04Nov
By: Burc Tanır November 04, 2016

Is setting the price of your outcome a nightmare? It shouldn’t be. Pricing strategy for eCommerce is one of the most fascinating topics for any business or marketing professional. This is because, when it comes to pricing, you have all the power. While you can’t easily change your costs, product characteristics and customers’ tastes, you can change your pricing now, in this very moment, and almost any time you want. But this ability doesn’t mean there are no rules to follow. And that’s what we are going to discuss here. Pricing is a marketing tool and the most efficient way to improve conversion rate optimization. By applying various pricing approaches, your business will be more efficient, profitable and sustainable in the long term.

If you don’t follow these approaches, the chances are that you will set prices out of the market. Meaning that they might be too high or too low. On the one hand, if they are too low, but your business is still profitable you may think it is not a big problem. However, I am afraid it is. When you are not making the money you should, you are losing opportunities to invest in the business. Every successful business needs to invest in becoming better to keep the good performance in the future. Neglecting to do it, when it is possible, is a great mistake. If on the other hand, you price your products too high, I don’t need to explain what will happen…your sales will go down quickly, and you will be recognized as someone who tries to sell overpriced products, resulting in customers not even considering your product offers.

Pricing strategy for eCommerce: Other reasons why price is essential

In addition to the information above, there are other reasons to point out why pricing strategy for eCommerce is important. But we can summarize them in one: pricing is one of the main decision factors when online shoppers are going to buy something. And here is the data:

According to PWC research these pricing-related reasons are the main ones customers visited an e-commerce website:

  • 61% to compare pricing
  • 23% to participate in promotions
  • 41% to look for coupons

What insight do we get from this? First, that people are looking for good prices and when they notice that one shop is offering coupons or deals, they visit its website. Second, that when they don’t visit a website because of a promotion, it is very likely that they are comparing prices, a trend that is even more powerful in emerging eCommerce markets.

We can say we are in the comparison era. Before the internet, comparing prices required moving around the city to check different options. But now, thanks to Price Comparison Engines, in just a matter of minutes you can get prices, not only from the business of the city but from companies all over the world. It is easy and also a generalized behavior. 90% of people say they do research online looking for offers. And the rate is higher for some more sensitive categories of products like electronics and others that are considered important purchases for a family budget.

These days competition is so hard that many great businesses with high-quality products are getting poor results. You can’t afford to fail when setting your prices because in the end, it is your source of income, and that makes it an essential decision. Due to that fact, it is also recommended that everyone in the company participates in pricing decisions, despite the fact that many businesses just leave it in the hands of one specific person.

pricing

Pricing strategy for eCommerce: First approach – cost-based

This is the most intuitive way to set a price that goes further than just setting a random amount. The logic is simple. After calculating the costs of a product for your company, you just have to apply the profit margin you want to achieve. That way if the cost of product “A” is 50 and the margin you desire is 100%, you have to price it at 100.

So there are two key factors here:

Costs: It may seem simple to know them, but it is not. Calculating cost it is not just adding the costs of the units you have to buy to produce a product or to put it on your website. There are also indirect costs that you have to add. You need to know the overall costs of your business and then decide which part of it corresponds to each product. Following our example, if we have product “A” and product “B” and our overall costs are 10.000 units, we could assume that each product takes up 50% of the costs. So you just need to divide 5.000 units by the amount of products “A”. Sadly, life is not so easy and real data does not usually slip into round numbers. The percentage will be different and likely very hard to calculate. If you want to apply this approach you may need to use some indicators. Even when you know the numbers won’t be exact, it is important that you estimate them as accurately as possible.

Margins: If costs are tricky, margins are more so. If you just follow this approach, it is a subjective decision. How much should you earn? Ideally a lot, but you have to keep it interesting for buyers, which takes us to our second approach.

Pricing strategy for eCommerce: Second approach – market-oriented

Did you know there are more than 12 million online shops in the world? Now that you know, I’m sure you agree with me that you can’t set your prices as if the world revolves around your business. Which is exactly what you would be doing if you just apply the first approach. So, we need to complement it. Now that we know ourselves (costs and margins we want), let’s look to the others.

