SVP, Partnerships + GTM - One of the original founding members of the S&O team, Tony oversees strategic partner development and go-to-market planning for our Channel, Technology, and Agency partnerships.
Few things are more vital to the success of your online store than the prices of your product.
Do you price low to undercut the competition and make a profit by selling more for less?
Or do you price high to create a quality, aspirational product or service? It might be harder to make sales, but they’ll be far more financially rewarding.
There are dozens of different pricing strategies that your business can adopt. Many are so product and business-dependent that just because they work for one store, it doesn’t mean they will work for another. Copying your competitors isn’t the answer.
But neither is winging it. Operating without a clearly defined, coherent pricing strategy in place is a disaster waiting to happen. Forging ahead with a strategy that isn’t working isn’t a very good idea either.
That’s why today we’re going to discuss the most common online pricing strategies. So whether you’ve been operating an online store since the dot-com bubble or have just opened your virtual doors, you’ll be able to implement a strategy that could boost your sales immediately.
In today’s blog post you will learn the following things:
- The types of online pricing strategies available.
- Real life examples from online retailers.
- Psychological pricing strategies.
- How to price your products.
Types of pricing strategies
There are dozens of pricing strategies that e-commerce retailers can implement. From straightforward pricing options to more advanced tactics, here are the most commonly used strategies by online stores:
Cost plus pricing
This simple strategy involves adding a markup on top of the wholesale price that you paid for your products. This is a common practice for many drop shipping stores and retailers who do not manufacture their own products.
Example: Advance Auto Parts adds a markup to the wholesale price of the batteries that they sell.
Manufacturer suggested retail pricing
A lot of the time manufacturers will suggest a retail price. In some cases, they will even add this to the product packaging. This takes a lot of stress out of product pricing, but it means you can’t create a pricing advantage over competitors.
Example: Many shoe retailers such as JackRabbit will use the MSRP.
In the case of value-based pricing, you determine your product’s price by how they are received by customers. You still take into account manufacturing costs and overheads, but this strategy relies heavily on your understanding of customers. The idea is to price your product according to the customer’s perceived value of your product, that is, you price it at exactly or just less than the amount they are willing to pay.
Example: A subscription box service, like Blue Apron, doesn’t price packages based solely on the value of the items within. They price based on the value they bring to users which, in the case of Blue Apron, is convenience, speed, and ease-of-use.
In this strategy, retailers set their prices according to competitors. This doesn’t necessarily mean setting the lowest price, however. It could mean offering a discount on one product but slightly higher prices on other products.
Example: 2Wheel, a specialist retailer of motorbike gear and accessories, uses a competitive pricing strategy to ensure it always has the lowest prices in the industry.
Customers love sales and discounts. So why not give them what they want? There are severals stores whose entire pricing strategy is based around discount pricing.
Example: UK-based Secret Sales provide luxury, designers goods at up to 70-80% off their original pricing. Nothing on the website is sold at full price.
Have you ever seen a fantastic deal that’s made you head to that store to pick up that product and several other items? That’s the theory behind loss-leading pricing. The idea is to sell something at a loss that is so enticing customers will come to you specifically for that product. While they are there, however, they will also buy several other items which you will make back the profit on.
Example: Printer manufacturers, such as Canon usually implement loss-leading pricing. They sell the printers for less than it costs to make them and make all of their profit on the ink.
Occasionally, stores won’t list prices at all. Instead, they will try to capture a customer's details (usually their email address or phone number) in order to make a sale in the future. This is a common practice with high ticket items and non-physical products.
Example: Social media management tool Hootsuite uses a lead generation pricing model on its most expensive package. This way, their sales team can tailor the price to a company’s needs.
A quick lesson in behavioral economics
On their own, any of these pricing strategies will go a long way to boosting your sales. But if you want to get even more sales, you’ll need to get out the psychology and economics textbooks from high school.
Just kidding. We aren’t going to give you any homework, but implementing behavioral economics theories into your pricing strategy can send your sales through the roof. Here’s a brief overview of how psychology can help with your pricing.
Don’t have identical prices for similar products. A study by Yale found that if similar items are priced identically, consumers are less likely to buy anything.
End prices with a nine. Yes, it’s an old trick, but it works. Ending prices with a 9 is so effective they are often able to outsell lower prices ending with a different number
Take advantage of anchoring. If you have an expensive item, place it next to an even more costly item. It will seem like a bargain if it is compared with something that’s extremely expensive.
Keep it simple, stupid. The Journal of Consumer Psychology found that the more digits and punctuation marks in a price, the larger the prices seemed to consumers.
How to price your product
Step 1: What is your product?
The first step in finding the perfect price for your products is to think about where your products belong in the marketplace. Are they price-orientated or are they value-orientated?
For instance, if there is nothing that distinguishes your product from your competitors, your product is price-orientated. This is because, with nothing to choose between products, consumers will choose the cheapest product when given a choice.
If your product is more innovative, bigger or offers something that your competitor's products don’t, then your product is value-orientated, and you don’t have to base pricing on current market values.
Step 2: Who are your customers?
Take a moment to think about who your customers are and how they behave. If you already have customers, look at any data you have to build a picture of what your average customer looks like. Where do they come from? Are they male or female? Are they wealthy?
If you don’t have any customers, picture who your ideal customer would be. If you are targeting a lot of people, you’re going to want to keep the pricing low and competitive. But that’s not the case if your customers are wealthy. They may be willing to pay more for the illusion of exclusivity.
Similarly, if your customers know a lot about your product and consider themselves aficionados, they will be willing to pay more than your typical consumer. Take Verdant Tea, for example. They sell loose leaf tea at over $25 per 25g.
Imagine Walmart copying those prices! They wouldn’t because the people that buy tea from Walmart don’t care about quality. The people that buy tea from Verdant Tea do care about the product and are willing to pay much more for something they will enjoy.
Step 3: Choose a strategy.
Now that you’ve thought about your product and your customers, choose one of the strategies we discussed at the start of this article. Make sure that the strategy aligns with your product and your typical customer.
Step 4: Know your margins.
Rule number one of selling online is “make a profit”. With this in mind, don’t get caught in a race to the bottom in which you price your products too low to make any money from them.
When deciding on any pricing strategy, always make sure that you know your margins and that you have given yourself enough of a cushion so that even if your overheads increase, you can still make a profit.
Step 5: Test, test and test again.
The companies that are most successful online are the ones who are constantly testing everything. This includes the price of their products. Use a testing and optimization tool like Unbounce or Optimizely to run A/B tests on your website to compare different price points. You can use some of the points raised in the behavioral economics section of this article as a jumping off point when testing. You’d be surprised what your customers are willing to pay.
Don’t forget about marketing
Of course, pricing is only part (albeit an important one) of your e-commerce success. Another huge factor is how you market your products. And there aren’t many better ways for e-commerce stores to advertise their products than on Google Shopping.
Sales & Orders makes succeeding on Google Shopping easy. With easy to build and structure campaigns, and a string of advanced optimization tools, users can dramatically increase conversion rates and decrease CPC. Best of all, you can pay an expert to take care of the entire campaign for you. Schedule a demo today and start selling more with Google Shopping.