How should you price your products? This is one of the most crucial elements to consider when building your online store. Mistakes in your pricing strategy can be costly. In fact, pricing is one of the elements that will make or break your online venture.
The groundbreaking metrics expert Katharine Delahaye Paine once said, "the moment you make a mistake in pricing, you're eating into your reputation or your profits." But what did she mean? How can you avoid these mistakes?
You don’t want to price your items so high that you scare away customers. But you also don’t want to go so low that your profit margin suffers. This means it can be hard to settle on the right price.
The price of your products will play an important role in how well they sell. You'll need to consider a lot of information. Who is your target consumer? How much are your competitors charging? You need to know which price will show that your product is the best value.
There is usually a distinct trade-off between quality and price. When something is too good to be true, it usually is. So, choosing the right price for your products will not only influence your sales. It can also affect how customers perceive your business.
How to Price Your Products Appropriately
Say you have a product that is worth $100.00. If you were to sell it for $1.00, it would be a fantastic deal. But shoppers already have expectations for how much a product like yours should cost. This means they could think it's cheap, and decide to shop elsewhere.
Situations like this one are why you need to price your products appropriately. To do that, you'll have to do your homework. Answer these questions before deciding on your pricing strategy:
- Who is your target consumer? What is their age range? How much will they be willing to spend?
- Who is your competition? How much are they charging?
- Is your product a budget item, luxury item, or somewhere in between?
- How is your product, or company, different from the competition? If all things were equal, why would someone buy this product from your store?
Direct & Indirect Costs
Before considering which pricing strategy you want to use, you need to know your costs.
These include both the direct and indirect costs involved in sourcing your items. It’s hard to price an item accurately without knowing exactly how much it costs you. This amount isn’t just the price you paid for the item itself. You also need to consider other costs. These include:
- Packaging costs
- Shipping costs (both to you and to customers)
- Part of your overhead costs
- Any professionals you hired to get the product ready for sale. For example, photographers or content writers.
After you've done some homework, look at your costs:
- How much does your product cost you to make?
- How high of a markup will you have to use to turn a profit? This includes the price of your product and other overhead. Remember shipping, credit card fees, and hosting fees.
If you sell a product that costs you $3.75 for $12.00 and sold 300 of those items, you would receive a revenue of $2,475.00.
But say you were to lower the price to $8.00 per unit to make it more attractive to customers. You would need to sell approximately 600 units to get the same revenue as you would at the $12.00 price point. This means you will need to sell twice as many units and:
- Deal with twice as many customers
- Have twice as many outgoing shipments (which doubles your shipping costs)
- Pay double the merchant fees that you would have had on 300 units
As you can see, by keeping it at $12.00, you are maximizing the sale.
Effective eCommerce Pricing Strategies You Need to Know
Many factors go into determining the perfect price for your products. Let’s go through a few of the most common and effective pricing strategies. You can use and combine them to determine what works for your online store.
Profit margin is the percentage difference between your selling price and your profit. By using a profit margin calculation, you can start determining the best way to price your products. To do this, take the basic cost of the product. Then, multiply it by a set percentage that covers your overhead costs and the profit you wish to make.
For example, let's assume:
- You buy your product for $5
- Your fixed and variable costs run $1 per item
- You want to make $1 on every item you sell
You would need to sell your product for at least $7 to make the profit margin you wished.
Of course, this is a simplified example. It doesn't include nuances like what your competitors are charging. But it does give you a starting price point.
There are very few niches of online stores that have absolutely no competitors. You can use the market to understand the industry standard. Knowing what competitors charge will help you with your pricing strategy.
Start by doing market research and checking out the competition's websites. You can see how much they are selling their comparable products for. In some cases, you can also see how well their products are selling. Some sites may list how many items have sold while others will only show customer reviews.Once you’ve done your research on their pricing, you can decide on this part of your strategy. Do you want to match their prices or try to beat them? Remember to keep all your direct and indirect costs in mind when employing this strategy. Factor in your item’s quality, too. You may be able to match/price higher if you know your condition is better. Or, alternately, match/go lower if you can source your products at a price that makes it workable.
