Are you planning to start an online store? If so, you must be thinking about price determination.
There are different pricing approaches. They depend on various aspects of your business, like consumer behavior, product types & market values, etc. You also need to consider your production cost, business goals, and competitor’s prices.
Finding the right pricing strategy for a new product on your online store is not easy. You need to understand pricing management and how they work behind your customer’s mind and put them into practice.
For example, setting a low price for your retail product can’t be a winner all the time. It might trigger a lot of sales but won’t bring enough profit. On the other hand, the high price is also risky. You may lose cost-conscious customers for this and fail to meet your sales target.
In this post, I am going to guide you to build a profitable price determination strategy that can overcome all these barriers and generate a consistent profit.
Keep reading.
Pricing Strategy is the process of setting the exchange value a retailer will get for his goods and services.
Price determination refers to the methods and tactics companies use to price their products or services.
Let’s take a look at the steps below that are affecting your price determination. You need to follow these steps before you start planning your pricing.
How much does it cost to make a product ready to sell in your online store?
Find this before you calculate your price. List down your overall expenses, too. Are you already tracking them?
Here, I’m listing some of the vital costs you should track and add to your pricing plan-
I have only mentioned the basic costs
above. There could be more or less depending on your business type. So you have
to keep a list of all those costs while pricing your product.
Then it’s possible to have a stable budgetary control and assume your future
spendings as well.
Let’s get back to the first days of your business planning. Time didn’t matter then. You worked day and night to find a way out. You asked questions like how to create a unique online store or how to turn your investment into a considerable success.
But as a professional, you should count the time you are spending on your business. Why? The answer is simple. Time adds significant value to the pricing strategy for a new product.
So, before you go for a pricing plan, consider the time you have spent.
You can use time-tracking tools like Hubstuff or Toggl. These tools let you analyze how much time you are investing.
You can estimate your market position by finding out your competitor’s pricing. It helps you to learn how to set a competitive price.
Is this the only way to determine your market position?
Here are a few measurements metrics which can help you further:
– Product Quality Percentage i.e how much your product is better in quality than your competitors
– Value Proposition i.e how your products can add more value to the customers need
Remember, pricing is not the only parameter to determine your market status. Maybe your competitors are offering a low-end price for a particular product. It doesn’t mean that you can’t sell the same product at a higher price and outperform them.
If your products or services are providing better quality and value, you can easily overtake your competitors’ position in the market even at a higher price.
Shipping cost significantly influences the pricing strategy of online stores.
In fact, high shipping costs are one of the top reasons for cart abandonment. See the charts here provided by Statista.
So, you must set a shipping cost that can accomplish-
i. A secure product shipping at the customer’s doorstep
ii. Steady, competitive and attractive pricing.
iii. Healthy profit
Here are some suggestions I want to share.
i. You can set a good profit margin in your price if you are applying a flat shipping cost for all the purchases. You have to consider product types and amounts for that.
ii. If you offer free shipping for a certain number of products, make sure that you set a price that recovers all of your expenses and profits smartly.
You have to do some homework to determine the price of your online store. It includes the understanding of potential customer behavior, their willingness to pay for a specific product, and overall market research, etc.
Let’s take a look at these top pricing strategies with their pros and cons.
MSRP or Manufacturer Suggested Retail Price is the price recommended by a product’s manufacturer or supplier. It is also called the list price.
A manufacturer calculates the MSRP by considering the following elements-
MSRP was designed mainly to keep the same price level of a particular product across the retail stores.
So, while you determine the price for a new product on your online store, make sure you check the MSRP of different suppliers and select the most profitable one. You can get the MSRP by contacting the product manufacturer directly.
– You can save your pricing effort and just follow the MSRP to sell your products.
– Retailers who use MSRP can’t compete it. Because most of the online stores would sell the product at the same price. Suppose you want to sell a Samsung Galaxy S10. It has an MSRP price every retailer are following. Whether a customer buys it from you or Amazon, the price will be the same.
In keystone pricing, you double up a product’s wholesale cost or production cost and then set that as the product’s retail price. For example, if you spend $100 on a gift item, you will sell it for $200.
Keystone pricing is the right solution for you when you have a rare product or product on demand. People also love to pay for a product that is unique and unbeatable in quality.
However, you must look at the other side of the coin. The keystone formula makes your price expensive. When a customer finds an item for a considerably low price in another store, why should he pay you more money? If you apply this strategy to an available product, you will be putting yourself at risk.
– It’s an easier tactic if you consider the process.
– Keystone pricing can aid you to gain a higher profit margin in a short time.
– Not a good idea for common and available products.
Most of grocery stores apply this pricing strategy to sell similar products at a bundle price.
Multiple pricing lets you sell a product at different rate following these factors-
For example, you can offer two pairs of socks at $5 and three pairs at $7. When you provide multiple prices for similar products, it will increase your chances to sell more units.
– Multiple pricing motivates your customers to purchase in a more significant volume. It displays a considerably lower price, and people want to save their money.
– After you start to introduce a product in bundle frequently, it will be difficult for you to sell the same product at a regular price. Your customer may think the price is too high, i.e., it harms the real value of the item.
This pricing strategy is helpful when you want to introduce a new product. To attract customers, you offer a low price or discount for a fixed period. A lower price makes customers interested in the new product. It also helps your online store to beat the competitors.
Penetration strategy works better with the launching of a brand new smartphone, TV, books, etc. For example, Netflix brings revolution to the DVD rental industry by being more handy and affordable.
Influential grocery store chains Costco and Kroger use penetration pricing to sell organic food. Usually, the margin on groceries was not significant then. But these two stores found the selling of organic food is growing. Besides, organic food has become more popular than non-organic items.
