Using the right ecommerce pricing strategies can make or break your conversion rates. Like any form of marketing for a successful multichannel brand, your pricing strategy should be tested and tweaked to find the optimum price for your product, at the right time, for the right shopper – all in real-time. In fact, most successful brands use a combination of competitive pricing strategies to create a hybrid, specific to their niche and market, that is more likely to convert.
This post gives you the top seven ecommerce pricing strategies you should be testing for your multichannel brand and offers tips and tools on how or when to use each.
ecommerce Pricing Strategy #1: Value-Based Pricing
Mixing beginner competition and cost pricing together, value-based pricing is about finding the optimum price for the optimum margin based on how a potential shopper sees a product's perceived value. Put another way, this is about using a variety of data and a well-established sales funnel to match product pricing to the shopper's perceived value of that specific product.
To implement a value-based pricing strategy, you would first establish cost-based pricing – whereby you establish the cost of the product and add your break-even profit margin. You would then look at the competitive landscape to analyze market averages – thereby determining what the market is prepared to pay for the product: its perceived value.
If the perceived value of a product category is high in your market, you could then increase your margins to match – without outpricing yourself – capitalizing on extra profit. Of course, you could then use sales to come in lower than perceived value to boost sales volumes over shorter increments. In essence, you are giving an emotional value to your product, which can be very powerful when used in conjunction with sound customer experience strategies, good customer support, and high-quality products.
Think of name brand products like Apple iPhones or Supreme apparel, where the perceived value is increased by the brand impressions. Therefore, the most significant disadvantage with this strategy is you would need to have an established ecommerce brand identity and strategy, and back these with quality to ensure expectations are met. This is because customers will only be willing to pay what they see your brand is worth, and if the delivered item or the customer journey along the way is poor, you will lose overall brand value, thus making it harder to sell other products.
ecommerce Pricing Strategy #2: Dynamic Pricing
Also known as competitive or value-based pricing, dynamic pricing is the multichannel ecommerce brand stand. Simply put, this pricing strategy includes dynamically tweaking pricing in real-time based on competitor or market changes. This allows brands to have the right price, for the right product, at the right time – thus improving their chances of converting based on market changes such as demand or competition.
Dynamic pricing is not just about dropping your prices to match or undermine your competitors. For this strategy to be successful, sellers will need to continuously collect and use industry, customer, and competition data to tweak prices in real-time. In other words, it's about finding the optimal price, based on multiple factors and market variables, more likely to generate the sale in that given moment. Simply put, dynamic pricing will use various pricing strategies, changing dynamically based on selling condition changes such as seasons, peak or low shopping times of the year, and competitive landscapes.
The most significant advantage of using dynamic pricing strategies is that they give you flexibility and allow you to react quickly to market or industry changes, minimizing a knock-off effect on your conversion rate that they may cause. The disadvantage is that you need to not only monitor the data in real-time but act immediately on that data, which can be very tricky.
In fact, without a tool to let you do this automatically, it's almost impossible. In short: unless you're only selling one product, dynamic pricing requires top-end repricing tools. And for those selling on multiple channels and marketplaces, you will need a smart multichannel listing system that quickly sets pricing rules per channel.
Bonus Content: Repricer Tips and Examples
ecommerce Pricing Strategy #3: Penetration Pricing
For ecommerce brands looking to launch a new product category in a highly competitive market, penetration pricing strategies can be very effective in gaining market share. It is important to note here that you need to be willing to accept lower profit margins in exchange for gaining market dominance. Having said that, for intermediate, established brands, this can be highly effective.
Let's say you are a multichannel apparel brand, about to launch a designer handbag accessory category for the first time. To break into this competitive market, targeting buyers who don't yet know your brand may be difficult. Therefore, you would research your biggest competitors' pricing strategies and use penetration pricing (often in the form of a launch promotional sale) to come in at lower prices – essentially sacrificing some of your profit for market share. Then, after you had penetrated the market and grown in dominance, you could slowly hike up the prices (or remove the promotion).
The penetration pricing strategy is partially effective in boosting sales volumes. Think of brands like Primark, which keep their margins low to stay price-competitive, but have competitive sales volumes – selling more products to mitigate the lower margins. Although this can be very effective in attracting new shopping markets to your store's brand, it can be a difficult strategy to implement. Get it wrong, and your brand will be seen as low-quality.
