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How to Create a Successful Pricing Strategy

Having a sound pricing and promotions strategy is a key component of running a successful eCommerce storefront, but striking the perfect balance is tricky.  If your prices are too low, you may not be able to meet costs and stay afloat.  If your prices are too high, you risk losing a sale.  Strategies are different for every store, but most merchants start by answering these basic questions:

COST
What are the costs of running your business?  Be sure that you know your variable costs, like materials and shipping, and your fixed costs, like overheard.  And don’t forget to give yourself a salary.  You have to live on something.  Calculate your cost of goods, which is what you must cover for each item you sell.  Your product prices must cover your cost of goods and your overhead for you to make a profit. 

POSITIONING
Are you opening a discount store or a luxury shop?  What market you’re trying to attract determines a lot about your pricing.   If you have a discount store, then it’s important to have lower prices than your competitors since people are looking for the best deal when they come to your store.  With some products, you can get a good idea of pricing by checking Google Shopping.  If you sell a high-end product, it could actually hurt you if you price your items too low.  Luxury shoppers feel more comfortable paying for quality and often believe they get what they pay for. 

DEMAND
What is the demand for your product?   Do some market research to find out how much people want your item and how much they would pay for it.  Don’t worry if you don’t feel you have the means to hire a fancy market research company.  You can do a quick survey of people you know to see what they would pay for the product you’re carrying and then experiment with your pricing after your store goes live. 

Once you have a grasp of your cost, positioning and demand, you can consider the different methods people use to price:

COST-PLUS PRICING
With this method, set the price by adding a certain profit margin to the total of your cost of goods and fixed cost.  However, be sure to account for some variations in sales volume.  For instance, it’s smart to be able to miss your sales forecast by a factor of at least two and still be profitable.  

TARGET RETURN PRICING
Set your price to target a specific return-on-investment (ROI). 

VALUE-BASED PRICING
Price your product based on the value it creates for your customer.  If you sell an item that saves people $1000 a year, for instance, you could charge a few hundred dollars for it and people would probably pay it since they’d recoup their costs quickly.  At the end of the day, however, shoppers will only pay what they this is fair.  If your product only costs $10 to make but it has a $500 value, people will probably have a hard time paying that much for it.
    You can also offer other value to your customer for shopping with you, like excellent customer service, an easy return policy or free shipping.  Price is not a shopper’s only consideration, so make clear with them why they should buy with you besides price.

PENETRATION PRICING
This happens when a product is priced especially low to gain market share and garner new customers.  Once a store has a clientele, the price increases. 

PSYCHOLOGICAL PRICING  
A lot of pricing is about perception.  If you market your store as a bargain basement,  it’s best to have the lowest prices around.  It’s even a good idea to offer a price-match with your competitors so that you guarantee customers the absolute lowest prices.  Many customers won’t take you up on the offer so you won’t lose much profit, but it goes a long way in instilling confidence.  On the flip side, if your store is about high quality, your prices should probably be higher than the competition. 
    Keep in mind that from a psychological point of view, there are certain prices that sell more than others.  For example, people are drawn to prices under $100, $20 or $5.  Prices like $19.99, as opposed to $20, are also more attractive.  

OTHER PRICING
Other types of pricing include product bundle pricing, where merchants combine multiple products into one package, like gift baskets.  Sellers can use product bundle pricing to move old stock and less popular items by combining them with more popular, high demand items.   Another variation of this pricing is product line pricing, when merchants give different prices for a range of products and the pricing reflects what the consumer perceives as fair over that range.  For instance, if you sell magazines, one magazine may be a certain price, but if you buy a year’s subscription the price per magazine drops.
    Through optional product pricing, merchants attempt to increase an order by offering options on a purchase (like monogramming).  Captive product pricing occurs when a shopper buys an item that requires a specific accessory to operate, like an inkjet printer that uses ink cartridges or an espresso machine that requires proprietary coffee pods .  The merchant can clear a good profit margin and garner repeat sales on the cartridges or the pods because their customers have no other choice but to buy them.

Pricing is a challenging balance, but the bottom line is that generally you shouldn’t charge lower than your costs or higher than what customers consider fair.  That seems like common sense, but many eCommerce merchants don’t consider this guiding principle. They either underestimate their costs or overestimate what people will pay.  If the balance isn’t working, you may have to rethink your strategies.  Either cut costs, lower prices, or change your product positioning so that you can justify a higher price.    

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