Pricing strategy effectively isn’t about assigning a set of numbers to items that you sell, it’s about managing perceptions and understanding consumer psychology. The common misconception is that consumers shop primarily based on logical thinking. Especially with the advent of the internet and instant price comparisons, you might think that most pricing decisions are made based on numbers and hard data.
If you’re new to e-commerce, if you’ve been a wholesale business or a physical business in the past, you probably have no clue what kind of pricing would work on your store. That’s a fair point and good place to start.
How do you charge the maximum amount of money for your product when you’re selling it online? How do you go about creating a winning e-commerce pricing strategy? That’s what we’re going to reveal in this blog post!
What is a Pricing Strategy?
The process starts in two parts:
- Pricing range
- Specific price point
The first part of the process is to actually figure out a pricing range and this is the kind of range that you can play around with. Then the second part of the process is to arrive at a specific price point. You have your price range and then you boil down to a specific price point.
To start with the pricing range, first of all you have to have your basic business calculation in place. Let’s say that for a $100 sale that you are going to make, you’re probably going to spend $40 on the cost of production of the product and shipping. You need to know that your production and shipping is around 40%. You have to also figure out this is the minimum that you pay for shipping and production.
Then, finally you’ll have to understand a little bit about the e-commerce space as to how digital marketing drives customer acquisition for e-commerce. You also have to know that Facebook Ads, Google Ads, Instagram Ads and all of these channels require money and the metric that you’re chasing there is the cost of acquisition.
If you know the approximate cost of acquisition for your audience and it also depends on your product and so forth, you’ll probably come up with a number like let’s say 30%. It is going to be your cost of acquisition. Once you know these costs you also add up your operating expenses, your teams, your subscriptions and all of that so that you know your basic cause that you have to incur for every product sale.
What Kind of Pricing Are Your Competitors Charging?
You need to consider your industry as a whole and what kind of charges are your competitors charging from their customers. Look for similar products like your product online and look for your competitor stores and see what kind of pricing they are charging? What’s the maximum that you can go to with this kind of quality, with this kind of product category that you have with this kind of audience? Look at stores which are probably as old as you, online and that you think have a similar brand value as yours. Initially the only way to do this could be:
- To see the age of the store
- How customers are responding to them
- How good their social media following is, how similar it is to your social media following
What you’ve done is in the first part of the process you’ve arrived at a minimum price point and a maximum price point. This is your pricing range. Your pricing range is where you’re going to play around with.
Why Do You Need a Pricing Strategy?
Pricing is something that many new dropshippers and e-commerce store owners overlook. There are a bunch of ways you can use pricing strategies depending on your goal for your eCommerce store. The right pricing strategy can help you achieve all of your goals and more like boosting sales revenue, increasing the value of each order or setting your brand apart from the competition.
7 Types of Ecommerce Pricing Strategy
Some pricing strategies are great for beginner dropshippers. However, there are a few you should avoid until you’ve built up a loyal customer base. Let’s start with the simplest and most used strategy:
1. Cost-Based Pricing
Cost-based pricing, also known as cost-plus pricing, is super simple to just calculate your costs and add your profit margin markup to reach the price for your product. This pricing strategy allows you to apply a fixed percentage profit margin to the total cost of your goods.
As a drop shipper you don’t have to cover as many costs as a brick and mortar store. That’s one of the biggest benefits of the drop shipping business model. There’s no store rent or high staffing costs but you’ll still need to consider the costs of running your ecommerce business and marketing fees.
2. Competitor-Based Pricing
This pricing strategy is about looking at how much your competitors charge for similar products. Competitor-based pricing allows you to make an informed decision about how to price your goods. You can determine the average price by diving deep into your competitors’ pricing strategies.
For example; You can offer the lowest price to attract new customers or differentiate your brand for a higher price if your product is unique or provides an additional feature or benefit.
3. Value (Consumer) Based Pricing
Value-based pricing sets the maximum amount customers are willing to pay for your product and generally consumers are willing to pay more for products made from higher quality materials or a higher production standard.
4. Dynamic Pricing
Dynamic pricing is a flexible approach that allows you to increase or reduce your pricing based on sales. If there’s a surge in sales you can increase your pricing to boost your profit. For example; if thousands of people have an event and turn to Uber for a ride, the app will automatically increase the pricing in the area.
5. Bundle Pricing
Bundle pricing is a simple strategy to sell multiple products in one bundle at a discounted price. Browse the cosmetics aisle at any Walmart and you’ll find bundle deals for many items. You’ll also see the Bundle Pricing model at most fast food restaurants. This could be multiple units of the same product like a buy one get one free offer or a selection of complimentary products.
6. Loss Leader Pricing
Loss leader pricing is a strategy to sell a product at a loss to entice shoppers to buy from your store. Although the loss leader is sold below cost, this strategy can be profitable if shoppers buy other products from your store.
For example; Gillette often sells razors at a loss, but customers are required to regularly refill their razors. Gillette makes a profit on these repeat purchases.
Supermarkets also use loss-leading pricing to attract shoppers to the store. By placing the lost leader in the back of the store, shoppers must pass by other products before they find the product. This can lead to immediate purchases on higher profit products.
7. Price Skimming
Price skimming is a strategy where the price is initially higher before gradually falling over time as demand declines. You can take advantage of the demand for a new product and then lower the price to appeal to a wider audience.
This strategy can work well for some product types. For example; tech products are usually priced higher in the initial release. However, the products become less desirable over time as new models are made available and the price reduces.
Depending on your business model, your pricing strategy can continuously change. Be fair and make sure you offer value to your customers. They are smart, so your pricing strategy must also be smart.
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