With online shopping becoming the norm, ecommerce businesses are always looking for ways to set themselves apart from competition. One way to do this is by offering competitive prices. When it comes to product pricing, ecommerce businesses have a unique challenge. Unlike brick-and-mortar stores, ecommerce businesses need to be more strategic in how they price their items. There is no easy answer when it comes to getting ecommerce pricing right—it really depends on your business. If you’re selling a generic product, it might be worth it to undercut your competitors in order to get more sales. However, if you’re selling a unique product, people might be willing to pay more for it.  

The most important thing to keep in mind when pricing your products is to make sure that you’re making a profit overall. Many ecommerce businesses focus so much on getting sales that they forget to make money. It’s important to do your research and figure out how much it costs you to produce your product and then add a margin to that.

Factors influencing your pricing strategy

According to research by Prisync, 60% of consumers consider pricing as the first criteria of their buying decision, which makes pricing one of the crucial pillars of a business. When choosing the right pricing strategy, businesses need to consider many factors—the cost of producing the product or service, the competition's prices, and the perceived value of the product or service. It's also important to be flexible and adaptable so the business can adjust its prices as needed in order to stay competitive.

Why do you need a pricing strategy?

A pricing strategy is important because it can help businesses maximize their profits and stay competitive in the market. It also helps businesses respond quickly and effectively to changes in the market. There are a few reasons why you need a pricing strategy for your ecommerce business. For that, you need to think about what you're trying to accomplish with your prices.

➤ Are you looking to make a profit?

➤ Increase market share?

➤ Lower costs?

Once you know your goals, you can develop pricing strategies that will help you reach them.

Choosing a pricing strategy that is right for your business and customers

Every business is different, so there is no one-size-fits-all solution when it comes to pricing. The best way to find a pricing strategy that works for your business is to experiment and see what works best. Pay attention to your sales and profits to see if there is a correlation with the prices you're charging.

While you want to ensure your business makes a profit, you don't want to scare away your customers. Keeping the below factors in mind will help you decide the optimum price:

➤ Cost: You need to make sure you're covering your costs and making a profit on each sale.

➤ Competition: How does your price compare to those of your competitors? If you charge too much, you may lose customers to them.

➤ Budget: Not everyone can afford to pay top dollar for products or services. Try to find a pricing point that appeals to as many people as possible.

➤ Value: How much value is your product/service adding to the customer's life?

When it comes to pricing products for your online store, there are a few key things to keep in mind in order to maximize your profits. Here is a guide to the different pricing strategies and how to price products for maximum profit:

1. Cost-based

One of the most common pricing strategies is cost-based pricing. This involves setting prices based on the costs of production, including materials, labor, and overhead. Costs can be divided into three categories: fixed costs, variable costs, and sunk costs.

Fixed costs don't change regardless of the number of units sold, such as rent or payroll. Variable costs are incurred with each unit sold, such as materials or shipping. Sunk costs are irrecoverable expenses, such as advertising or research and development.

Ecommerce businesses should price their products based on their variable and fixed costs in order to break even on each sale. The simple formula is:

Price = (All costs involved) + Desired Profit

For example, if it costs $100 to create a product and the business has the following:
- $20 fixed costs

- $10 variable costs

- Wants to make a 20% profit

They should charge $150 for the product.

2. Competitor-based

With a competitor-based pricing strategy, prices are based on what your competitors are charging for similar products or services. When pricing products, many ecommerce businesses look to their competitors for guidance. This is especially true when it comes to new products or those in a competitive market. Businesses using this strategy need to be careful not to price themselves out of the market while making sure that they're still making a profit on each sale.

For example, in the image below, you can see how Pepsi and Coca-Cola price their products competitively close to each other to ensure that neither of them loses out in the market.

3. Value-based

A value-based pricing strategy is based on the perceived value of a product or service to the customer rather than on the actual costs of producing and delivering it.

Adopting a value-based pricing model is essential for success in today’s competitive market. It can help to differentiate your product from those of your competitors. When customers can see that they are getting good value for their money, they are more likely to choose your product over someone else’s.

For example, according to a Business Insider article, Apple's reputation and brand value allows it to charge a premium over other electronic devices available on the market, which has led to a huge price gap in the industry.

 Source: Statista

4. Retail pricing

A common pricing strategy is retail pricing, where prices charged by businesses are based on the costs of production with an additional markup for the retailer.

Have you tried booking an airline ticket for a given flight on two consecutive days? It's quite likely that the price varies each time you check the rates. Some online retailers use this technique—called dynamic pricing—where the price of a product changes based on demand. When a product is in high demand, the price goes up. When there is low demand, the price goes down. Other retailers use fixed pricing, which means that the price of a product is set and doesn't change.

