Ecommerce Pricing: 5 Strategies Every Retailer Should Know
Every ecommerce store needs thoughtful pricing if it’s going to pass consumers’ sniff test. Why? Because online shoppers have so many product options at their fingertips.
If a shopper doesn’t like your price, they can find an alternative product—or the same product for less—in seconds through Google or Amazon.
Even if they like your price, online shoppers will compare your product to competitors’ items. In an Episerver survey, 68% of shoppers reported that they often or always compare Amazon’s selection to individual retailer sites.
Attract these judicious consumers with informed ecommerce pricing. Consider the product’s quality, demand, and competition to set pricing that seems reasonable to customers but also doesn’t leave revenue on the table.
It’s a lot to juggle all at once. We’re here to help.
In this post, we’ll help you find the best pricing strategy for your ecommerce business. We’ll cover examples, pros, and cons for each pricing model, as well as suggestions for when to use each strategy.
1. Cost-based pricing strategy
A classic, widely used strategy is cost-based pricing. Retailers calculate their price point by adding the costs of making the product and the markup percentage.
This strategy’s simplicity drives its popularity: With this pricing, retailers know their revenue will be greater than their costs.
Because it ignores the market, cost-based pricing can minimize profits. Customers may be willing to pay much more than the markup percentage you’ve set. This risk is especially important if your competitors are physical retail shops. As an ecommerce retailer, your costs are probably much lower, so following this strategy would lead you to set below-market rates. Cost-based pricing can also minimize profits if your markup is too high.
This strategy is useful, though, if savings are a part of your value proposition. Costco, for example, attracts their budget-conscious customers by promising that no item will be marked up more than 15%. The store’s profit margins are low, but they’ve been able to continuously grow, thanks to their loyal customer base.
Cost-based pricing is also effective for building trust in customers if you choose to be transparent about it. Everlane, for example, outlines the costs of their products and their markup amount, so shoppers know they’re not being overcharged.
Takeaway: Cost-based pricing is simple to execute but potentially minimizes profits by not taking into account customers’ willingness to pay.
2. Market-based pricing strategy
Market-based pricing is driven by the competition. You set prices for your products that are close to the current market prices of similar items.
If taken too far, this strategy leads to a race to the bottom. Ecommerce companies continue lowering their prices to be the best deal on the market. Eventually, they’ve lowered their prices so much the companies are no longer profitable.
But market-based pricing, when used reasonably, is a powerful way to attract online shoppers. Thanks to the internet, it’s never been easier for consumers to compare pricing. Retailers with competitive pricing will get the approval of savvy shoppers who have done their market research.
Consider using market-based pricing if your customers are budget-conscious. Shoppers who are focused on savings tend to check competitors’ prices. Keep them interested in your brand and products by setting pricing relative to the market.
Market-based pricing is also worth using if you’re selling products on online marketplaces like Amazon. Shoppers on these sites can see every vendor’s pricing for the same product. To attract customers your price must match or be lower than competitors’.
It may make sense to offer a higher price if you offer fast or free shipping and competitors don’t. However, most retailers on marketplaces offer generous shipping policies to compete with Amazon Prime.
Takeaway: Offer market-based pricing to attract budget-conscious customers. Aim for rates that are close to competitors’, but don’t undervalue your products in a race to the bottom.
3. Value-based pricing strategy
This strategy means what its name suggests—pricing based on customers’ perceived value of your product.
First, retailers identify their products’ differentiating features compared to their competition. A home goods store, for example, may find that their sheets have a higher thread count than their competitors’ bedding.
From there, retailers survey customers to understand how much they value their products’ extra features. The home goods store, for example, may interview customers and find they’re willing to pay $50 more for their high thread-count sheets. This customer research plus competitors’ pricing are the retailer’s value-based rate.
Apple is well-known for its value-based pricing. Consider the basic model of their MacBook Pro—it has a 1.4 GHz processor with Turbo Boost up to 3.9GHz, a 13-inch screen, 128GB of storage, and 8GB of memory. It costs $1,299.
Microsoft’s competing product, the Surface Pro, is nearly identical. It has a 1.7 GHz processor with Turbo Speed up to 2.6 GHz, a 12.3-inch screen, 128GB of storage, and 8GB of memory. It costs $899.
Apple is charging more for their laptop because of value-based pricing. The company has concluded that its customers care about their differentiating features—like their unique operating system—enough to pay $400 more.
Many retailers are turned off by value-based pricing because it seems like a lot of work. And to some extent, that’s true. According to the Harvard Business Review, you either need to conduct customer interviews or conjoint analysis to assess how shoppers value your product.
