E-commerce gives merchants the ability to draw clients from almost anywhere in the globe while providing quick shipment, personalization, and other benefits. It also faces various difficulties. It is also important to have a robust ecommerce pricing strategy.
Customers are no longer restricted to their favorite local spots; they can now compare prices online and discover the greatest deal. This forces internet merchants to compete on price, excluding well-known or cutting-edge brands.
As a result, one of the primary factors influencing a company’s performance is its e-commerce pricing strategy.
Robust pricing tactics possess the ability to impact brand image, stimulate sales, and optimize financial gains. Poor pricing choices, on the other hand, might result in declining profit margins, a decline in clientele, and possibly the collapse of the company.
The brand’s position in the market is determined by its price, together with its target market, marketing plan, perception of the brand, and market share.
E-commerce companies should thoroughly research the market to identify fair, competitive, and lucrative pricing rates.
- Types of Ecommerce Pricing Strategies
- The reasons for and consequences of an online pricing strategy
- How combining pricing strategies helps boost business
Types of Ecommerce Pricing Strategies
Based on consumer expectations, industry norms, and product positioning, businesses employ a variety of pricing techniques.
Competition-based pricing is a low-risk pricing technique in which companies base the price of their products on the average of their competitors’ prices in the same industry. Setting a competitive price that satisfies consumer expectations and preserves profitability is the aim.
Two forms of this kind of pricing exist:
Price matching: To prevent losing clients based solely on price, a company puts its pricing at the same level as those of its rivals. This is typical in highly competitive industries (like consumer electronics or clothes) where prices are highly sensitive.
Price leadership is when a company undercuts the pricing of its rivals to establish itself as the industry leader.
- Competitiveness in the market: Companies can draw in budget-conscious clients and keep clients by offering competitive prices.
- Customer perception: Pricing that are comparable to or somewhat less than those of competitors give customers the impression that they are getting good value.
- Profitability: Companies are able to balance market share, customer demand, and profitability through data-driven price decisions.
- Margin erosion: Companies that undercut rivals by offering the lowest price may participate in a race to the bottom.
- Loss of differentiation: Companies that focus solely on pricing lose out on opportunities to highlight special value propositions, superior quality, or features of their products that could support higher prices.
- Lack of control: The company is unable to adjust prices or respond to changes in the market as a result of its reliance on the actions of its rivals.
Price skimming is the practice of a firm setting an initially high price for a product and progressively lowering it. It is typically employed for novelty products, such as video games. This tactic targets clients who are willing to pay more for higher features or exclusive access, as well as early adopters.
- Profit maximization: By capitalizing on early adopters’ price insensitivity, businesses aim to maximize profits during a product’s life cycle.
- Recoupment of investment: Novelty products are usually expensive to produce or conduct research and development (R&D). Price skimming rapidly recovers these expenses.
- Product positioning: To create excitement and an air of exclusivity, innovative products are advertised. Exorbitant prices support this perception.
- Lack of sustainability: High pricing may lose appeal to customers who are price-sensitive as the product ages and competition rises.
- Susceptibility to competition: The pricing advantage of the skimming technique may be diminished if rivals enter the market with comparable products at lower costs.
- Dynamic pricing
Dynamic pricing, sometimes referred to as demand-based pricing or surge pricing, is a real-time pricing method that is determined by the state of the market.
Supply and demand, rival price, the time of day and/or seasonality, consumer demographics, and outside variables like the weather or special occasions are all significant influences.
During periods of high demand, surge pricing takes advantage of consumers’ price insensitivity. For instance, during the summer, passengers willingly pay more for their airfare. On the other hand, during slow seasons, prices drop to encourage sales.
For sectors such as transportation (airline tickets, ride-sharing services), hospitality (hotels and vacation rentals), and entertainment (concerts and athletic events), dynamic pricing is the de facto pricing model.
- Maximizing profits: Companies can profit from their clients’ willingness to pay. Slumps during the off-season may be balanced by surplus earnings recorded during the on-season.
- Flexibility: Dynamic pricing allow firms to be more agile by reacting quickly to changes in inventory, competition, and other variables.
- Negative consumer perceptions: If surge pricing is utilized excessively, customers may see it as price gouging. Companies run the risk of offending customers who are price conscious.
- Capital and labor are needed for dynamic pricing: advanced data analysis software and price algorithms are needed.
Penetration pricing, as opposed to price skimming, offers a product at a discount. The objectives of this approach are to create a foundation in the market, promote trial purchases, and increase demand. The reasoning behind this is that trading profits in the short term creates a lasting market presence.
- Market share: Companies can entice clients who are sensitive to price by providing products at a cheaper cost than their rivals.
- Obstacles to competition: When consumers get used to low costs, they could be reluctant to purchase pricey substitutes.
- Poor brand perception: Low costs could be interpreted as a sign of inferior quality.
- Lack of brand loyalty: When prices rise, consumers may go to other brands.
Value-based pricing measures the worth of your product, whereas some pricing schemes are dependent on production costs.
A B2B software solution, for instance, might save businesses money by preventing expensive errors. The product’s pricing is determined by the cost savings that businesses get from using it, not by the cost of developing it.
For businesses to establish themselves as a reliable partner, they need to have a thorough awareness of their target market.
- Differentiation: Companies might present themselves as reliable suppliers with a special offer.
- Customer centricity: Companies need to provide outstanding customer service in order to defend value-based pricing.
- Complexity: Value-based pricing frequently necessitates the creation of personalized quotes or tiered pricing based on client requirements. To present an unbeatable value offering, businesses require an unrivaled grasp of the market.