Retail price = Cost of goods + Profit

For example, repeatedly looking for flights triggers ticket prices to rise above the usual rates.

Source:NextAdvisor

5. MSRP

When it comes to setting prices for their products, many ecommerce businesses adhere to the manufacturer's suggested retail price (MSRP). MSRP is the price the manufacturer recommends that the product be sold to retailers. It is typically higher than the wholesale cost, which is the price paid by the seller to the manufacturer.

There are a few reasons ecommerce businesses might choose to stick to MSRP pricing:

➤ First, by sticking to MSRP, businesses can ensure they aren't undercutting their competitors.

➤ Following MSRP allows businesses to maintain a certain level of prestige and perceived value for their products.

➤ Adhering to MSRP can help protect businesses from being too pricey.

Typically, the MSRP may not be too high or too low from the wholesale price and might be very close to basic markup values.

For example, most products on the market follow the MSRP method to price their products.

Source: Market Business News

6. Keystone pricing

Originated in the jewelry trade in 1896, keystone is a pricing model that is based on the idea that retailers should mark up their products by two times the cost of goods. This markup helps to cover the additional costs of doing business, such as advertising and employee salaries.

Keystone pricing must be done keeping in mind the future discounts and sales that might come up. This will help sellers keep a decent profit margin even after markdown. Using this strategy will help you to price your products in a way that allows you to make a profit while still being competitively priced.

Keystone price = Wholesale price x 2

For example, if the wholesale price of a product is $100, the keystone price is twice that, i.e. $200.

7. Multiple/Bundle pricing

Bundle pricing is when you offer a package of products or services at a reduced price. This can be an effective way to increase sales, as customers may be more likely to purchase a package deal than individual products or services.

There are several things to keep in mind when using bundle pricing:

➤ Make sure the products and services in the bundle are related. Customers are more likely to purchase a package deal if the products and services are related.

➤ Keep the price point low. Bundles should be priced lower than if the products and services were purchased separately.

➤ Promote the bundle heavily.

Use this strategy to create a higher perceived value for a lower cost—which can ultimately lead to driving larger-volume purchases.

If not done right, you'll have trouble trying to sell them individually at a higher cost, creating inconsistency for consumers. There is no fixed formula for bundle pricing. Sellers may fix prices as they deem appropriate.

For example, in the image shown below, bundle pricing offers a better deal than buying the products individually.

Source: Revenue Management Labs

8. Penetration and discount pricing

Penetration pricing is a technique employed in ecommerce whereby a company sets a low price for a product in order to achieve market share quickly. The idea is that once the company has captured a large percentage of the market, it can then raise prices and still maintain its market share.

This technique is often used in conjunction with discounting, whereby the company offers products at a lower price than its competitors. By doing so, the company can lure customers away from its competitors and gain market share. The discount pricing strategy can be effective for attracting a larger amount of traffic to your store. Many brands, especially in the clothing segment, also use this to get rid of old inventory, which has made the "end-of-season sale" a widespread strategy today. There is no fixed formula for penetration pricing either.

We can use a real-time example of how Netflix, according to Product Plan, avoided any significant price hikes to build and grow a steady customer base in the market as compared to its competitors to become the biggest streaming platform in the U.S.

9. Loss-leading pricing: Increasing the average transaction value

Have you visited a store during a sale to buy something and also ended up buying things you hadn't planned for? The retailer here has effectively employed loss-leading pricing by offering a product or service for free or for a small price to get customers to buy more expensive items. The loss-leader pricing strategy is a popular marketing technique where businesses offer products or services at a reduced price in order to attract customers and increase sales.

In the context of an ecommerce store, customers might end up buying or checking out with items that aren't placed under discount while visiting your online store during a sale or discount offering. There are several benefits to using loss-leading pricing as an ecommerce pricing strategy:

➤ Attract more customers who may be interested later in purchasing higher-priced items.

➤ Increase customer loyalty by encouraging customers to return to your store to buy additional items.

➤ Improve the bottom line by increasing overall sales volume.

➤ Effective in increasing the average transaction value because once the customer has bought a low-priced item, they're more likely to buy another one.

➤ Aid in increasing revenue and profits, customer loyalty, and brand awareness.

Reliance Jio, according to Hyais, followed a losing strategy by offering its products or services at a lowered rate compared to the market price. Reliance Jio, in the beginning, allowed customers to receive free services and access to voice calls for as long as they liked by offering free SIM cards to customers. Doing this enabled it to expand its customer base significantly and gain a larger market share.

Source: Jio

10. Psychological pricing

In recent years, psychological pricing has become a popular ecommerce pricing strategy. It uses non-standard prices to influence the buyers' decisions. This approach involves setting prices not just to cover the cost of the product or service, but also to evoke an emotional reaction in consumers. There are a few different tactics that can be used within this strategy.

