your business.