By utilizing consumer behavior, psychological pricing can establish a sense of exclusivity, affordability, or worth. The odd-even pricing strategy, prestige pricing, and anchoring effect are a few popular ones.
- Perceived value: Customers will see the retailer more favorably if they believe they are receiving a good bargain.
- Increased sales: Irrational decisions to buy are prompted by perceived affordability.
- Competitive advantage: Companies can set themselves apart from rivals based only on how they perceive prices.
- Perceived deception: Some clients could think that psychological pricing is manipulative or dishonest. Customers might like clear-cut, uncomplicated pricing.
- Unsuitability: Complex products with few alternatives depend more on price than on features, quality, and originality.
Bundles of products are more affordable overall than buying individual goods. Because of their perceived value, clients are pushed into more expensive solutions. Three common bundle pricing models are mixed bundles, leader-follower bundles, and pure bundles.
- Enhanced perceived value: Clients believe they are receiving greater value for their money.
- Increased sales volume: When clients are persuaded to buy more items than they had planned, product bundling raises the average order value.
- Inventory control: Faster stock movement reduces warehousing expenses and increases inventory movement predictability.
- Reduced profit margins: Bundles reduce the individual items’ retail prices, which lowers their profits.
- Consumer preferences: If a customer just wants one item, they might not want to buy an entire bundle.
- Complexity: Compared to selling individual items, managing price and inventory for bundles calls for more preparation and cooperation.
Loss leader pricing.
In order to attract new clients and increase sales of other lucrative products, businesses may purposefully set prices below cost. Customers are attracted to the loss leader product like a magnet, and it is anticipated that they would buy more complementing, higher-margin products.
A widely appealing and highly sought-after product should be selected. The goal is to drive website traffic and increase sales, not to make quick money.
- Increased traffic: Companies can present their products and possibly win over new clients who will become loyal customers.
- Increased revenue from the sale of additional products: Companies are more likely to upsell or cross-sell related products.
- Reduced profits: Selling goods at a loss means giving up on quick money without knowing if future sales will make up for the losses.
- Perceived value: Consumers who are used to always reduced costs might not want to switch to regular-priced goods.
- Margin erosion risk: Relying too much on loss leader pricing at the expense of missing out on profitable item sales puts overall profitability at risk.
The reasons for and consequences of an online pricing strategy
The pricing approach is dependent upon both external and internal variables. Production costs, the company’s stage of development, and the degree of uniqueness of its value proposition are a few examples.
Production and delivery-related fixed and variable expenses should be taken into consideration when setting prices. Companies need to make ends meet and keep a profit.
Exorbitant production or delivery expenses need to be paid by the company or charged to the customer. A successful pricing plan requires strict cost control. In the cost-plus pricing strategy, production costs are increased by a markup, usually expressed as a predetermined percentage.
In their rush to capture market share, new companies can aim to just break even.
Defining a fair price.
Fairness is a relative concept that is shaped by the mechanics of the market and personal opinions. Nonetheless, keep the following points in mind while figuring out a reasonable price:
Cost-value relationship: Reasonable profit margin is provided by fair pricing, which also covers manufacturing expenses.
Market competition: Given the value offered to customers, fair pricing is competitive in the market.
Transparency: Consumers value up-front, transparent pricing that is free of unforeseen costs and deceptive practices.
Perception of the customer: Fair pricing takes the buyer’s willingness to pay into account. Determining what pricing customers think appropriate requires an understanding of their psychographics and demographics.
Companies frequently base their own pricing strategy on industry norms or price based on competitors. To make the appropriate comparisons, online retailers must choose whether to market their products as high-end, mid-range, or affordable.
Businesses can differentiate their offerings depending on price by using relative pricing. By setting pricing higher or lower relative to competitors, ecommerce enterprises can distinguish themselves as premium suppliers or cost leaders.
To support pricing, organizations might use differentiators other than market research. Some instances are:
Product quality: Expensive pricing are justified by superior product quality. Companies can increase the selling price by making R&D investments, using high-quality materials, or providing cutting-edge features and functions.
Brand reputation: Because of their well-established brand loyalty, reputable brands—including those on social media—may be able to charge more.
Customization: Making items according to the tastes of each individual consumer justifies a higher price since they will pay more for a product that fulfills their particular needs.
Customer service: A strong differentiator that raises a brand’s price elasticity is exceptional customer service. Giving customers ongoing support, individualized attention, and a streamlined returns process adds value.
Sustainability: Consumers are getting more and more ready to spend more on goods that support fair trade, sustainability, and environmentally friendly methods.
How combining pricing strategies helps boost business
Companies can increase sales and conversions by combining price strategies. Online retailers can reach a wider audience by offering different pricing strategies for different products or by changing the strategy over time.
Targeting and segmentation: Value-based pricing will appeal to consumers who are on a budget, whereas premium pricing is intended for client profiles that are looking for premium, unique products.
Discounts and promotions: Hurry-building and impulse buying are fostered by promotional pricing, which includes flash sales, discounts, and buy one, get one (BOGO) offers.
Loss leader and cross-selling: You can pair a loss-leader pricing plan with cross-selling tactics. Businesses can advertise higher-margin items after clients are lured in by the cheap item.
Loyalty programs: Rewarding loyal consumers with exclusive privileges or special discounts encourages them to make additional purchases.
We hope that through this post you were able to gain knowledge on different ecommerce strategies. However, if you are looking for an ecommerce development company, then you should check out Appic Softwares.
We have an experienced team of developers that can help you manage your store. You can even hire dedicated developers from us and let them manage your store.