8 Ecommerce Pricing Strategies to Maximize Profits | ShipBob

The cost-plus pricing strategy (also known as 'markup pricing,' 'breakeven pricing,' or 'cost-based pricing') generates profits by adding a ... Product Pricing Integrations Customers Blog Support Login GetStarted Product Pricing Customers Blog Integrations Support LogIn GetStarted 8ProfitableEcommercePricingStrategiesforYourOnlineStore ByShannonCallarman July1,2020 Aneffectivepricingstrategycanmakeorbreakyourecommercebusiness.Doyousetpriceslowtostaycompetitivebutreduceprofits?Or,doyousethigherpricesbutriskmissingoutonasmanynewcustomers? Usingtherightpricingstrategyforyourecommercebusinesscanhelpscaleyourbusinessandgrowyourrevenueandprofits.Althoughproductpricingisadifficulttask,therearewaystoidentifytherightpricingstrategythatfitsyourbusiness.  Inthisarticle,we’llgooverwhyyouneedanecommercepricingstrategyandtheeightmostcommonpricingstrategiesusedbyecommercebrands.  Whatisanecommercepricingstrategy? Anecommercepricingstrategyisawellthought-outplanthathelpsdeterminehowyouaccuratelypriceproductstoincreasesalesandprofitswhilestayingcompetitive.Differentecommercepricingstrategiesareuseddependingonthetypeofproductssold,productdemand,andcompetition.  Theimportanceofhavingadefinedpricingstrategy Therightecommercepricingstrategyisdifferentforeachbusiness.Andevenasabusinessgrows,itmightneedtoadjustitsstrategy.Forexample,asimplecost-pluspricingstrategyfocusesongeneratingprofitfromeachsale.Cost-plusworksfortheearlystagesofanecommercebusiness,butmightnotbesustainablelong-term.  Asyourbusinessgrows,costsmightgrowexponentially,andthetruecostperorderand/oracquisitioncostcanriseaswell.Youneedanecommercepricingstrategythatwillhelpyouscaleyourbusiness.Therearemanydifferenttypesofpricingstrategiesusedbyecommercebusinessesthatdon’tharmprofitsinthelongrun. Evenifyourecommercebusinessiscurrentlyprofitable,therecouldbeopportunitiestoimproveprofitsfurtherifyoucontinuetoreevaluateyourpricingstrategyandimproveuponit. Createapricingstrategythat’srightforyourbusinessandcustomers Manytimes,anecommercepricingstrategyisbasedonthetargetaudience,whatyouridealcustomersarewillingtopay,andwheretheycurrentlyshopforsimilarproducts.Therightpricingmodelwillcomedowntowhatshoppersarewillingtopayforyourproductbasedonseveralfactors,suchasbrandreputation,demand,andcompetition.  Whoisyourcustomer? Developingbuyerpersonascanhelpyoubetterunderstandyourpotentialcustomers.Byknowingthedemographics,traits,disposableincome,andbuyinghabitsofyourtargetaudience,youcancreateapricingstrategythatfitsyourbusiness. Forinstance,somecustomersaremorecost-consciousnesswhileothercustomersarewillingtoapremiumpriceforcertainproducts.Besuretodoyourresearchandnotimplementanecommercepricingstrategybasedonaguess.  Whatmakesyourbusinessshine? Totrulydifferentiateamongthousandsofecommercebrands,yourbusinessneedsawaytostandout,andtherightpricingstrategycanhelp. Forexample,internationalretailerH&Moffersstylish,sustainable,andhigh-qualityclothingatanaffordableprice.Theirpricingstrategyhashelpedthembecomearenownedbrandbecausetheywereabletofillagapintheclothingmarket. The8pricingstrategiesforecommerce Pickingtherightecommercepricingstrategyisgoingtorequiretrialanderror,aswellasreevaluationovertime.Whileasimplecost-pluspricingstrategymighthelpwithinitialgrowth,itcouldhamperyourbusinessinthelongrunascostsbegintorise. Choosingtherightpricingstrategydependsonseveralfactors,fromhowmuchitcoststoproduceyourproducttocustomerdemand.Hereareeightdifferentpricingstrategiesusedbygrowingecommercebrands.  