One of the foundational aspects of building any business is correctly pricing your products. While this process may seem obvious, for those working in the ecommerce space, it is a complex, often challenging issue.
To make things even more complicated, companies can no longer simply take advantage of the local market. With ecommerce sales projected to reach nearly a quarter of total retail sales by 2026, the impetus is increasingly on businesses to have competitive pricing on a global scale.
But where do you start? What do you need to look for? How do you make sure your prices are competitive with marketplaces such as Amazon?
By understanding what pricing models are available and how they can best serve your business, you can build a strategy that will help you — no matter the customer, product or market.
With cost-based or cost-plus pricing, the price of a product or service is determined by the cost to make, distribute, store and market. From there, a profit goal is introduced to decide the final selling price.
Cost-based pricing is often the default strategy, as it doesn’t require advanced market research or a broader understanding of the mindset of customers or competitors.
Straightforward and simple to calculate prices.
No need to factor in competition, market valuations or vagaries.
Allows businesses to prioritize focus elsewhere.
Not ideal for B2B customers, as it lacks initiative and customer engagement.
Easy to misprice products due to a lack of competitive research.
Difficult for SaaS businesses because of the nature of benefits to products and services.
For competition-based or competitive pricing, costs are determined by what the competition is doing. When your products or services have similar competition within the market, it is relatively straightforward to price them in the same range as your competitors.
With competition-based pricing, branding and marketing strategies are the differentiator between one business and the next.
Simple to implement and price.
Lower risk to pricing models as they’re priced to the current market.
Reduce the chance of undervaluing products with a low price.
Can lack accuracy in evaluating the true value of your products or services.
Relies heavily on marketing to separate from competitors.
Removes customer value to concentrate fully on competitor pricing at the expense of customer pricing.
Value-based pricing strategies focus on the customer, where products and services are priced based on customer benefits. Through the use of survey sources and B2B customer data, you can price per customer, product and market
Value-based pricing, also referred to as worth-based pricing, attempts to find the actual value of a product by relying heavily on your customer’s needs and wants.
Allows for high margins.
Pricing is not based on production costs or competition but on the level of engagement from customers.
Can lead to significant profits.
Requires more extensive pricing research compared to other pricing methods.
Must gain a firm understanding of the target market and buyer personas.
Perceived value of products can fluctuate according to product niche or market.
Price skimming is a pricing strategy that involves ecommerce businesses selling products at a higher price but reducing it incrementally over a period of time until it reaches the market price point.
This short-term strategy typically occurs when a company has a substantial competitive advantage in the market. As time goes by and competitors catch up, the price is lowered to match the increased supply.
Establishes an early position in the market, appealing to early adopters and new customers alike.
Helps ecommerce startups to remain competitive from the get-go.
Maximizes the bottom line at the earliest stage available.
Can damage brand reputation if performed improperly or if high prices aren’t lowered to match the market.
Sensitive to time — there is a relatively small window for success.
High prices can lead to lower volume of demand, limiting growth at an early stage.
Penetration pricing is a marketing strategy that occurs when a business enters a new market with below-average or lower prices than the competition. Companies typically use this strategy when attempting to highlight a new product or entice customers into the door.
Penetration pricing works the opposite of price skimming. With this strategy, price will slowly rise thereafter as customers begin to buy the product and a foothold is established within a market.
Encourages the rapid adoption of a product.
Businesses can enter the market with less competition at the price level.
Can establish goodwill with customers at an early stage.
Upfront costs combined with lower prices can limit the growth of small businesses.
Customers may move back to more prominent brands once prices increase.
Can lead to narrow profit margins.
Bundle pricing — or product bundling — is the strategy of selling multiple products together at a combined price. Sometimes called "package deals," product pricing bundles are generally made up of complementary items or, less frequently, similar products.
Bundle pricing can be especially popular with customers who appreciate the bundle's discount as well as those who value speed or simplicity over the ability to tailor their product options.
Can effectively increase average order value (AVO) by selling more without higher transaction costs.
Makes it more challenging to lose customers to price-comparison shopping.
Can encourage cross-selling if the bundle includes items from unique categories.
Can limit the sales of more popular products.
High barrier to entry — companies need the capability of selling multiple products at a time.
Customers may decline or dislike bundle pricing if it’s the only option available.
Charm pricing, better known as psychological pricing, is the belief that a price can psychologically impact customer expectations. Businesses use this impact and influence to encourage customers to buy their products.