➤ One common tactic is to use odd numbers instead of even numbers. Pricing at $9.99 instead of $10.00 is more profitable because the number nine is seen as being close to 10, but not quite there, which creates a sense of urgency and encourages people to buy before the price goes up.

➤ Another popular psychological pricing tactic is using prices that end in .95/- or .99/-.

These types of prices can be more persuasive than standard prices, because they seem like better deals to consumers.

Source: widerfunnel

11. Premium pricing: Above-competition pricing

A premium pricing strategy means that your products or services are priced above those of your competitors.

There are several reasons why you might want to price your products above the competition:

➤ First, it can help you attract high-value customers who are willing to pay more for better quality or features.

➤ This can make your business appear more prestigious or exclusive.

➤ It shows that you’re confident in your product and believe that it’s worth more than the competition.

➤ It differentiates your product from the competition and makes it stand out, which encourages customers to buy from you rather than from a competitor.

➤ Finally, it can help you earn a higher profit margin on each sale.

When it comes to pricing your products, you have to find the right balance between being competitive and charging a premium. Charging too much will scare away potential customers, but setting your prices too low may result in lower profits or even losses.

Many ecommerce businesses make the mistake of pricing their products below the competition. While this may seem like the logical thing to do, it’s actually not the best strategy. In order to be successful, you might need to price your products above the competition. 

Source: Teachingmensfashion

12. Anchor pricing: Creating a reference point for shoppers

Anchor pricing is one strategy that can help ecommerce businesses create a reference point for shoppers. Anchor pricing is the process of setting one product's price at a higher level than others in order to make the lower-priced items seem like a better deal. When customers consider buying a product, they often look at the price and compare it to similar products. If the price is too high, they may decide not to buy the product. Anchor pricing can help reduce this hesitation by providing a lower-priced option that customers can use as a reference point.
Anchor pricing can be used in two ways:

➤ When used as an initial price, the anchor price is set at a lower level than the regular price. This makes the regular price seem like a better deal in comparison.

➤ When used as a discount, the anchor price is set at a higher level than the regular price. This makes the discounted price seem like a better deal in comparison.

For example, in the image shown below for a beds' website, the Twin and Twin XL beds are featured at a better price than the Queen bed.

Source: invesp

Setting wholesale prices: What you need to know 

When pricing products for wholesale, there are a few important factors to keep in mind. The price you set will depend on the product itself, your target market, and your desired profit margin. One thing to consider is your costs. This includes the cost of the product itself, shipping, overhead, and any other expenses associated with your business. You need to make sure you are making a profit on each sale.

Wholesale price = Cost of goods manufactured (Total material cost + Total labor cost + Additional costs and overhead) + Profit margin

Here are a few tips for setting wholesale prices:

➤ Do your research. Find out what other similar products are selling for, and factor that into your price point.

➤ Keep your margins in mind. You'll need to make sure you're making a profit on each sale.

➤ Consider your target market. If you're targeting budget-conscious consumers, you may want to offer lower prices than if you're targeting luxury buyers.

➤ Be flexible. Don't be afraid to adjust your prices if necessary; it's important to stay competitive in the marketplace.

Source: Erplain 

Price discrimination

One of Microsoft's bestselling products is Office 365, which is priced at a special rate for students. Frequently, they are given it for free. But if you are a regular user, you have to pay the full price. This is a classic case of price discrimination, when a business charges different prices for the same product or service.

This can be done in many ways, such as by offering discounts to certain customers, or by charging more for products that are in high demand. There are several reasons why businesses engage in price discrimination. The most common reason is to maximize profits. By charging different prices to different customers, businesses can extract more money from those who are willing and able to pay more.

Price discrimination can be broken down into three categories:

➤ First degree — When a business charges different prices to different customers for the same product or service.

➤ Second degree — When a business charges different prices for the same product or service, but it is based on quantity purchased.

➤ Third degree — When a business charges different prices for the same product or service, but it is based on qualities that are not related to the quantity purchased.

Below is an example of a third-degree price discrimination strategy.

Price skimming

Price skimming is the process of setting a high initial price for a new product or service in order to limit the number of buyers and maximize profits. The goal is to lower the price as demand increases gradually and eventually reach the point where the average price is equal to the marginal cost of production. This allows the company to make profits from its early adopters.

Another reason for price skimming is when a company is trying to capture market share from its competitors. In this case, the company will charge a low price in order to attract more customers. However, once it has captured most of the market share, it will increase the price in order to maximize profits.

There are two main types of price skimming:

➤ Horizontal — When a company raises prices for all of its products.