1.Cost-pluspricing Thecost-pluspricingstrategy(alsoknownas‘markuppricing,’‘breakevenpricing,’or‘cost-basedpricing’)generatesprofitsbyaddingafixedpercentagemargintothecostofaproduct. Cost-plusisoneofthemostbasicandstraightforwardpricingstrategiesfornewand/orsmallerecommercebusinessesbecausetheformulaissimpleandeasytocalculate. Let’ssayyousellshoesonline.Tousecost-pluspricing,you’dfirstgatherthecostsofmaterials,labor,andfixedcostsperproductandaddthemup: Materials:$10 Labor:$15 Fixedcosts:$20 Totalcost:$45 Tomakeaprofit,theshoeshavetosellforatleast$45.01.However,weknowthatcharging$0.01morethantheproduct’stotalcostisn’tviablesinceyoualsohavetoaccountforcustomeracquisitioncosts,shippingcosts,taxes,ecommercereturns,andotherexpenses. Mostecommercebusinessesachieveaprofitmarginbetween50-100%.Ifyourgoalisa50%profitmargin,youhavetocharge$90foronepairofshoes.You’llthenmakeaprofitonthesalewhileaccountingforthetruecostperorder. Cost-pluspricingpros Cost-plusisapopularpricingstrategybecauseit’seasyaslongasyourpricesarehigherthanthetruecostperorder.Yourfinanceteamoraccountantcanquicklyhelpyousetupacost-plustrackingsystemtocheckhowyourbusinessisperforming.  Cost-pluspricingcons It’spossibletomessupthecalculationswhenusingcost-pluspricing.Ifdoneincorrectly,yourbusinesscanlosemoneyoneachsale.Ifcostsofmaterialsunexpectedlyincrease,butproductpricesstaythesame,you’llloseoutonprofits.Youcouldincreaseyourprices,butthatcouldderailcurrentcustomersfromshoppingatyourstoreagain. 2.Competition-basedpricing Mostoftenusedforcommodities,competition-basedpricingisbasedonofferingbetterpricesthanyourcompetitors.Thismeanscomparingyourpricestothepriceofsimilarproductsofferedbyyourcompetitorsacrosschannelsandmakingpricingadjustmentsaccordingly. Forexample,ifyourunastreetwearbrandthattargetsGenZcollegestudents,youmightneedtouseacompetition-basedpricingstrategytocompetewithotherstreetwearbrandstargetingGenZ.Spendingtimeandefforttoresearchyourcustomerscanyielddividendsforyourbusiness. Competition-basedpricingpros Competition-basedpricingcanhelpyoubeatthecompetitionbyluringintheircustomerswithcheaperprices.Ifyou’relookingtoattractcost-consciouscustomers,thisisagoodoptionforyouastheyarewillingtogiveupbrandloyaltytosavemoney.  Therearealsopricingappsavailable,likePriceIntelligentlyandPrisync,thatmakeiteasytodomarketresearchandsetpricesbasedoncompetition. Youcanalsofactorinhowmuchyouandyourcompetitorschargeforshipping,asofferingfreeshippingcanbeanothercostdifferentiatoroversimilarbrands. Competition-basedpricingcons Unlikebrick-and-mortarstores,customerscaneasilyvisitotherecommerceshopsinafewsecondsiftheydon’tlikeyourprices.Ifyoucan’tcontinuetoloweryourcoststomakecost-consciouscustomershappy,you’llstarttolosesales. Competitivepricingcanleadtoa‘racetothebottom.’Ifacompetitorchoosestocompetewithyouonprice,bothbrandswillcontinuetocutprices,whichcanultimatelymakeyourproductseemlessvaluableanddesirable. 3.Value-basedpricing Value-basedpricingfocusesonfiguringoutthemaximumamountacustomeriswillingtopayforyourproduct.Value-basedcustomersfocusmoreonqualityand‘fairness’overanythingelse.Customerslikethisneedtoknowthattheproductyou’resellingisofthebestquality,fairlysourced,eco-friendly,and/orhardtocomeby.  