Your e-commerce pricing strategy has a direct impact on how well your online business performs. There are so many things to consider when it comes to pricing such as the cost of your products or services, your customer’s needs, and your competition.
E-commerce businesses often struggle with determining the right prices for their business. They want to price their offerings low enough that customers will purchase, but also high enough that they can make a reasonable profit. For this reason, we’re going to show you 6 e-commerce pricing strategies to help you sell more with your e-commerce business.
1. Cost-Based Pricing
Cost-based pricing is probably one of the easiest methods to determine the price of your product or service. It involves calculating the cost of the product or service and then adding a percentage mark-up to determine the total price. Essentially, cost-based pricing takes into account the cost of selling a product or service and then leaving enough margin to make a profit.
Cost-based pricing can be determined in two ways: full cost and direct cost pricing. Full cost pricing considers variable, fixed, and % markup, whereas fixed cost pricing considers variable costs plus a % markup. Variable costs include things such as packaging, shipping, credit card fees, and raw materials. Fixed costs include things such as your domain name and hosting.
Disadvantages of Cost-Based Pricing
With a cost-based pricing structure, you are more likely to miss out on profits by ignoring the competition. This is because cost-based pricing takes more into account the time that is tied to the product or service. This isn’t always the best approach when your value is worth more than just your time.
However, by developing a cost-based pricing structure, your customers will be used to these prices and the opportunity to charge more in the future may be challenging. If you decide to raise your prices, customers may decide to move on to competitors with lower prices. With that said, if you move forward with a cost-based pricing structure, it’s important that you determine your total value and include that within your margin before setting your final prices.
2. Market-Based Pricing
Market-based pricing involves e-commerce businesses setting the prices of products and services based on current market conditions. This means that businesses will take a look at competitors pricing and match it in order to increase sales. In market-based pricing, businesses should still consider things such as customer needs, competition, and price sensitivity.
It’s also important to consider how closely related the product or service is. If your product or service has more or less features compared to your competitor, ensure that you are still pricing accordingly. For instance, if you are offering more features, then it’s best to set your prices a bit higher to reflect the value of your product.
Disadvantages of Market-Based Pricing
If you and your competition are selling similar products or services but their product is priced drastically low, you will have to match their prices in order to keep up with the competition, which will hurt your profits. If you price too high, this can hurt profits as well as customers may want to go with the least expensive option.
3. Value-Based Pricing
Value-based pricing is a process that involves setting prices based on the customer’s perceived value of the product or service. With that said, customers will purchase your product or service based on what they think it is worth. This means that in order to effectively set value-based pricing, your product or service will need to enhance the customer’s life in some way in order to increase how much a customer is willing to pay for it.
Disadvantages of Value-Based Pricing
Value-based pricing can be challenging as there is not an exact science to figuring out how to set your prices. E-commerce businesses will need to have a deep understanding of their business and what they’re actually solving for their customers. This means that e-commerce businesses need to do thorough research to position themselves in front of their clients.
4. Dynamic Pricing
Dynamic pricing is a concept that the prices of your product or services change based on its costs, as well as, competitors prices to find the perfect price point. Essentially, your prices will constantly change as it is meant to reflect the changing market conditions. This allows businesses to maximize their profits with each customer.
Disadvantages of Dynamic Pricing
With a dynamic pricing structure, your prices will fluctuate. With that said, it is possible that you will have a customer buy something from you at a lower price in May and another customer pays a higher price in December. This can make a customer feel alienated and feel as though they are getting cheated if they know that someone else was able to get a better deal.
5. Loss Leader Pricing
A loss leader pricing strategy is where an e-commerce business sells a product or service just below the market cost in order to stimulate other sales for more profitable products and services. This acts as a sales promotion and is generally used when businesses first enter the market. With a loss leader pricing strategy, you can expect to see little to no profit on the items sold but the opportunity to get customers to buy other products and services at its full value is promising.
Disadvantages of Loss Leader Pricing
With a loss leader pricing structure, there is a possibility that customers may only take advantage of the loss leader products and services. This will hurt your business in the long run as you are likely to lose money, making it difficult to keep your business afloat.
6. Long-tail Pricing
A long-tail pricing strategy consists of businesses selling low volumes of hard-to-find items. As customers are moving away from mainstream items, being an e-commerce business that offers less popular, low-demand products and services could possibly bring the largest profits. Those that adopt a long-tail pricing strategy could serve as a rival to the mainstream e-commerce businesses, and essentially create a strong position for themselves in the market.
Disadvantages of Long-tail Pricing
Consumers are moving away from mainstream buying to more artisan buying. However, as this is still in transition, e-commerce businesses who have adopted a long-tail pricing strategy may find it difficult to sell. This kind of strategy may not produce profits as quickly as expected and is instead a more effective long-term pricing strategy.
Pricing your products and services for your e-commerce business takes time and research. However, once you develop the right price strategy for your business, you will be on your way to selling more. If you’re ready to grow your e-commerce business, learn more about how PriceEdge can support your e-commerce Pricing strategies today.