A common usage of this tactic is to price an item at $9.99 instead of at $10. The prices are essentially the same, but because nine is lower than ten at first glance, customers can feel they’re getting a better deal.
Offers businesses a high return on their investments.
Creates a sense of transparency surrounding prices.
Can help the effectiveness and functionality of sales and promotions.
Can drive customers away if the tactic is too noticeable or cynical.
Can create long-term pricing expectations.
Requires consistent, focused attention to the market.
Dynamic pricing is based primarily on market demand, giving businesses greater flexibility when setting prices. It can be used to match real-time changes in the market, currency fluctuations and even price-match competitors.
The central goal of dynamic pricing is to find the right price at the right time for a specific customer.
Better understanding of customer behavior and motivations.
Real-time, flexible pricing.
Built to work within B2B settings.
Pricing fluctuations can confuse or anger customers.
Requires extensive market research.
“Gaming the system” can lead to the loss of reputation for a brand.
Regardless of the different pricing strategies you decide to use, the following tips can help you with a successful implementation:
When performing your pricing research, you must ensure that you are up to date on the wholesale prices within your market.
Wholesale is a rapidly growing market, with sales reaching nearly $700 million in 2022. For B2B companies and distributors, wholesale can help buoy sales and offset transportation costs.
When conducting product research and setting your prices, the number one thing to consider will almost always be the prices of your competitors.
Maintaining a view of your competitor’s prices can help you keep track of market fluctuations and how your prices compare. If your prices are significantly higher or lower than that of your competitors — and you’re planning on penetration pricing — then you may be missing a large stream of revenue.
At some point, it may be worth it for your business to experiment with customer-specific pricing models. The goal of customer-specific pricing is to make sure that you better understand consumers and reward them with prices based on their desires and motivations.
By implementing a pricing plan built with the customer in mind, you can not only serve them based on the metrics that you currently have, but you can also gain additional insights into customer behavior.
When establishing an ecommerce pricing strategy, make sure to avoid the following mistakes:
The dangers of rigidity — in life as in business — are manifold, and for ecommerce platforms, it can very easily lead to a static or stifling pricing environment.
The market is constantly shifting, and businesses that want to maintain long-term relevance must ensure that they are on top of the latest trends and prices.
If your pricing doesn’t match up with what your competitors are doing — whether significantly lower or higher — you are potentially losing out on extensive sales and weakening your brand in the process.
For ecommerce businesses that use an omnichannel or multi-channel approach, maintaining consistent pricing across all channels is critical to long-term success.
Inconsistent pricing can quickly change how customers perceive your brand, as well as ensure that only one channel of your business finds the success you’re looking for.
A critical mistake that can hamstring any B2B business is not segmenting your customers.
Customer segmentation is a process by which you divide your customers into segments based on common characteristics, from demographics to behaviors, allowing you to market to them more effectively.
By not segmenting customers, you cannot create a tailor-made customer experience for each persona, limiting your reach with customers and ultimately hampering sales.
For the modern B2B ecommerce organization, there are more pricing strategies and options available than ever before.
By maintaining a consistent understanding of your customers, what they’re looking to buy, and what prices are most likely to entice them, you can build a successful business capable of reaching consumers on a global scale.
Pricing segmentation is the process of charging different prices for the same product or service depending on the customer or market you are targeting. In essence, prices are differentiated based on the willingness to pay them.
While this practice may sound unusual, it is anything but. Pricing segmentation exists throughout the market, from promotional sales to discounts, based on the concept of price sensitivity.
The pricing differences between B2B and B2C ultimately come down to the target market.
Business-to-business (B2B) is the sales of goods and services from one company to another. While there are typically fewer customers available to sell to, there is a larger gap in the prices, pricing model and information available to each business.
Business-to-consumer (B2C) is the sales of goods and services from a company directly to the consumer. These prices are typically based on competitive pricing and — because there are so many potential customers available — generally are less expensive and less prone to significant shifts.
For B2B businesses, the answer is complex and depends on your business model and market conditions. The first question you must ask yourself is what your B2B buyers are willing to pay. If you don’t understand that question, then the question is ultimately moot.
If you have a product that customers are willing to buy — and understand the ranges you are going for — then placing the prices on your site will not likely hurt your business.
With fixed pricing, consumers make a single purchase at a known price.
The central benefit of fixed pricing is the consistency that comes with it. No matter who is paying, no matter where the product is bought, the price remains the same.