Remember the last time you visited your favorite shop? Let’s relive those moments together and see how you can relate that with e-commerce pricing.
You go into your favorite store, gazing through the stalls briefly, touching a couple of the items for the feel and texture. Suddenly, you find your perfect match. You grab it and place over your body to see if it really looks great on you. You love the item and the only thing between owning it is the price tag. You find the price tag after a quick search, flip it, and check how much it’s worth.
It costs a lot. It’s not a bargain, it’s not a deal so you give up, and probably leave the shop after that.
Wolfgang Digital studied average session lengths for a full year. The company found that the average session lasts 3.49 minutes.
Do you know how many items can a person scan in 1 hour in the e-commerce ecosystem when we take into account that the avg. session is 3.49? Around 17 items.
Let’s expand on this statistic with research from Google’s consumer barometer.
As you can see only 21% do research moments before a purchase. The rest starts from hours to more than months!
So how many products and prices you think a consumer sees to land on your website and complete a purchase? Probably hundreds to thousands.
With this post, we’d like to get into the most important factor in making a purchase, which is pricing to help your store get the results you need.
And in this guide, we gathered all of our e-commerce pricing knowledge into one big resource to help succeed no matter which strategy you pursue.
Consumers are all about pricing
For any size of e-commerce company from any country, e-commerce pricing matters. A lot.
To emphasize that even further, let’s look at some stats:
More than %60 of online shoppers worldwide consider e-commerce pricing as the very first criteria affecting their buying decision.The most important store features driving the purchasing decision (80%) is competitive pricing.
- Around %90 of e-commerce shoppers are masters of hunting deals. Thanks to technology and comparison shopping engines consumers get alerts in multiple items from multiple stores.
- Price comparison engines are a key part of the e-commerce marketing stack, as they constitute around % 20 of e-commerce traffic for all sorts of product categories.
Obviously, this ratio is even higher for product categories where e-commerce pricing is even more important, and the shopper persona is naturally more price-sensitive.
Don’t get scared by these numbers. Here lies a great opportunity for gaining advantage and changing the direction the wind blows.
You see, e-commerce pricing can act as a high-traffic marketing tool and can influence both comparison engines and conversion rates.
Now let’s see how you can start doing proper e-commerce pricing in your business as much as your customers do – or even more – depending on your market positioning and start getting most out of pricing.
This method requires the company to write down its unit product costs for each of its products in its portfolio, and then set a target profit margin for each of those products and price the products as the sum of the unit costs and the target margin.
Some common costs most e-commerce businesses have are:
- Salaries and payments
- Sourcing products
- Platform fees
- Returns and refunds
- Bank and processing fees
It may be too obvious but it’s really shocking to see how so many e-commerce companies lose track of their unit costs and fail to even apply this strategy.
Let’s take a look at the second part of the equation, where most of us get greedy, the target profit margin.
Here the crucial part is coming up with the right profit margin that will maximize the total profit gained for your company without scaring off the customers.
And how do you do that?
Well, you must understand that the target profit margin does not depend on the will of the company or people at all, it depends on the buyer.
For example, if the product is in the luxury business, then the buyers wouldn’t care about low prices really, so, a fatter profit margin could still hold valid. However, the same approach would yield zero sales in the consumer electronics industry. There, the profit margins are totally slim, and the player with relative expensive online prices does not have much of a chance in the market.
To conclude, we can tell that there are 2 risks that come with this approach.
- A company can undervalue its products
- A company can lose its competitiveness
That’s why cost-based pricing should be the basis for other strategic pricing approaches and should be applied together.
If you’re not alone doing business in your market you definitely need to be aware of your surroundings. There are tons of companies active in the same industry, around 860,000 e-commerce companies to be exact. As part of this huge jungle, each company active in any country in any product category directly competes with several other businesses.
Therefore, an e-commerce company can not only focus on its costs and the desired profit margins. It shouldn’t ignore the market competition as well. As we explained at the beginning of this post, consumers care heavily about the price and they compare the prices with your competitors all the time.
A company who wants to win or stay in this game must understand its own position in the market and be aware of others all the time.