Forinstance,ifsellingjewelryonline,costumejewelrywouldbepricedonthelowersidebecausethecustomerisawareit’smadewithlow-costmaterials.Higher-endjewelry,likeanengagementringfromTiffany&Co.,wouldsellatahigherpricebecausepeoplearewillingtopaymoreforpremiummaterialslikediamonds.   Value-basedpricingpros Value-basedpricingcanbeappliedtoalltypesofproductsbecauseoftheperceivedproductvalue.Valuepricingalsohelpsyouunderstandhowvaluableyourproductsare.Ifyoufindcustomersarewillingtopaymorethanyoucurrentlycharge,youcouldintroduceanewlineofproductsatahighercost.  Value-basedpricingcons Value-basedpricingcanbetoughtogetright.Youhavetospendtimeonstudiesandfocusgroupstofindthebestpricepointthatkeepscustomershappywithoutcausingadeclineinsales.Also,theperceivedvalueofaproductcanchangeovertime.   4.Priceskimming Priceskimmingisastrategywhereaproduct’sinitialpricedecreasesovertime.Priceskimmingispopularfortechproductsthatbecomelessvaluableorobsoleteasnewtechnologyisintroduced(e.g.,VCRsanddigitalcameraswereonceinhighdemand,butasDVDsandsmartphoneswithhighqualitycameraswereintroducedtothemarket,theoldtechbecamelessdesirable).Asnewerproductmodelsbecomeavailable,oldermodelsbecomecheapertopurchase.  Technologyproductslikesmartphones,televisions,computers,andgameconsoleshaveasegmentofcustomersknownas‘earlyadopters.’Thesetypesofcustomersarewillingtopayahigherpriceforthelatestandgreatest. Anotherexampleisseasonalproducts,likeholidaydecororwinter/summersportsgear,whichusuallygoesonsaleorclearanceduringoff-seasons.  Priceskimmingpros Priceskimmingisagoodstrategyforbrandsthatofferhigh-demandproducts,technology,orseasonalitems.Astimegoeson,customerswillmostlikelywantnewerproducts,butyoucanstillbenefitfromputtinglastyear’sproductsonsaletoattractbudgetshoppers.  Priceskimmingcons Priceskimmingisnotagoodoptionfornewerandsmallerecommercebrands.ApplecanpriceskimbecauseiPhonesareinhighdemand,theyconsistentlyputoutnewermodelswithbetterfeatures,andthebrandhassomeofthemostloyalcustomers.Priceskimmingworksonlyifyouhaveloyalcustomersandcanattract‘earlyadopters.’  Priceskimmingdoesn’tworkforbusinessesthatselleverydayproductsorcommodities.Ifyourcompanysellscosmetics,priceskimmingmightnotbethebeststrategyasmakeuphasashortshelflifeandisahighlysaturatedmarket.  5.Loss-leaderpricing Loss-leaderpricingfocusesonsellingproductsatalosstoenticecustomerstopurchaseamoreexpensiveproductoffering.Thecostofthelossismadeupwhencustomerspurchasesadditionalitemsthatareneededtomakethesoldproductfunctional(e.g.,aprinterandprinterink,avideoconsoleandvideogame,etc.).Theextraproductscanbepurchasedatthetimeoftheinitialsaleorlateron.  Anexampleofaproductthatusesloss-leaderpricingisrazorblades.Mostrazorsaresoldinexpensivelyalongwithacoupleofsampleblades.Butwhenitcomestimetobuynewblades,thecustomermightnoticethatthebladescomewithapremiumprice.Sincetheyalreadyboughttherazor,theymostlikelywillpayforextrablades. Loss-leaderpricingcanbeusedtoincreasetheaverageordervaluebyhavingconsumerswanttopurchasethecomplementaryproductinadditiontotheverycheaply-pricedproduct,wheretheymightbewillingtoaddmoretotheircartbecausetheyalreadyfeellikethey’regettingadeal. Loss-leaderpricingpros Loss-leaderpricingisagreatwaytoenticecustomerstomakeaninitialpurchase,andhavethemcomebacktopurchaseadditionalproductsfromyouronlinestore,increasingtheircustomerlifetimevalue(LTV).Youcanusethisasanopportunitytocreateproductbundlesorsellproductaccessoriestomakeupforthelossofsellingtheinitialproduct. Loss-leaderpricingcons Loss-leaderpricingdoesn’tworkifcustomersdon’tmakeadditionalpurchasesoriftheecommerceshippingcostisashighasthecartvalue.Theecommercepricingstrategyreliesoncustomerloyaltytotheproductand/orbrand. Withloss-leaderpricing,youwillneedtomakesurecustomershaveanexcellentshoppingexperience,sothey’rewillingtobuyfromyouagain. 