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Profitable Price Determination: How To Set in Brand New Online Store

Are you planning to start an online store? If so, you must be thinking about building an effective pricing strategy.

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 condition.

Finding the right pricing strategy for a new product on your online store is not easy. You need to understand them and how they work behind your customer’s mind.

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 pricing strategy, that can overcome all these barriers and generate a consistent profit.

Keep reading.

What is Pricing Strategy?

Pricing Strategy is the process to set the exchange value a retailer will get for his goods and services.

According to Chron, Pricing strategy refers to the method companies use to price their products or services.

Let’s take a look into the steps below. You need to follow these steps before you start planning your pricing.

Step 1: Measure Your Business Cost

How much 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 cost you should track and add up to your pricing plan-

  • Your inventory cost
  • Urgent supply costs you need to make a product ready to sell
  • Website building cost including hosting and designing
  • Labor cost like you hire someone to manage your site etc.

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.

Step 2: Measure Your Time Cost

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.

Step 3: Find Your Position in the Market

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 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 service are providing better quality and value, you can easily overtake your competitors position in the market even at a higher price.

Step 4: Consider the Shipping Cost

Shipping cost significantly influences pricings strategy of online stores.

Infact high shipping cost is one of the top reasons for cart abandonment. See the charts here provided by Statista- 

Shipping Cost

So, you must set a shipping cost which 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 amount of products, make sure that you set a price which recovers all of your expenses and profit smartly.

Top Pricing Strategies For a Brand  New Online Store

You have to do some homework to set 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.

1. Consider the MSRP

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-

  • Production cost
  • Sales cost
  • Average markup by retailers and wholesalers
  • Profit margin of the manufacturer

MSRP was designed mainly for keeping the same price level of a particular product across the retail stores.

So while you set the pricing strategy 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.

Pros:

– You can save your pricing effort and just follow the MSRP to sell your products.

Cons:

– Retailers who use MSRP can’t compete it. Because most of the online store 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. Either a customer buys it from you or Amazon, the price will be the same.

2. Take a Look into the Keystone Pricing Strategy

In keystone pricing, you double up a product’s wholesale cost or production cost then set that as the product’s retail price. For example, if you spend $100 for 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 which is unique and unbeatable in quality.

However, you must look at the other side of the coin. 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 for an available product, you will be putting yourself at risk.

Pros.

– 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.

Cons:

– Not a good idea for common and available product.

3. Multiple Pricing

SAP defines, “Multiple pricing, or multiple unit pricing, is a pricing scheme that specifies the item price for multiple units.”

Most of the grocery stores apply this pricing strategy to sell similar products at a bundle price.

Multiple pricing let you sell a product on different rate following these factors-

  • Product quantity
  • Customer’s type
  • Delivery time
  • Payment terms

For example, you can offer two pair 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 unit.

Pros.

– Multiple pricing motivates your customers to purchase in more significant volume. It displays a considerable lower price and people want to save their money.

Cons.

– After you start to introduce a product in bundle frequently, it will be difficult for you to sell the same product at regular price. Your customer may think, the price is too high, aka it harms the real value of the item.

4. Penetration Pricing

This pricing strategy is helpful when you want to introduce a new product. To attract the 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.

Let’s look at this example below shared by Investopedia. It shows how penetration pricing helps to generate more sales. 

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 becomes more popular than non-organic items.

The other grocery stores start to sell different types of organic food at a higher price. But Kroger and Costco are selling organic food at lower prices. Effectively, the penetration pricing increase their sales.

Pros.

– 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 help to increase its popularity.

– Increase your site traffic and lure people into buying several related products.

Cons.

– You can’t apply this strategy frequently. To 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 regular price will be at risk.

5. Loss Leader Tactics

Suppose you saw a digital ad in social media. An online store is offering a Philips electric razor at 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 loss leader pricing strategy.

Pros.

– Loss lead technique is a booster. It helps to increase sales faster. It aids you to sell multiple products at the same time. Thus, ensures a higher profit margin in a short time.

Cons.

– You can’t use this strategy often. If you do, your customer will be in confusion to pay the regular price for a product. The effect is similar to price penetration or discount.

6. Psychological Pricing Technique or Charm Pricing

While purchasing a product, customers have several options. They choose a 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 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 which 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.

Pros.

– Your customer 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 $2.99 looks more of a winning shot.

– Charm pricing can boost your sell and ensures a high ROI.

– It simplifies the decision-making process of the customer.

Cons.

– Charm pricing can’t work with a luxury product. When people willing to spend a $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 customer becomes aware that the deals are not so profitable as the thought.

7. Competitive Pricing

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 price and set 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.

Pros.

– Your chances are high to sell products among budget customers

– You have all of your competitor’s pricing data to set even a more reliable price

Con.

– 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.

8. Prestige Pricing or Premium Pricing

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 Wiki defines it as the practice of keeping the price artificially high.

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, sold a minimal amount for a specific time of the year. They set a high price than the regular apples in the market. People will think it’s healthier and an act of health consciousness to purchase this 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 shop in the USA.

Pros.

– If you follow a wise eCommerce marketing plan, premium pricing helps to establish your brand quickly. If you create the prestigious atmosphere around your product or business, people will fall for you.

Cons.

– 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 sell isn’t going to increase.

9. Price Anchoring Technique

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 is using price anchoring for many years. Take a look here-

Marketing Rebellion Book Price

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 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.

Pros.

– Price anchoring increases your sales.

Cons.

– You can’t offer a price which is too much lesser 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.

Final Thoughts

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.  

Comments

2 Comments

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Peritus Infotech

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

Avatar
Anja278d

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.


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