In such a crowded fast-paced market, it seems impossible to build a clear map of the competitive landscape. Oh wait, that’s exactly what Prisync is doing right now. It helps you automate this process with an easy dashboard.
Now that we’ve got that plug out of the way we can continue to our strategy.
A competitive pricing strategy doesn’t mean undercutting your competitors and lowering your prices until your margins are very low. There’s also a danger of opening a race to the bottom contest with your rivals which no one would want to enter in.
The major and often neglected benefit of market-oriented pricing with solid competitive pricing intelligence is that it sometimes shows companies exceptional price increase opportunities where the price might be really low versus the competitors. This mostly happens when a company has cost advantages versus its competitors and when identified a price increase can be applied while still holding the competitive edge.
Let’s see this strategy with an example specified below where you can find three different e-commerce retailers selling the same LE CREUSET 27cm Signature Oval Casserole, Marseille Blue.
The first one is the most competitive in terms of price, selling at £171.08. The second retailer sells the same item at £210.00, the same as the third retailer. So, in this scenario, the first e-commerce retailer can detect that opportunity through a price monitoring software and raise the price just below its competitor by setting it £200. This move will increase profit margins and still be the most competitive items in the market.
The first retailer marked with red on the dashboard:
The second retailer marked with blue on the dashboard:
The third retailer marked with green on the dashboard:
Market-oriented competitive pricing can also be taken into the auto-pilot mode by applying dynamic pricing. By setting the competitive price change updates as the internal price change triggers (by means of notifications), companies can achieve more sustainable and unbeatable competitiveness.
In basic terms, dynamic pricing is a pricing approach that enables you to set flexible prices by taking into account your costs, targeted profit margins, the demand of the market and your competitors’ prices. In other words, you’ll be able to set the optimal price at the right time in response to real-time demand and competition status, while taking into account your business goals.
Having tons of data is great. But, the crucial thing is to convert data into actionable insights. Fortunately, there are dynamic pricing and repricing software in the market that help you to generate recommendations from the data that you’ve collected from competitors. Then, the technology lets you calculate optimal prices through repricing rules that you’ve set based on your competitors’ prices, market demand, and costs.
Once the optimal price rules are set, then you can enjoy the rest! The repricing engine works all day and your prices will be changed according to the fluctuations in the market and, of course, based on the rules that you’ve set. With the mix of competitive intelligence and repricing ability, your business can gain a seamless competitive advantage in the market. As you’re able to react to every single move in the market, your prices will always stay competitive or optimized.
In every aspect of e-commerce, customer-centricity should come first above anything else, and pricing decision making is not an exception to that.
To offer perfectly tailored price-points to its shoppers, any e-commerce company should be easily and clearly answering these 2 questions.
What is my shop’s unique selling proposition?
Do I mostly deliver a hard to find value and satisfy my customers, or do I deliver them a value that can be found elsewhere at the right price points?
How do their minds work while shopping for my products and is it their heart or their mind speaking while buying my product?
The answer to both of these questions will actually bring a solid self-awareness for the e-commerce company when it comes to its customers. From that point onwards, a company can easily tell whether a slim margin is a must for its shop, or how significant the placement of the prices next to the product pages is and many similar pricing decisions.
Obviously, for companies that remain mostly at the value-oriented end of the spectrum, higher profit margins with weak pricing visualization (more emphasis on other elements associated with the product) and communication would work. Because those shoppers will be buying those products with their emotions rather than their rationale. – with fewer calculations or comparisons.
Product bundling is fairly simple. You sell a range of products together for a combined price. This is different from customers simply adding various products to their bag separately because it plays on the psychological, economic idea that consumers will be more likely to make the purchase when there’s a significant perceived value.
By improving the value of what you’re selling, you’ll sell more and make your customer’s happy.
For example, many products require accessories. Some are mandatory (like a lens cap on a camera that usually comes with the camera), but some are highly desired, but optional, like a tripod for a camera.