The other grocery stores have started to sell different types of organic food at higher prices. However, Kroger and Costco are selling organic food at lower prices. Effectively, the penetration pricing increases their sales.
– It will attract a load of price-sensitive customers who want to buy an excellent product at a lower price.
– If the product quality is satisfying, price penetration helps to increase its popularity.
– Increase your site traffic and lure people into buying several related products.
– You can’t apply this strategy frequently. Too much penetration brings you a bad reputation. The customers will start to think that you are offering bargain deals. Your chances of selling an item at a regular price will be at risk.
Suppose you saw a digital ad on social media. An online store is offering a Philips electric razor at a very low price. When you proceed to take the offer, you discover that you have to buy a bundle of other products as well to get the electric razor at that low price.
What is the catch?
Maybe that online store is selling the Philips shaver at a loss, but they can recover the profit from the other products they sell with it. It is called the loss leader pricing strategy.
-The loss lead technique is a booster. It helps to increase sales faster. It helps you sell multiple products at the same time. Thus, it ensures a higher profit margin in a short time.
– You can’t use this strategy often. If you do, your customer will be confused about paying the regular price for a product. The effect is similar to price penetration or discount.
While purchasing a product, customers have several options. They choose one product over another. How do they make this decision?
According to Harvard professor Gerald Zaltman, 95% of people’s purchasing decisions take place in their subconscious mind.
What motivates someone’s subconscious mind? Various factors can influence it.
You need to understand why people need a particular product. How much are they willing to pay to get this item in their cart? Do they feel any difference between $599 and $600?
Let’s answer all the questions with one single example.
MIT and the University of Chicago conducted a pricing experiment. A particular women’s clothing was tested at different prices. The prices were $34, $39, and $44.
The experiment showed that most women liked to purchase this item at $39. They preferred an odd number over even numbers despite having an option.
Make them feel that you are offering a price that helps them to get the product reasonably. Keep it affordable to your potential buyers and make sure it comprehends the benefits of the product equally.
– Your customers will think they are getting the right deal at ease. Literally, there’s no difference between $2.99 and $3. But you too can’t deny that $2.99 looks more of a winning shot.
– Charm pricing can boost your sales and ensure a high ROI.
– It simplifies the customer’s decision-making process.
– Charm pricing can’t work with a luxury product. When people are willing to spend $15000, it will not look so good if you set a price like 14999.99.
– You can’t implement this strategy for a longer period. Your customers become aware that the deals are not as profitable as they thought.
A competitive price is highly related to the price set by your rival online stores for any product. You need to benchmark all of your competitor’s prices and determine a price at a lower rate comparatively.
Outpricing isn’t easy. It requires a lot of market research. Here, your goal is to set a lower price than your competitor’s. But can you ignore the possibility of losing profit? So, you must find a price that sticks to save your cash flow and product market.
– Your chances are high to sell products among budget customers
– You have all of your competitor’s pricing data to set an even more reliable price
– It’s difficult for a smaller online store to apply competitive pricing. It demands an extensive range of market research and a larger effort to analyze the market data. Even if you can set a lower price than your competitor’s, you need to sell more to retrieve your investment.
Prestige pricing is about setting a price higher than any of your competitors. According to this strategy, you exaggerate the price of your product significantly.
The rule of thumb of premium pricing is to benchmark the competitor’s price and go above them. It is all about presenting your product as more exclusive, luxurious and prestigious.
For example, an apple orchard produces exceptionally cared and cultivated apples. They marketed their apples as exotic and more organic and sold a minimal amount for a specific time of the year. They set a higher price than the regular apples in the market. People will think it’s healthier and an act of health consciousness to purchase these premium fruits at a remarkable rate.
Starbucks is also doing the same thing. They sell their coffee for a competitively higher price than the other coffee shops in the USA.
– If you follow a wise eCommerce marketing plan, premium pricing helps to establish your brand quickly. If you create a prestigious atmosphere around your product or business, people will fall for you.
– It’s challenging to establish premium pricing for any product. It depends on your product type, its origin, market values, etc.
– You will lose your budget-sensitive customers, which means your sales aren’t going to increase.
Anchor pricing shows a comparison between the real price of a product and the discounted price.
It’s a popular pricing technique among the top online stores around the world. Amazon has been using price anchoring for many years. Take a look here-
It’s also called reference pricing. Your customer can see the regular price and the special price at the same time. It will help them to choose how much they gain if they purchase the product.
You can understand price anchoring more with the Black Friday sale. People wait for this sale to seize big discounts. When they see the original price and get the chance to grab it for a lower price, it triggers their psychological bias.
– Price anchoring increases your sales.
– You can’t offer a price that is too much less than the original price. If you do so, people will start to believe that you have low-quality products or you have a lack of confidence to beat your competitors.
There are no straightforward ways to set up a fruitful pricing strategy. But research helps you to make an informed decision nonetheless.
Now that you have read this post, I believe you can decide which strategy suits you the most.
Remember, every type of online store needs a different pricing technique.
So, do you have some questions in your mind? Don’t forget to ask in the comment section.
View Comments
Hey Kaji, This article was extremely helpful. Now I have a huge list of tactics I want to try on my own clients’ sites that will keep me busy for years! I really liked the ideas about the price strategies
It’s also called reference pricing. Your customer can see the regular price and the special price at the same time. It will help them to choose how much they gain if they purchase the product.
Is it ok to use multiple tactics on a site or should I just pick one and see how it goes?
Hi Carlis, although we don't have a recipe for that, we think it's best to try several strategies to find out which ones best serve your business goals. And it's important to measure frequently, because we want to respect your budget and target profit margins.