Pro Tip: Always run a price test. Before implementing any new pricing strategy, you will want to test it. This means testing how product conversions change and how pricing affects specific markets and sales channels. Changing or overriding rules per channel is relatively painless if you have good-quality multichannel management software.
ecommerce Pricing Strategy #4: Price-Skimming
Next on our list of expert ecommerce pricing strategies is price-skimming. This is another pricing strategy considered to be competitive and is essentially the opposite of penetration pricing. With this strategy, you would set your launch price at its highest and then gauge how the market reacts, decreasing the price as demand decreases. You would then lower the price in increments to find the best price point for your product – the optimum price for conversions, with the highest amount of profit margin possible.
[Source: Economics Help]
Another example of using this strategy is when high-demand products are put on clearance sales to â€˜flog' the last of the stock at the end of a season. The biggest advantage of using this price strategy is that you can capitalize on high demand earlier on, to increase sales and profits. The disadvantage is that early shoppers who see the lower prices could develop negative feelings towards your brand. However, this can be mitigated by using clearance sales and ensuring your strategy is very thoroughly planned.
ecommerce Pricing Strategy #5: Loss Leader Pricing
The next expert competitive pricing strategy worth testing is loss leader pricing. Loss leading takes penetration pricing a step further by sacrificing profit entirely for market share. A prime example, if you will excuse my pun, of a brand that dominates with this strategy is Amazon. Amazon's whole business model is based on selling products at a loss in order to dominate the market.
Note: This kind of pricing is controversial and has been banned in some states and countries, so make sure you check with your legal consultant before implementing this strategy.
In short, loss leader pricing is used to attract new potential customers with extremely low pricing in the form of sales. Store owners can then recoup the â€˜loss' by upselling accessories or other, higher-quality (higher-priced) products. Think of how big retailers use specific Black Friday product prices to bring customers to their stores, where they can then upsell product options or expose customers to other product lines not discounted.
Therefore, the most significant advantage of this pricing strategy is quick market dominance in a highly saturated market, as well as providing a good source of store and marketplace traffic. The vital thing to note here, however, is if you want to turn those first-time shoppers into repeat customers, you need to back this strategy up with good customer support and a quality product. The last thing you want to do is attract shoppers you can't funnel through your long-term growth plan.
ecommerce Pricing Strategy #6: Discrimination Pricing
Generally, ecommerce discrimination pricing (sometimes called segmented pricing) is far less standard than the other price strategies mentioned so far. However, it's a common practice for brands selling across a host of channels. Discrimination pricing uses a combination of dynamic and traditional value-based strategies to set prices based on market segments. This can be based on locations, selling channels, or other target market demographics.
In short, you would essentially target one group of potential customers with one price and another group with a different price – allowing sellers to find the optimum price for conversions and profit per segment. These segments could include the selling channel, shoppers' purchase history (think VIP sales), or geographic location – just to name a few.
[Source: Economics Online]
The most significant advantage of using this strategy is that you can boost sales while getting the best profits possible by tailoring pricing to specific segments. However, this is a complicated strategy that will require you to monitor very closely in real-time and use multichannel listing software, especially for ecommerce businesses with extensive inventories selling across various channels.
Pro Tip: A highly advanced multichannel listing tool such as StoreAutomtor will enable you to manage and control prices based on inventory and channel, override prices based on channel demographics, and automatically set international conversions and updates – just to name a few!
ecommerce Pricing Strategy #7: Lead-Generation
For bespoke B2C and B2B sellers, lead-generation pricing models can be a powerful conversion tool, especially for cases where products are customized individually from customer to customer. Lead-generation strategies are also often used for product launch campaigns, where potential shoppers need to request a quote.
Let's use the example of a multichannel B2B ecommerce brand marketing office equipment to business managers. This could be office electronics like printers and phones, or furniture such as organizers, desks, and chairs – which are typically customized for specific clients, bundled, and/or sold in bulk. Therefore, as these products are tailored to each particular customer, lead CTAs such as â€˜request a quote' are used instead of set pricing.
For those selling in bulk or offering highly-customized products, this allows you to engage with potential shoppers directly and tailor the best pricing to their specific needs. This strategy, however, is only for unique brands where customer choices determine pricing.
Pro Tip: There are ways you can incorporate lead-generation without forgoing traditional pricing. An excellent example of a brand winning at this is Smart Furniture. All their products are customizable in the checkout process, but they have included a â€˜Request a Free Swatch' lead-generation button.
There you have it, seven expert ecommerce pricing strategies to test and tweak for your multichannel brand. Ultimately, you will want to test each of these strategies for your specific market, niche, and brand – as we know, one size does not fit all. Additionally, try combining a variety of these strategies to create a winning hybrid for your brand.