6.Dynamicpricing Dynamicpricingisallaboutflexibility;pricesareneversetinstoneandcanincreaseordecreaseatanymomentduetoconstantchangesindemand. Dynamicpricingissometimesreferredtoas‘surgepricing.’AppslikeUberandLyftusedynamicpricingwhentheyseeasurgeofcustomersintheareathatneedaride,suchasbadweather,bigevents,etc.  Dynamicpricingpros Withdynamicpricing,youcandecreasepricestoincreasesalesifsalesfallbelowaspecificvolume.Or,youcanraisepricestogeneratemoreprofitwhenyouseeasalesspike.Dynamicpricingcanbecombinedwithcompetitor-basedpricingtokeepyourpricescompetitiveifyourcompetitionchangestheirprices.  Dynamicpricingcons Dynamicpricingcandrasticallyreduceyourconversionsifpricesarealwayschanging.Ifyourcustomersknowpricesaregoingtofalleventually,they’remorelikelytowaititoutbeforemakingapurchase.Insomecases,toomanypricefluctuationscanmakecustomerswaryofpurchasingfromyourecommercebusinessatallandcausethemtolosetrust. Plus,it’sverytime-consumingtoconstantlybechangingyourprices,especiallyifyouhaveahigherSKUcount. 7.Premiumpricing Thepriceofaproductconveysitsvalue.Premiumpricingisastrategyusedtopricevaluableluxuryorhigh-costitems.Withpremiumpricing,thegoalistocommunicatethatyourproductsorbrandisrenownedand/orsignifiesstatus.Oneofthebiggestexamplesofthisisdesignerclothingandaccessories. Premiumpricingpros Premiumpricingcanbeaprofitablestrategybecauseyou’reonlytargetingindividualswhocanaffordtopurchaseyourproducts.Withimprovedtargeting,youhaveloweradcostsasyouaren’ttargetingthegeneralmarket.  Premiumpricingalsomeansyourproductsaremorelikelytobewornbycelebritiesorfamouspeople.Youcanusethistogaincelebrityendorsementsorrunmarketingcampaignswithstarstoincreasebrandawarenessandaimtobealuxurybusiness. Premiumpricingcons Premiumpricinglimitsthenumberofpotentialcustomersyoucantarget.Ifyourbrandmessagingandadcampaignstargetthewrongaudience,youcanendupwithalotof‘windowshopper’visitorsthatdon’tconvertintopayingcustomers.  Shopperswhopayforapremium-pricedproductwillalsoexpectmorefromyourbrand,suchasapremiumshipping.Withoutastrongbrandreputation,positivecustomerreviews,andevidenceofproductsbeingofhighquality,you’llhaveahardtimemakingasale.  8.Anchorpricing Anchorpricingisastrategythatgivescustomersareferencepricepoint(theanchor)whenresearchingproducts.Forexample,whenrunningadiscountofferforaproduct,yoursitecandisplaytheoriginalpricenexttothediscountedprice.Forexample,anecommercestorecanlistaproductas‘$100$75′toshowthecustomerhowmuchmoneythey’resaving,eveniftheproductregularlysellsfor$75ontheirstore.  Anchorpricingpros Anchorpricingattractscustomerslookingforadiscountoradeal.Italsocansparkasenseofurgency.Byreferencingthehigheranchorpricepoint,customerswillfeeltheneedtomakethepurchaserightawayormissoutonadeal. Anchorpricingisoftenusedforbundlesorsubscriptionordersbyshowcasingthecostsavingsacustomergetswhentheybutmoreorsubscribe,ratherthanmakingaone-offpurchase.Inthesecases,adiscountisofferedforcommittingtomultipleitemsorordersandthecustomercantestthesavingsatcheckouttoverifytheywouldsavemoneythisway.  