Bundling products of a similar nature is a great way to increase your average order value because customers are likely to be looking for similar things. Someone buying a DSLR camera is likely going to be interested in buying a different lens or a tripod to go alongside it.
Penetration pricing is an e-commerce marketing strategy business use when they’re highlighting a new product or service or wish to enter a new market.
It works in a simple way, where they set their prices lower than their competitors in the hope to increase their market share of customers. Usually, this practice only happens during the initial offering and is meant to allure customers to their store, as opposed to their competitors.
Price discrimination is a tailored approach to pricing where an identical item could have different prices. It works on three different degree levels:
- First degree: Consumers are charged the maximum they’d be willing to pay for any given product. For example, auction or bidding sites, where one customer might pay lots more for a similar item, based on what they’re willing to pay.
- Second degree: Consumers can choose their price discrimination. For example, they might be offered a lower price if they buy a product in higher quantity.
- Third degree: Products are priced differently based on customer segments.
In essence, it involves taking customer data including their behavior and perception, segment customers based on that data and then generate prices specific to each segment.
Dynamic pricing is a type of price discrimination and is an approach whereby eCommerce store owners change the price of their products based on a number of different factors. The difference between price discrimination and dynamic pricing is the outside vs inside influences and the basis on which prices are changed.
Dynamic pricing affects everyone in the same way. Price discrimination could affect me differently to the way it affects you because of our own personal buying habits.
Look at the original article to see the best use cases of price discrimination.
An e-commerce loss leader pricing strategy involves setting one or two of your products to be sold at a lower price – a price that actually puts you at a loss – in order to get your customers through the door (or on your website).
You do this in the hope that once they’re on your site, they’re more likely to buy your other (normally priced items).
An electric toothbrush is a great example of a loss-leader product. This electric toothbrush costs £99
Although we do not know the manufacturing costs for these toothbrushes, we can assume they make most of their profits on the replaceable toothbrush heads.
When you think about an electric toothbrush, you don’t tend to buy them often. And so brands can afford to sell them at a loss because they know they’ll easily recoup their lost profit costs form the toothbrush heads which need to be changed much more regularly for great oral hygiene.
So if you want to implement a loss leader strategy and are worried, consider whether you have any add-on products where people would need to come back to your store to make a further supplementary purchase.
In its simplest terms, e-commerce price skimming is the art of setting high prices for your products during an introductory phase. What this means is that businesses are able to leverage the “newness” of their product and maximize their profits from the get-go.
What you need to remember about price skimming is there are consumers out there who want to be the first ones to get hold of a product. They like the feeling of exclusivity. In some ways, it makes them feel as though they’re part of a special club.
If you want to implement price skimming, then you could think about using phrases such as “exclusive offer” or “limited availability”, “be the first to get your hands on” within your marketing copy to make sure you highlight the need for consumers to take action right away.
Apple is one of the best examples of price skimming used most effectively. During the run-up to a new iPhone release, there are sufficient rumours before the announcement even happens.
Once it’s time for the actual announcement there has already been enough excitement drummed up that increases the buyer’s appetite for a purchase.
You’ll have seen the news, where wannabe iPhone owners would camp outside the store to be one the first to get their hand on the newest model. Others would pre-pay for their model weeks before they even get the phone.
Are you ready to care about your prices?
To repeat, pricing fails when it’s taken as a department’s or a person’s dull role within an e-commerce company. When taken seriously and handled in smart ways, it turns into a secret and very effective marketing tool.
The approaches that we shared here are the 3 core pricing approaches and as you might have also felt, they are not necessarily mutually exclusive. In other words, you do not actually choose one and apply one and neglect the others. Contrarily, like most the marketing and growth strategies, they work best when applied hand in hand with each other. (like, competitive market-oriented pricing together with correct unit cost calculations.)
Finally, pricing is not a static task, and it requires ongoing effort to optimize and fine-tune it as your e-commerce company grow. Like any other e-commerce operation that you need to run, there will always be room for improvement and it’s not going to be an easy operation but fortunately, you have quite enthusiastic folks like us that look forward to helping you out with your online pricing strategies to help you achieve sustainable price competitiveness and profitability.