Jake Rheude is the Director of Marketing for Red Stag Fulfillment an ecommerce fulfillment warehouse that was born out of ecommerce. He has years of experience in ecommerce and business development. In his free time, Jake enjoys reading about business and sharing his own experience with others.
About 87% of e-commerce customers surveyed say that price is the most important factor in their purchase decision, so you’ve got to optimize your product pricing if you want your business to thrive, or even survive.
The question is, how do you make sure the price is right?
The short answer: hard work and testing to determine the right pricing strategy.
In the e-commerce space, that means collecting data and trying your hand at a variety of price points to find what fits best for your online business needs as well as your customers.
Over the next few minutes, we’ll consider:
- Where to start
- A few pricing strategy options
- Value-add options
- Customer considerations
- And if you can cut your prices right now
There’s also one final note about the whole journey and why it’s useful but might be a little longer than you think.
No Quick Fix
Let’s get one thing out of the way: there’s no quick and easy fix to have the right price every time. You need to lay some groundwork and gather some data to get started. Then, you set a price and watch to see how things go.
It’s a process, but not an impossible one. Let’s dive into the steps and see if you can get an easier handle on smart pricing.
Start with Current Margins
Dig out those books and start looking at how much you’ve made in your recent month or quarter. Now, calculate all your costs and see what your gross profit margin was. Old data won’t help as much as your recent figures.
Whenever possible, break down your gross margin into segments for each of your products or categories. Granular data helps you understand not only what sells but what you want might want to toy with for the largest impact.
You might have some low-cost products that have low margins but are consistent sellers, making them smart freebies to promote bigger-ticket sales.
To get the best-possible benchmark data, gather your margins from each month over the past year. This way, you can compare your month-before and year-before numbers to help account for any seasonal fluctuations.
Match Pricing Strategy to Business Strategy
There are a variety of pricing options available to you based on your business strategy. Tie pricing to what you value about your company, whether it’s price, product range, or service that’s your differentiator. Here are a few different pricing options that you might consider.
Here’s your most vanilla pricing option. Cost-plus is when you take the wholesale price of the goods you buy and then add a specific amount — can be a percentage or a flat rate — to that cost to set your sale price.
Many companies who do this will increase the cost to cover warehousing, shipping, and other expenditures as well as adding a small profit margin. While simple, it makes sure that you have a profit margin across your sales all the time.
Cost-plus doesn’t require much research beyond your costs to acquire a product and then deliver it to your customer. The downside is that this tends to be less efficient than other options for optimizing your prices and doesn’t adapt quickly to customer preference changes.
It’s fast and easy to do but match cost-plus pricing may leave you with small margins or miss out on customers.
Anything you can sell, I can sell cheaper. Or, at the same price.
That’s the heart of competitive-based pricing. You look at your competitors and comparable products to set your prices slightly above or below what you think the industry standard is. You’re allowing your competitors to do all the hard data lifting, and then copying their homework.
It’s an effective strategy early on, but you might outgrow it as your company gets a solid footing. Copying competitor pricing means you’re not considering the elements that make your business unique. You might also be missing a key portion of your competitor's strategy that lets them offer a product for that specific price.
Your competition might use a certain product as a loss-leader to encourage greater total sales. If you’re copying their price but not their strategy, you could simply be losing money on a product without reaping the benefits. Again, always go back to your data when you can.
How much money do you need to run your business?
If you can answer that question, you can look into target-return pricing. This strategy involves created a large equation to determine what price will give you a planned level of revenue and profit based on how many products you normally sell over a given amount of time.
Essentially, you’re calculating total sales volumes as well as sales targets and then setting prices based on the overall revenue you need to raise. This is often seen for larger companies that are focusing on a broad corporate profit objective that can be met if sales remain constant or grow.
This strategy requires detailed knowledge about your business and will take time to learn where you might be able to increase margins and where to decrease them to meet sales as well as revenue goals.
If your business is focused on putting the customer first, then you’ll want to look at value-based pricing models. This strategy requires significant customer research into what they’re willing to pay for your goods. You can test multiple prices and offers to get there, but at the end of the day it’s all about the value they place on your goods.
If you can maintain this customer focus, you’re able to find prices that people embrace and may even be able to boost your loyalty by delivering what the customer is after. One note about value-based pricing is that it not only includes the specific prices of products but also deals.
So, if you add batteries in for free when a product needs them, you might have a slightly smaller margin, but people could enjoy the hassle-free nature of your store enough to come back and shop again. Or, you could prioritize service to help people achieve a specific look or goal.