Cost-plus pricing does not use market prices to determine a price. Instead, you’re looking internally for your prices. You’ll find your break-even point, the lowest price that you can sell a product and recover your costs. Remember to factor in both direct and indirect costs. After you’ve determined that amount, you can then add in your markup for the profit you can make on that item. You can add in a percentage for your whole inventory or mark products up individually. You may find that some prices seem too high. In that case, you'll need to either find ways to reduce your cost, or lower the markup on the item. There are many online product price calculators to help you with this task.
When you have a unique product, high demand, and few competitors, you can put a high price tag on your product. You can price your product as high as your target consumer would be willing to pay. Effective branding can play a big part in this strategy. Once customers trust your brand, they may buy your products simply because of it. This is a strategy commonly used by large companies. For example, Apple produces tech products with an exclusive operating system. Many people are willing to spend more for them in comparison to products from other brands.
Economy pricing is putting a low price on your product to get the largest amount of sales. It's best when competition is high and your target customer is very price-conscious. This may work for you if you can source your products for much less than the competition. And if you’re willing to take slightly less profits in exchange for higher sales numbers.
But watch out: trying to get the lowest price is not always the best. If you only care about how low your price can go, you can harm other parts of your business. As Seth Godin said, "The problem with the race to the bottom is that you might win. Even worse, you might come in second."
This strategy involves giving your product a low price when you introduce it. This helps you to gain market share. You then raise the price once you become established in your industry. This lets you increase profits while keeping the customer base you’ve already gained.
Bundling & Add-On Pricing
Product bundles are a combination of items sold together at a discount. They give customers the chance to get more items they want at a lower price. This upsell and cross-sell strategy helps sell more inventory. It also helps to increase the value of the items for the buyer, since they feel as though they're getting a deal. Bundles often work best when you put a high-value item together with lower-value items. This balances the profits you get from the bundle.
Bundles can be a good way to introduce people to your products. You can create a "sample" bundle that has a variety of products from your store. Some retailers produce trial sizes of their products for this exact purpose. Trial bundles entice buyers and show off new product lineups. This is especially helpful if your products come in different scents, colors, or more.
This pricing strategy also takes advantage of products that sell well together. For example, a customer can buy a bundle to get the main product and its accessories together at a discount. You can also sell non-physical addons like warranties as part of a bundle.
Investor and business tycoon Warren Buffett once said, "Price is what you pay. Value is what you get." Psychological pricing is all about emphasizing the value.
Psychological pricing relates to how people think and feel about prices and shopping. When you understand these things, you can optimize your prices for that behavior. One of the most effective examples of this is using nines in your price. This is why almost everything these days has a price ending in 99.
Consumers want a good bargain, and this small trick makes things seem more affordable. For example, say your most expensive items are several hundred dollars. You can make your $500 diamond ring seem more reasonable by making it $499. Of course, this $1 difference isn't a lot when it comes to the profit margin. But the psychology of consumer behavior makes it look like a better deal.
Psychologists have found that most consumers focus on the first digit in a price more than the last. 499 sounds much better than 500, even if it’s extremely close to 500. The same is true with prices like $9.99 compared to $10 or $59 compared to $60.You can also use price to signal intangible product features. These can include quality, fairness, or others. For example, customers associate higher prices with higher quality. Pricing your product higher than a competitor can give this impression.
A great way to encourage sales with your pricing is by holding promotions. These can include coupons, discounts, and more. You can base discounts on percentages or flat amounts. By offering a discount, you've made a product affordable for more customers. Many shoppers wait until a sale to buy something they've been wanting. There are many types of price discounts, including:
- Quantity Discount: The more a customer purchases, the bigger the discount.
- Seasonal Discount: Lower rates depending on the season, time of day, etc.
- Promotional Discount: This is a short-term discount designed to increase sales.
Your pricing strategy is crucial to your success. You need to understand your costs before you set your prices. You also need to know who your customers are and what their budget is. Once you have these down, you're ready to price your products. Possible pricing strategies include:
- Margin pricing
- Market pricing
- Cost-plus pricing
- Premium pricing
- Economy pricing
- Penetration pricing
- Bundling and add-on pricing
- Psychological pricing
- Price discounts
Each of these has its advantages, so use the methods that are best for your business. Remember you can also change your pricing strategies if something isn't working. You can also use different strategies together to determine your perfect price. Make sure you experiment and see how customers respond, and don't be afraid to change your tactics. Soon you'll find the best prices for your bottom line.