A guide for ecommerce retailers
Pricing is one of the hottest topics among new sellers and many struggle to find the right strategy for their business. It’s important to learn the key elements of pricing before you get started and continue testing and learning what works best for your customers.
Many sellers have discovered that lower prices create a competitive edge by attracting more customers. However, if you mark your items too low, you run the risk of losses. Higher prices can give you a safety net to cover expenses. However, if you mark your items too high, you run the risk of losing customers. This is the struggle many ecommerce business owners run into over and over again.
Striking A Happy Balance
This guide will cover the different pricing strategies you can employ to help you strategically price your online products. It will help you find the balance between high-profit margins and attracting customers.
There are 7 approaches to consider as you work to find a balance in your pricing strategy.
7 Approaches to Pricing
The right pricing strategy can help you attract more customers, encourage larger orders on average, and create repeat purchases. There are 7 common approaches to pricing. Until you find the best strategy for your business, you may want to test the different strategies to discover the best fit for your customers and your business goals. Most companies also combine strategies and may use several at once.
Keystone pricing is the most common approach and is a method of pricing where sellers price merchandise for an amount double the wholesale price. Keystone pricing is a simple and straightforward approach to pricing. However, it doesn’t account for supply and demand, a critical component of maximizing revenue.
Keystone pricing is the best place to start whenever possible. However, the likelihood that it remains your only pricing strategy is low. Many of today’s products simply cannot be set at Keystone due to high production costs versus the general market rate.
Consider another pricing strategy if your business competes at either end of the spectrum — from discount competitors to high-end luxury brands. Adopting Keystone pricing at either end will likely guarantee a loss.
Multiple Unit Pricing
Multiple unit pricing, multiple pricing, or bundle pricing offers shoppers a lower price per unit for the purchase of two or more products of the same type. Multiple pricing is great for clearing excess inventory or introducing new products. Use this strategy sparingly or customers may think your regular items are overpriced and therefore should not be purchased until they’re discounted.
The ideal time to use multiple pricing is at the end of a season for products that have not sold well or when you need to introduce new products that customers may be hesitant to try. Make sure you read up on your state’s regulations when considering these strategies. For example, some states will not allow you to sell products below cost or give out freebies.
Discount pricing offers price reductions to customers through sales events or special offers. Discount pricing is an easy way to attract new customers and works best when timed for special events or holidays. Lowering the price of a product to encourage purchases is a conventional strategy, but simply announcing your price drop may not be enough. It can even have adverse effects if your customers perceive the discounted price as the product's true value.
Effective discounting dispels this idea and creates a sense of urgency. Discount offers are not one-size-fits-all. Let the product’s market relevance and sales history influence your strategy and try to provide a reason for every discount. Otherwise, customers will think less of your brand and product value.
A loss leader is a product priced below its market cost to stimulate the sales of more profitable goods or services. Loss leader strategies are great for traffic generation and product introduction.
- Magazine publishers can attract more long-term subscribers by offering the first few editions at little to no cost.
- Cable service providers can offer lower pricing on a competitive feature to recruit new annual contract signups.
- Hardware stores often sell larger tools for cost or below, expecting customers to buy accessories along with the new tool. Accessory items tend to have a much higher profit margin and are often impulse buys.
The past success of loss leader pricing has led to many states passing laws that severely limit — or explicitly forbid —selling products below cost. Loss leader strategies can backfire, with customers purchasing only products that are priced near or below acquisition cost. Such purchasing patterns effectively foil the strategy underlying loss leader pricing.
The best use of the loss leader strategy is to use it in your marketing efforts and in acquiring new customers. However, carefully consider your loss leader product and how you intend to promote other offerings in parallel so that your loss is actually a gain. Most importantly, be aware of your state’s laws on loss leader pricing. cost. Loss leader strategies can backfire, with customers purchasing only products that are priced near or below acquisition cost. Such purchasing patterns effectively foil the strategy underlying loss leader pricing.
Psychological pricing relies on the nature of human psychology to make prices appear more attractive to consumers. There are several types of psychological pricing: odd-even pricing, prestige pricing, anchor pricing, and price lining.
Odd-Even Pricing: The practice of setting prices in odd numbers just below an even price. For example, marking an item $19.99 rather than the even price of $20.00. This strategy makes the price appear considerably lower than it actually is. Research shows prices ending in “9” are more likely to drive sales.
Prestige Pricing: On the opposite end, prestige pricing inflates prices to create a sense of greater value. For example, a “limited edition” canvas print might be priced at $70 rather than $30 to give the impression that it is a better and rare product.
Anchor Pricing: Anchoring refers to the consumer’s tendency to heavily rely on the first piece of information offered when making decisions. To apply, place premium products and services near standard options to help create a clearer sense of value for potential customers. They will perceive the less expensive option as a bargain in comparison.
Price Lining: Better suited for businesses with an extensive product line, this tactic involves creating a price range for a particular line. For example, Brandless.com has built an entire business on this strategy with all items priced at $3.
Psychological pricing allows business owners to influence how consumers perceive a product’s value without actually changing the product. This makes it a cost-effective way to influence consumer purchase decisions.
This pricing strategy requires retailers to list competing products at prices lower than the competition. Pricing below competition can help businesses appeal to every consumer’s love for low prices. However, by guaranteeing lower prices and therefore lowering profit margins, you will not make a significant return without a large sales volume. Pricing below the competition is a common pricing strategy because it’s easy, but it’s also dangerous if you don’t have a clear understanding of your business’s financials.
Additionally, even with low overhead costs secured, you remain subject to your competitors’ actions. One of the worst outcomes of below competition pricing is a "price war” where competing businesses race to cut costs and ultimately hurt their bottom line and their brand perception. Some companies have resolved price wars while still maintaining below competition prices by redesigning their products for fast and easy manufacturing.
Retailers price above the competition when they have a clear advantage of non-priced elements of their products, services, or reputation. In order to charge an amount above the competition, you must differentiate your brand and products.
For example, Apple can consistently charge consumers more because they’ve established a reputation as makers of high-quality products, ensuring the market sees its offerings as unique or innovative. If you choose this strategy, have a good reason why your products are priced significantly higher than the competition.
Whether you use none or all seven of these strategies, we encourage you to continue every effort to better understand your customers, competition, and business financials. That’s the best way to successfully, strategically price your products.