The more data you have, the better you can target this pricing. It won’t be 100% accurate all the time because prices often follow customer trends, but it can help you spot those trends and adapt more quickly than the other methods on our list.
Quote or Lead-Focused
For your specialty e-commerce stores, there’s one last option: “contact us for a free quote.”
This hidden pricing structure is becoming more common in the e-commerce space as we see large products, parts, equipment, and other items being sold online. It is useful when the quality of the product impacts its use or when the customer is likely to consider buying used or refurbished equipment.
This hidden pricing usually requires that a customer give you their contact information to get the price quote. This method turns them into a potential lead where you can send them marketing and other information in the future.
It isn’t right for all e-commerce stores, but it might be useful if your customers do a lot of research before they buy and if you sell expensive items.
Can You Raise Your Current Price?
Now, let’s talk about the reason most of you landed on this article: you’re wondering if you can safely raise your prices tomorrow without hurting your bottom line. The best advice is to give it a try when you feel comfortable.
Always do the math ahead of time. It’ll make you feel better.
For example, let’s say you’re selling sunglasses at a 50% margin. You up your price by 10%. You can lose as much as 17% of your sales and still be in the exact same revenue position as before. If you only lose 15% of sales, then you’re bringing in more money.
There might also be some hidden savings as well. If you’re renting a lot of space for inventory, increasing price may allow you to keep less stock on-hand and cut down on some warehousing costs. This is also true for bulky items that might need a specialty order fulfillment partner to ship.
It can be scary trying to determine how much to raise your pricing and predict how much of a sales dip or increase you can expect with that change. Let’s look at a few things your customers will be considering when they head to your shop.
A Few Things That Impact Customer’s Price Acceptance
In the hunt for the right pricing strategy, you’ll want to come back to a few of the different aspects of your products, business, and customers that help dictate what they’ll pay for what you’re offering.
Here are some of the quick items to get you thinking about your individual relationship with your customers:
- Quality I: Customers are willing to spend more if they think your goods are high quality for that product category. This includes quality relative to your competitors as well as overall quality, which is impacted by how they perceive your brand.
- Quality II: The second aspect of quality is that sometimes customers are willing to pay more if they think your higher price indicates a higher quality product. Think of the last thing you had break unexpectedly. Would you be willing to pay 5% more if you thought that meant it wouldn’t break next time?
- Uniqueness: Customers are more willing to spend if they feel your product is unique. Differentiation from your competitors increases perceived value. The good news is that differentiators can also include things like customer service or how often you come out with a new model.
- Temporary deal: When a potential customer believes that your price is about to go up, they’re more inclined to buy today.
- 3-for-2: People are often willing to buy an extra item and increase total sale values if they believe a deal or reward justifies the extra, especially in 3-for-2 pricing.
- The world: Your target demographic is going to respond to the environment and their world, even when this has nothing to do with your product. Pricing is always sensitive to what’s happening in the lives and economies of customers.
Price sensitivity should be ongoing research for your company. Look into how your customers are valuing your products and your overall service. Not only do you want to read up on industry trends, but also take to social media and review sites to see what people have to say about your specific offers.
The great news is that you might find some especially compelling reviews and stories that you can then use in your next marketing effort — or to justify a price increase.
Hold Off on Slashing Prices
Once you start cutting prices with flashy ad campaigns and razor-thin margins, that’s your only place to compete. You essentially have turned your products into commodities and are driving the market to demand the lowest price instead of the best quality.
Let’s take the opposite look at our margin discussion earlier. If you’re at a 50% margin right now and decide to lower your prices by 10%, then you’ll need to make sure you boost sales by at least 25%. That quarter increase allows you to stay in the same spot; anything less and you’re losing money on the move.
Instead of trying to adjust pricing down, consider alternative options to increase the desire of your products. We’re an order fulfillment service provider, so we tend to believe that a smart method is to find a shipping partner who can deliver your goods at the best price within 2-3 days anywhere in the U.S.
Amazon has made this an expectation for most e-commerce goods, but Prime also teaches us that people are willing to pay for it. If you’re not currently using a third-party to manage your shipping, it’s time to consider that options. Third parties often get volume discounts from carriers like UPS and FedEx, and that’ll help you save too.
This same thought can apply to other aspects of your business. Look for experts in every process, and you might identify a solution your customers will gladly pay to access.
Repeat the Process
There is no last step in the process of setting your prices and overall strategy. Customers change, as do products and the overall economy. To survive, you’ll need to refine your data and keep your eyes open so that you don’t miss a trend and get left in the dust.
The more you understand about your business and your customers, the better the position you’re in to succeed. The good news is that there’s plenty of information readily available to help you pick the right strategy and adjust for the times.