E-commerce pricing strategies

Pricing your products is one of the most challenging things in E-commerce. It will affect how much you sell, your margins, and even your brand. There are lots of different pricing strategies, however, there isn’t a one-fits-all formula that will work for every different type of E-commerce businesses.

More than that, pricing is a process. You will have to iterate many times to find what works best for you. The ultimate goal is to find a price for each product you sell that both maximize sales and profit.

At PricingBot, we help E-commerce companies with competitor price monitoring and we talk a lot with our customers about the different pricing strategies they use. We have seen lots of different strategies and pricing factors over the time and in this blog post we will detail the different factors to think about when deciding how to price your products, and the different strategies associated.

Pricing factors and strategies

This list is not exhaustive, and each strategy has its pros and cons.

Cost

Obviously, one of the first factor to look for when deciding your pricing is how much the product costs you. When you calculate the cost of the product, you can take everything into account: the production/buying cost, the labor cost, promotional cost, the support cost that can be associated with the product (Electronics), the return rate… This cost will give you the minimal price (minus taxes) that you have to sell your product in order to break even. The traditional pricing strategy, called “Cost-Plus” or “Cost-based” strategy is to apply a flat markup to this price.

Here is an example with a T-shirt that costs $10 with fixed and variable costs, and a 50% markup.

Cost plus pricing
Cost-plus pricing

Pros

Cost-based pricing is simple and can be done quickly. The markup being added to each product, you are sure to make some profits, and you can justify your prices.

Cons

It ignores the competition. Cost-Plus pricing can have dramatic effects: You end up either selling your products too low and missing huge profits because it ignores the price customers are willing to pay or selling too high.

Branding

Your brand positioning should be reflected in your pricing too.

Psychological pricing or price ending is a pricing/marketing strategy that uses “odd prices” meaning a little less than round numbers. This is based on controversial theories that certain prices have a deep psychological impact. For example, a $9.99 could be more associated with a $9 spend than a $10 spending, despite being closer to $10!

Prestige pricing is the exact opposite! Prestige pricing is the fact of turning odd prices into round prices. Some companies only use prestige pricing, because of their customer value other things than the core/functional value such as self-expression, emotional value, social value…You don’t spend $10,000 on a Rolex to know the time, you do it because you love the brand, because of the status symbol etc. That’s why Rolex are generally priced at a round number, and not $9,997.98! Prestige pricing is common for high-end goods like cars, jewelry, wine, luxurious clothing brands…

product perception
Product perception

Value & Unique selling Proposition

When someone buys on your website, he is not only purchasing the product you sell, he is also buying:

All those things depend on the product. For example, when buying clothes, people tend to be more interested in the return policy than when buying electronics. Sometimes, the shipping time itself can be the only thing that matters. For example for replacement pieces, chargers for electronics… tends to be the kind of products that people need as soon as possible.

All these things lead to a pricing strategy called value-based pricing. The overall goal here is to sell your product based on the value/benefits it provides to your customer, and not on its cost. This is a fascinating subject, sometimes, increasing prices can lead to a higher perceived value The drawback of value-based pricing is that you can miss out on potential buyers that are price sensitive.

A note on MSRP and MAP

MSRP or Manufacturer suggested retail price is a recommended price for retailers. MAP pricing stands for Minimum Advertised Price. The advertised is the important word here, the retailer generally has the right to sell a product at any price, but sometimes the manufacturers will enforce a minimum public price. Usually, manufacturers will reward compliant retailers with wholesale.

MAP policy is often used by US manufacturers, and in theory, it is supposed to lead to healthy competition, by avoiding a price war between retailers. MSRP, on the other hand, is more about educating the customers about the “fair price” for a product, and as a way to calculate profits for retailers.

In practice, the MAP is often violated by online retailers. Sometimes you won’t have the choice to comply, because if you don’t, your manufacturer could ban you from selling its products according to the MAP agreement you signed.

Competitive pricing vs A/B testing

A/B testing is a way to test which variation of a unique variable is the most effective. It can be used in different domains, like changing the email subject to test the open rates, changing the color/layout on a website and check the effect on conversion rates, and of course on pricing. The problem with A/B test on pricing is that for most E-commerce company the sales volume needed to be sure that we observe a real statistical difference between A and B is way above their current sales number.

In e-commerce, a typical conversion rate on a product page is between 3% and 5% (1). Let’s take an example, you sell a T-shirt for $19 with a 4% conversion rate. On average, you have 1000 visitors on this product page per week and 40 sales. You decide to lower to price to $15 dollars and see that you made 50 sales with 1000 visitors to the product page. Hooray, you’ve increased your conversion rate by 25%… Not so fast, unfortunately, the maths tell us that this conclusion is wrong.

To answer the question: “Given a 3% conversion rate on a product, how many sales do I have to make to be 95% sure that a price change affects on my conversion rate?” we can use the Chi-squared test. Without digging into the mathematical details, the Chi-squared test can help you determine whether the differences in your conversion rate could have happened randomly, or show a real statistical difference.

a/b test on price
You can check our A/B test checker

Conclusion

Generally, if you’re not getting hundreds of sales per month for a specific product (meaning dozens of thousand visitors on this product page), A/B tests on pricing are worthless and don’t have any statistical significance.

Competition-based pricing

This is why competition-based pricing can help you. If you don’t have the volume to perform A/B testing on prices, you can still leverage the different competitors in the market, and by monitoring their prices you can have a better understanding of the pricing dynamics in your market. It’s not about a race-to-bottom, you don’t have to align yourself on the cheapest, but it will give you some boundaries, the sales dynamics. Once you have enough data, you will be able to take action and adapt your prices in order to sell more or to increase your profits.

Of course, doing this manually is a time-consuming task, and PricingBot can help you with this. Identifying the competitors you need to watch can be a difficult subject. Monitoring too many competitors is often useless, choosing the right ones is the key, and we will see this in another blog post.

I hope you enjoyed this post. If you want to get some tips about pricing strategies and E-commerce don’t hesitate to subscribe to our newsletter!

Sources

1: https://www.smartinsights.com/ecommerce/ecommerce-analytics/ecommerce-conversion-rates/