We’ve all been there. You’ve found that perfectly flattering garment in your favorite store. You run your fingers across the fabric, hold it up to your frame. Then comes the moment of truth. You slowly reach for the price tag and twist it around to see the price. Gulp. Maybe after some quick calculations (“hmmm, if I only eat Kraft Dinner for the next two weeks…“), you’ll drill down on the details: color, size, and the like.

This is obviously offline behavior (what we do while we are shopping in a physical store) however, you’re dead wrong if you think we don’t act similarly while shopping online. Sure, when online there’s no need to turn the screen other way round to see the price, but instead it’s clearly stated there, right next to the product name and image. Your eye goes straight there. Unsurprisingly, after we decide if we like the general look of something, the price is the next immediate qualifier.

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Pricing Matters

For anyone who creates or manages a purchasing environment, a physical store, or an online store of any size, it’s no surprise that, duh, pricing matters. There are also some striking findings from eCommerce markets worldwide, which strongly proves this fact.

For example:

  • Price has been named as the most important factor affecting the online purchasing decision by the 60% of all online shoppers worldwide. This number is even higher in emerging eCommerce markets.
  • More than 90% of online shoppers invest time online to hunt the best deals and offers for the product they are planning to purchase. More than 10 mins per purchase on average.
  • Around 20% of eCommerce website traffic comes from various Price Comparison Shopping Engines all around the world. This ratio is significantly higher for certain product categories like consumer electronics or similarly price-sensitive segments of eCommerce.

Therefore, eCommerce companies of all sizes from all around the world should better gear up with their pricing operations and approach it as a group effort, instead of just leaving it to the hands of a single department or a single employee within the company.

By applying various pricing approaches, eCommerce companies can actually utilize pricing both as a marketing weapon and a conversion rate optimizer. Let’s see how your eCommerce company might tackle the pricing issue from different angles, depending on its market positioning and strategies.

Cost-based pricing

ecommerce pricing strategy

The most simplistic approach that could be utilized throughout pricing operations for an online store is cost-based pricing.

In this approach, the method simply recommends to define a particular cost associated to the product/service being sold, and then to define a target margin on top that cost. The outcome will be the price tagged to this service/product.

 

 

However, the challenging bit of this approach turns out to be defining these values of cost and profit margin correctly, to set the price right. Obviously, as soon as these two values have been put right, the rest is just a simple sum of these two.

Therefore, eCommerce companies taking the cost-based pricing approach need to sharpen up their skills at measuring, estimating and defining these two parameters regarding their operations.

The cost part is a little tricky to calculate exactly, because it does not only contain the unit purchasing price of the goods from a certain supplier, but also all the overhead expenses associated with the internal eCommerce operation of the company.  So, by summing up the unit purchasing price of the product and the overhead operational costs per unit, companies can calculate the unit cost of that particular product.

The next calculation should be done for the target profit margin and this target surely does not only depend on the will of the eCommerce company – of course, who wouldn’t like 2x, 3x margins in eCommerce – but it depends on the competitive landscape, the product type, and consumer preferences. In other words, in case the product is a luxury product, where the consumer is ready to pay out a premium fee for a product, the eCommerce company should not rely on tight margins while calculating its prices. However, in case of a consumer electronics or office supplies retailer, the margins are forced to be thin by the competitive forces within the market.

Arising from all these insights, cost-based pricing approach carries the risk of undervaluing your products or turning out to be uncompetitive. Therefore, it’d be better to use this approach hand in hand with other pricing approaches.

Market-oriented pricing

ecommerce pricing strategy

 

There are around 12 million eCommerce companies worldwide.

With that in mind, your eCommerce company can’t simply run its operations isolated from its market, just driven by internal decisions regardless of the market conditions.

As the consumers of such a market compare your company vs. others, it’s important to grasp a solid understanding about where you stand among your competitors’ prices alongside many other factors like assortment, reviews etc.

ecommerce pricing strategy

A demo of an automated competitor price tracker.

Such market intelligence and analysis that may be gained through automated price tracking solutions do not necessarily require you to drop your prices all the time, but lets you adjust your prices to be competitive, while maintaining your profitability.

In certain cases, where you are priced well below the competition you can still sustain your attractive low-priced position and profitability by recovering that raised amount in every purchase made for that product even if you raise your prices for a certain amount.

Why don’t we explain it with a real example and show you how to be the most competitive and get fattened margins.

Below, you see two different ecommerce retailers selling the same Adidas Supernova Running Shoe. The first one is the most competitive in terms of price, selling it at $117,99 and the second retailer sells the same running shoe at $129,95. In that scenario, the first e-commerce retailer can raise the price just below its competitor by setting it at around $127,99. This decision will bring fattened margins ($10 more out of every single shoe sold) that raise up the balance sheet and still let the product still be the most competitive in the market.