Anchorpricingcons Anchorpricingcanbetakentoanextreme,andcauseyoutoloseoutonsales.Ifthedisparitybetweentheanchorandthenewpricepointistoolarge,itcouldsignalthattheproducthasdefectsorit’slostitsvalue. Combiningecommercepricingstrategieswhenneeded It’spossibletocombineecommercepricingstrategiesifitworksbestforyourbusiness.Asmentionedearlier,dynamicpricingcombinedwithcompetitor-basedpricingcanhelpyoustaycompetitive.  Combiningloss-leaderpricingwithpriceskimmingcanincreaseyourcustomerLTVinthelongrunasthey’llcontinuetopurchasemultipleproductsfromyouastheydecreaseinprice. Value-costandcompetitive-basedpricingcanbecombinedtojustifywhyyourproductshavehigherprices.Youcanshowthatyourproductshaveuniquefeatures,bettermaterials,resistancetodamage,etc.tocommunicatetocustomersthatyourproductsareworththeextracost. Byusingacombinationofecommercepricingstrategies,youcanfurtherimproveprofitsandsales.Itmayrequiretestingandtrialanderror,butoptimizationscanbemade.  Pairingefficientfulfillmentwithoptimizedpricing Mostecommercebusinessesvieworderfulfillmentasacostcenter,andthattheyhavenochoicebuttoraisepricesiftheyoutsource.Or,theyunderstandofferingtwo-dayshippingcanlowercartabandonmentratesandincreaseaverageordervolume,butit’snotcost-effective.  Ecommercebusinessesthatpartnerwithathird-partylogistics(3PL)companylikeShipBobknowotherwise.Manyofthemhavefoundthatoutsourcingfulfillmenttoa3PLisnotonlycost-effectivebuthasimprovedtheiroveralllogisticsstrategy.  “Customersgetaccustomedtoacertainservicelevelatalowprice—oftenfree—andwantitfasterovertime.ShipBobhasbeenabletodeliverthecustomerservicelevelweneedattherightcost.SinceswitchingtoShipBobfromourprevious3PL,ourfulfillmentcostoncomparableorderswentdownby25%.” MichaelPeters,VPofE-CommerceOperationsatTB12 WithShipBob,ecommercemerchantscanoffertwo-dayshippingviagroundratherthanexpensiveexpeditedairshippingtotheircustomers.Thisway,youdon’thavetoworryaboutlosingsalestoAmazonorotherlargeretailerssincecustomersknowtheycangetpackagesdeliveredquicklyandaffordably. “WewantthecustomerexperienceofpurchasingonourwebsitetobesimilartoAmazonPrime.ThisispossiblewithShipBob,withoutinflatingtheshippingcosttoaninsanelevel.Todothis,westrategicallyplaceproductsaroundthecountry.WearestoringinventoryinthreeofShipBob’sfulfillmentcenters.” TimFink,Co-FounderofEnduroSport Therighttech-enabled3PLwillhelpyoureduceshippingcosts soyoucancreateanecommerceproductpricingstrategyaccordingly.ByworkingwithShipBob,youcanreducefulfillmentcostsandmakeyourordersevenmoreprofitable.  “LastJuly,Prymalreached$40,000inrevenue.AfterswitchingtoShipBobjustfourmonthslaterinNovember,wearereaching$160,000amonthinrevenue—that’s300%growth.We’realsosaving$8,000permonthinfulfillmentcosts.”  CourtneyLee,founderofPrymal ShipBobhasagrowinginternationalnetworkoffulfillmentcentersandallowsyoutosplitinventoryacrossmultiplelocations.Withdistributedinventory,productsareshippedfromthefulfillmentcenterclosesttoyourcustomerstoreducetransittimeand shippingcosts.  Conclusion Therearealotoffactorstoconsiderwhendevelopinganecommercepricingstrategy.Competition,ever-changingcustomerexpectations,materialcosts,andshippingallplayaroleinpricingyourproducts.Butecommercebrandsthatcontinuetoreevaluatetheirpricingstrategy,aswelltheirecommercelogisticsstrategy,willcontinuetostaycompetitiveandprofitable. TolearnhowShipBobcanhelpsavemoneyonretailfulfillmentwhilegrowingyourbusiness,clickthebuttonbelowforaquote.  RequestFulfillmentPricing Writtenby: ShannonCallarman ShannonCallarmanisaContentMarketingSpecialistatShipBob.Sheresearchesandwriteseverythingyouneedtoknowaboutthelatesttrendsandbestpracticesinecommerce. ReadallofShannonCallarman'sPosts