➤ Vertical — When a company raises prices for a new product or service.

Apple iPhones, for example, often utilize a price-skimming strategy during the initial release period. When products built by rivals are released, the price of the product drops to help maintain a competitive edge with respect to them.

Source: Financial Times

Dynamic pricing

Under dynamic pricing, prices on products and services are adjusted in real time based on demand, availability, and other factors. Dynamic pricing has become increasingly popular in recent years, as online retailers have sought to take advantage of real-time data on customer behavior. By monitoring factors like search terms and click rates, retailers can identify patterns in customer behavior and adjust prices accordingly.
The way dynamic pricing works is by taking into account how much buyers are willing to pay for a product or service at any given time. This can vary greatly depending on the time of day, the day of the week, or even the current events or news.

For example, despite criticism of Uber's unfair price surges, they stand by their algorithm and claim that it helps the system manage supply and demand issues, and that it provides drivers with incentives to work in difficult circumstances.

Source : thrillist

Add up your variable costs (per product)

Variable costs can change depending on how much of the product is produced, delivery location, and other factors. Ecommerce sellers need to be especially aware of variable costs, as they can add up quickly when shipping products across different countries.

In general, there are three types of variable costs that impact pricing decisions:

➤ Production — The cost of making the product itself, including materials and labor.

➤ Shipping — Shipping costs are incurred whenever a physical product needs to be transported to a customer. This might include the cost of packaging materials, as well as transportation and delivery fees.

➤ Administrative - Finally, these include all the expenses related to running a business, such as marketing and accounting.

There is no one perfect answer when it comes to pricing products. It's important to experiment and find the right price point that works for your business. But keeping variable costs in mind is a good place to start.

For example, if a seller decides to buy all the inventory instead of making it themselves, it may cost them extra per finished product. Shipping the product locally costs way less than shipping it globally. Lastly, marketing a product internationally is more expensive than doing it locally. These factors need to be kept in mind when pricing your product in order to make a decent profit margin.

Don't forget about fixed costs

We've seen that fixed costs such as rent, insurance, and wages don't change with the quantity of products or services produced.

For a small business, fixed costs can be a significant portion of its expenses. Again, this is why determining how much to charge for products is complex, as there is no one-size-fits-all answer.

Businesses should also be aware of the fact that the more products they sell, the lower their fixed costs will be as a percentage of sales. For this reason, it is often beneficial for ecommerce businesses to offer a wide variety of products rather than just a few select items. By doing so, they can spread out their fixed costs over a larger volume of sales and reduce their overall cost per sale.

For example, ecommerce businesses have to pay for web hosting, cost of goods sold, shipping and handling, credit card processing fees, shipping, advertising expenses, and other related services, regardless of how many items they sell.

Is there an ideal profit margin?

When pricing products, it is important to add a profit margin that will cover the cost of goods sold (COGS) and other associated expenses, such as shipping and handling. A common way to calculate a product's price is to start with the COGS, then add a percentage for overhead and profit. This overhead and profit percentage will vary depending on the type of business. For example, a retailer might add 40% for overhead and profit, while a manufacturer might add only 10%. A good rule of thumb is to price your product at two to three times its COGS.

Profit margin is calculated by dividing the company's profit by its revenue. This equation gives a percentage that reflects how much of each dollar brought in is kept as profit.  The higher the margin percentage, the more profitable the product. Margins can vary greatly between products and industries. While there is no magic number for an ideal margin percentage, most businesses try to keep their margins above 20%.

According to IBIS World, the industries with some of the highest profit margins in the US in 2022 include land leasing, industrial banks, stock and commodity exchanges, storage and warehouse leasing, etc.

Build your own strategy

A custom pricing strategy is when a business sets prices for their products based on their manufacturing costs and customer's ability to pay. Businesses can use this strategy to build customer loyalty by rewarding loyal customers with special discounts and offers like supermarket coupons or credit card points. 

It's also important to consider how you want your customers to perceive your product — is it a high-end item or a budget-friendly option? Once you've determined what you're selling and whom you're selling it to, you can start thinking about setting a price.

If you're unsure what the right price is, it can be helpful to test the different pricing strategies mentioned above to decide which works best for your respective businesses.

Conclusion

When pricing products, it's important to remember that you're not just competing against other businesses, but also against other products. To price your product correctly, you need to understand what it's worth to the customer and how it compares to the competition.

In conclusion, pricing your products for maximum profit is a delicate balancing act. By doing your research and setting a price that is fair for you and your customers, you can ensure that your business is successful. You need to find the right price point that will cover your costs while also making a healthy profit. Don't forget to consider your target market and what they are willing to pay. Use the tips in this guide to help you find the right price for your products and start making more money!