 

 

Dynamic pricing

ecommerce pricing strategy

A more sophisticated approach that stands at the top of market oriented pricing approach is, dynamic pricing.
In dynamic pricing, frequently updated competitor pricing information can be utilised as a triggering factor to update your own prices depending on certain pricing rules for your product assortment. To maintain profitability through dynamic pricing, eCommerce companies should always keep their costs in mind, and use a hybrid approach, where cost-based pricing may decide on the target profit margins according to the competitor pricing.

A useful and sustainable way to enrich your pricing strategy and apply dynamic pricing is to set smart prices by defining repricing rules through competitive pricing intelligence software. With these smart tools, you’re able to set e-commerce pricing rules by targeting certain profit margins and competitive pricing positions, and receive smart price recommendations as an outcome.

Consumer-oriented pricing

In eCommerce pricing, consumer-centricity is not a buzzword at all. It’s a hard and solid economical phenomenon.

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The initial step before going deep in different pricing approaches is to answer the 2 following crucial questions, with consumers in mind – and heart:

  • “Who are my customers?”
  • “What is my USP? – is it more value-related or price-related?

After answering these questions, you can also find hints for your profit-margin targets, your pricing communications (whether to push it forward, or to keep it almost hidden deep in your product page).

In case your customer persona is an experienced deal hunter (well, like the majority of online shoppers as we stated in the beginning) then you better muscle up to offer competitive prices and try to grab attention of your potential customers with your attractive offerings and discounts. However, it may be the other way around, and you might be targeting less price-sensitive buyers, like luxury brands or retailers. Then, keep the price out of your value proposition, set the tone of your pricing communication very low. Don’t try to offer bargains or deep discounts, as they will generally not be effective in converting your visitors.

4 Psychological Pricing Tips

If pricing was considered to be a science, it’d lay at the intersection of economics and psychology.

Naturally, our minds are majorly involved in all sorts of purchasing decisions we make online, so a better understanding of how our minds perceive prices becomes key when determining pricing strategies.

There are tons of parallel research going on in this subject nowadays, mainly piled up under the field of neuro-marketing. As a kind of an extension to consumer-oriented pricing approaches, let’s look at a few psychological pricing tips that you can experiment within your store.

01. Charm Pricing

You know this one. It’s the power of 9’s at the end of a price tag, instead of 0’s.

Even though it has become a widely known phenomenon, it’s odd to see that many eCommerce companies worldwide are still failing to utilize this strategy in their online stores.

If you haven’t jumped on this train yet, you’d better get moving, because for as basic as the charm pricing tactic seems (ex. tagging a product for $19.99 instead of $20.00), it doesn’t just increase your conversion rates, but it boosts those rates to nearly 100%!

02. Rational vs. Emotional Pricing

What you are selling should also be a defining factor in how you tag your products, visually.

Psychologically, purchasing decisions can be divided as easily as:

  • Purchases made by following the rationale or logic, and
  • Purchases that are dominated or driven by feelings or emotions

Depending on where your product category falls in these two segments, your prices should have a certain visual character.

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For example, the Toshiba devices like the ones above are mainly products that buyers consider technical details, specifications and all similar data points related to the product. Once a customer takes stock of all of these details, this becomes purely a rational decision-making process.

For such products, prices like the ones you see above from Amazon (ex. $639.96) is visually more fitting because it’s not a rounded number, and so it has a more calculated character and appearance.

Whereas, with products like these nice wooden pieces sold on Wallpaper Store, our feelings and our emotions come into play during the purchasing decision. We don’t really care about the weight of the wood, or the diameter of that square box, but how the products might look in our homes, or what they might say about our lifestyle.

In short, we don’t really need much of a calculation to be convinced to buy those products, and actually showing much detail can also kill the simplicity of the process and may even lower the conversion. Indeed, for products that we purchase with our feelings heavily involved in the decision, prices like $140, $190, or $285 tend to convert visitors much better than their non-rounded counterparts

03. Smaller Fonts

Who wants a large, looming price in their face?

It’s proven that prices that are shown in smaller fonts convert better than larger-fonted versions under the same display values.

Therefore, visit your online shop now and try to rethink how you can resize your font-sizes to convert your visitors better, with smaller prices.

04. Fewer syllables

i.e. shortly-pronounced prices

This one here is one of the most interesting and one of the least-obvious psychological pricing tips out there.

It’s said that the number of syllables, in the text version of a price tag, i.e. how we read and pronounce a price, affects the decision-making process of an online buyer.

While it’s doubtful that online shoppers read prices aloud while they’re shopping online, somehow, when you compare the two prices below:

$27.82, or “twenty-seven-eighty-two” vs. $28.16 “twenty-eight-sixteen” will convert better every time.

The conclusion? Pricing should be a consuming topic.

Once again, pricing should not be one person’s or one department’s role in an eCommerce company. It requires a more holistic understanding, and should be positioned as a marketing weapon and a conversion rate optimizer rather than a simplistic “to-do” before other marketing efforts.

As is the case in many eCommerce marketing tactics, there may not be a singular pricing strategy for your business, but instead we’d encourage you to test out the waters by mixing several approaches mentioned above.

Wishing you all the best of luck in your pursuit of the right price!