For that, you need to know in which position you are among your competitors. To find out, you can take advantage of a price tracking tool so that will give you data about your competitors’ prices and assortment, without needing to visit all their product pages every day. Thanks to that you will know if you are setting your prices among the most expensive online shops or among the cheapest. As I said in the beginning, chances are that you have applied a wrong pricing strategy for eCommerce and your prices are just too low. If that is the case, you can make your margin bigger and keep your competitiveness. If on the other hand, you discover you are pricing too high, you may decide to lower your prices to start to get more visitors from price comparison engines and higher conversion rates. Also, you will know when your competitors are out of stock. When it happens, you can try to boost your sales with an extra effort in advertising.

Now that you know well where you and your competitors are, why don’t you take a look at the customers?

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Pricing strategy for eCommerce: Third approach – consumer-oriented

Last but not least, you have to look at your customers to set your prices. To use this approach, you need to know your customers well, which means you have to know who they are and what they value about your product and what your Unique Selling Proposition is. With the first question, you will notice if your customers are deal-hunters or not. The truth is most of the today’s customers are deal-hunters. We already analyzed the reasons at the beginning of this article, but there are still a proportion of customers that don’t care much about the price. This is possible in luxury products. If your customers are among these last ones, you don’t have to force your customers’ attention to the price. So you should avoid deals and offers. What you have to do is focus on improving your brand, set a fixed valuable price and don’t move it if it is not necessary.

But, if your customers do care about pricing, you will have to focus your strategies in pricing. Luckily, Neuromarketing is here to help you with these four easy tips:

  • 99 is better than 100. The biggest e-commerce companies use it, so why not? It is shorter, and it looks smaller. Even when we know it is more or less the same, our brain that decides things so much faster than we think when trying to be reasonable, doesn’t know it. Because the human brain has to be intuitive to survive. Take advantage of it.
  • The same logic goes for pronunciations. A price that is pronounced shorter seems lower than a price pronounced longer. Thirty-six-twenty-eight (36.28) is worse than thirty-seven-one (37.01).
  • Round numbers for techniques, precise numbers for the rest. If your buyers are experts, try to set prices as precisely as possible. They know the small differences between your products, and they will understand why one costs $ 36 and other $ 38. However, if they are not experts, do not make things difficult and just set it at $39.
  • I guess you don’t like paying, right? Nor do your customers. Price has to be visible, and don’t oversize it, nobody likes that.

Pricing strategy for eCommerce should involve the full organization

As you have seen throughout this article, pricing is a decision that has a lot of factors to take into consideration. The company itself, competitors and customers are the three top areas to think about. I don’t think there is a single person in your business that is an expert on all three. So take advantage of the fact that a group makes better decisions than a single isolated person, and make pricing a strategic decision that involves the full company.

If you do pricing strategy for eCommerce well, your conversion rates will rise, and your company will be more efficient. Besides, you will have a better knowledge about your business. A comprehensive scope is the best option this time, so mix the approaches mentioned above and set the prices as they should be set. Good luck!

  • Haruna Ismail Veejay

    Nice one here man. I have learned a lot from you, but still confused though. could you please states the recommended global pricing rules on Oberlo?

  • Hi Haruna,

    The average price multiplier of all Oberlo users is around 2.00. Hope that helps!

  • Haruna Ismail Veejay

    Thank You! Tomas, but those that applies to all the mark ups?

  • Yeah, that’s the average. Obviously, the multiplier of 2.00 won’t work if you’re sourcing products for $2.00, or $200. But it’s perfect for products priced at around $15-30 🙂

  • Haruna Ismail Veejay

    Geeks!!! but if it fails to work for products of $2.00 or $200, then how are the products of that range being sold?
    thanks for your contributions

  • You can set up advanced pricing rules with Oberlo. You could set 2.00 price multiplier for products priced at $15-30, then a separate multiplier of let’s say 5.00 for products below $10, another multiplier of 1.4 for products above $100, etc.

  • Haruna Ismail Veejay

    Bravo! Thumbs Up 🙂

  • Luke Bonner

    Cheers, man. Awesome article.