“The moment you make a mistake in pricing, you’re eating into your reputation or your profits.” – Katharine Paine
There is a tremendous amount of wisdom in this quote. Pricing is the most critical and arguably the most sensitive element of any business model. Setting up pricing is a risky maneuver. McKinsey & Co. studies have revealed that a mere 1% improvement in your pricing can add up to 11% to your overall revenues. Whereas, lousy pricing not only affects revenues on every transaction but also generate a negative impact on your branding and marketing.
Importance of Pricing in eCommerce
The competition in eCommerce is insane. Every day, hundreds if not thousands of eCommerce website are pouring into the internet and retailers are going an extra mile in an attempt to cut through the noise and clutter. Moreover, due to this abundance of available channels, customers have more control over the buying process.
Let me put this simply if you are deciding to kickoff with an eCommerce startup, to have two available options to make your venture successful.
- Provide a fanatic ease of use and customer centricity. How about same day deliveries, Omni channels, drone shipping, etc. Something out of the box to get the limelight.
- Be cheap and affordable. For startups, it’s quite challenging to provide a variety of interactive options and features, so the only way to offer value is to be affordable.
It has to be one or the other. If you are overpriced with generic features, there are minimal chances that people will use your website. The dilemma is that prices too low affect the revenue which means you are further losing a lot of opportunities to reinvest in the business. Moreover, cheap prices also put the quality of your product into question (I would never eat a steak that only costs $2).
Tips for Perfect Pricing Strategy
To be honest, here, there is no one size fits all pricing strategy as it is completely subjective to the nature of your eCommerce store. You also have the opportunity to add a number of interactive extensions to your store during the eCommerce web development process. For instance, there are partial payment extensions developed by third parties that help your customer buy expensive products and pay the amount in installments.
However, there are some best practices that you must consider that will help you be more profitable as well as sustainable in the long term.
- Pricing Products as Suggested by the Manufacturer
The manufacturer suggested retail price or MSRP is the price that a manufacturer recommends and is also referred as the as the recommended retail price (RRP). The product suppliers suggest the price of the products that you as a retailer can use to sell the products to the general consumer. This model is frequently used in the automotive industry, and it streamlines the buying process by displaying a sticker on the car’s windshield or a spec sheet. Every retail product can have an MSRP such as appliances and electronics, also commonly have an MSRP.
As the beginner in the eCommerce industry, this approach saves you from the agony of setting prices of thousands of products that your store is offering.
Using suggested pricing strategy can get you into a direct conflict with competition theory. MSRP empowers a manufacturer to establish a selling price of the product often higher than the general market rates which creates an adverse effect on costumes.
- Keystone Pricing
Keystone Pricing is the method of marking the merchandise for resale to an amount that would simply double the wholesale price they paid for the product to determine the cost. Keystone prices model is a bit tricky, and there are scenarios in which keystone pricing may vary, i.e., it can either be too low or too high. Keystone essentially means that if a product cost is $20, then the sale price would be set at $40.
It makes it simple for you to calculate the profit and there is no cumbersome arithmetic involved. Streamlining the initial pricing approach makes good sense as you just need to double the price.
Pricing every product using this algorithm means that you may end up holding onto some products beyond their optimum sales bracket. However, you can use this pricing policy for certain departments in your store such as clothing or sports accessories.
- Market-Based Pricing
The market based or market-oriented pricing strategy is also referred as a competition-based strategy. In this model, a company evaluates the prices of similar products that different stores are offering in the market. It is essential to analyze different products with similar features and compare them with what you are offering. Furthermore, you can increase or decrease the price of your product if it has more or less features in the competition. It is also critical to analyze and interpret the price sensitivity of its potential customers who need the product.
It is comparatively less risky but requires a lot of research for market analysis. You can give your consumers a perception that you offering more value more quality at the same price.
Sometimes it’s unwise to price a product solely based on the market and competition without looking at the big picture.
- Customer Oriented Pricing
At the end of the day, it is all about what is perfect for your target audience. For this, you need to step into customer’s shoes and analyze his needs and weaknesses. Most of the customers today are deal hunters. This means that consumers are looking for sales, coupons, seasonal pricing and other promotion-related markdowns and getting a bargain. It is better to set your pricing strategy that offers competitive prices and try to grab the limelight of your potential customers by offerings captivating deals and promotion. Price is something customer is most concerned about, and even the giants like Amazon and Wal-Mart focus on customer-oriented pricing strategies. We see a lot of companies using 99 instead of hundred. It looks simpler and influences the buying moments
It is perfect for attracting a more significant amount of traffic to your e-commerce store. You can also get rid of any out-of-season or old stock by attracting a price-sensitive group of consumers.
Using this strategy all the time can gain you the reputation of a bargain retailer. Moreover, selling products at discounted prices way cheaper than market rates can actually hurt the brand perception.
There is no such pricing plan could be called as “The standard approach to pricing.” Everything is based on assumptions. That is why marketers and entrepreneurs often find themselves at the crossroads principally deciding which pricing strategy to go for. We hope that this guide could help you find your way and please let us know which pricing model you have decided to choose. I have also planned another article to examine how Walmart and Amazon cleverly manage to get away with overpricing.
Asad Ali is an internet marketing expert for almost 7 years. He is currently working at GO-Gulf – a Dubai based custom website development company where he is working on numerous projects for SEO, conversion optimization and targeting relevant audience for the clients. You can reach him on LinkedIn.