The work it takes to collect this research is worthwhile. Value-based pricing maximizes profits by being grounded in a willingness to pay. You have the option to charge more than competitors if customers value your product more.
Before you commit to this pricing strategy, be sure you have the time needed to research your customers. Luckily, there are many opportunities to survey shoppers on your ecommerce store. For example, you might show a pop-up that offers a discount in exchange for completing a survey.
You also should be able to differentiate your product from similar products on the market. A retailer offering generic products won’t be able to set a value-based price because their item is identical to brand-name competitors.
Takeaway: Value-based pricing maximizes your profits—you’re charging as much as shoppers are willing to pay. It’s complicated to calculate and involves research, so be prepared to invest time in this strategy.
4. High-low pricing strategy
Retailers using this strategy initially set product prices that are higher than the market rate. Once the product’s demand lowers, the retailer decreases the price with a sale.
The hope behind high-low pricing is that promotions will bring shoppers to your online store. Once they’re on your site, shoppers will purchase full-price items, not just discounted ones, to make up for the price reductions.
Retailers that use this strategy may struggle to attract judicious customers, ones who know there are lower-priced items on the internet. High-low pricing can also lead to losses if shoppers mostly buy discounted items from the retailer, not full-priced ones.
But if used with a loyal customer base, this strategy successfully drives sales. People who love your brand aren’t likely to notice or care if your prices are higher than competitors’. The excitement around a sale event will bring them to your store, and they’ll load up their carts with all types of products, discounted and full-price.
High-low pricing works best if you promote your sale events. As an ecommerce retailer, you have many online channels available for spreading the word. Sending a message to your store’s email list or publishing an organic social post are two cost-friendly options. Or, consider a paid social ad to boost the reach of your posts about the sale.
Build hype around your sale by emphasizing that the discount is temporary. Use phrases like “limited time” or even “last chance” to create a sense of urgency in your shoppers.
Takeaway: High-low pricing works best if your customers are loyal to your brand and aren’t budget-conscious. When you lower your products’ prices, promote the sale to build shoppers’ excitement and drive them to your store.
5. Price skimming strategy
Price skimming is very similar to high-low pricing. You set a high price for a product initially and then decrease its price over time as demand lowers.
The main difference between the two strategies is the timing of decreasing the product’s price. This process is gradual with skimming. With high-low, the price decrease happens at one point with a sale event.
Gaming companies use this strategy to price new, highly coveted consoles. Sony, for example, priced its PlayStation 4 at $399 when it was first released. By October 2015, the price was reduced to $349. Today, they’re sold for $299.
Skimming helps retailers maximize their profits. Initially, you gather as much revenue as you can while demand for the item is high. As demand lowers, you set a low price to attract more price-sensitive customers.
The model can lead to trouble, though, if the high price is above shoppers’ expectations. If you struggle to generate sales when the price is high, you’ll experience significant losses when you lower the price.
Minimize this risk by only using this strategy if your product is new and faces little competition. Shoppers will be more likely to accept your high initial price if there are few or no alternatives on the market.
It’s also helpful to build awareness of your new product if you plan to use this pricing strategy. Send a product announcement email to past customers. Or, share a promo product video on social channels to pique shoppers’ interest. This promotion will help you secure enough customers who are interested in the product and willing to pay the high early price.
Takeaway: Price skimming is ideal for new products with little to no competition. You’re able to earn as much revenue as possible by setting a high price at first, and then gradually lower it.
Refine your ecommerce pricing with a solid strategy
Online shoppers today can compare products through the internet in seconds. Encourage your target customers to pick your item with well-researched, thoughtful pricing. As a starting point, review the takeaways and suggestions in this guide to find the best pricing for your brand.
Whatever your strategy, once you know the approach you want to take, start by tracking revenue figures to see how your new pricing is impacting sales. Based on these results, make slight adjustments to your pricing that you think will generate more sales. With constant experimentation, you’ll always be able to find pricing that attracts customers and keeps them coming back to your online business.
Price isn’t something you necessarily get to choose—and sometimes increases are inevitable. If you’re looking to make a purchase more appealing to a larger audience but can’t lower your price, consider alternative financing options. These can be a good way to help customers manage larger orders without having to worry about paying for everything all at once or putting the entire balance on their credit card. That’s why point-of-sale financing is rapidly gaining ground—over the last six years, banks have lost 12 percentage points of market share to companies that offer POS financing, while those same solutions have gained 33 percentage points.