How important is pricing to your e-commerce business? Considering that 80% of people say that the most important aspect of shopping at a store is competitive pricing, the answer is “very important.” Implementing effective retail pricing strategies is essential to attract customers and optimize profitability. This comprehensive guide will explore key pricing terms, discuss top strategies, and provide actionable insights to help you dominate your competitors and maximize revenue.
What’s Retail Pricing?
Many factors determine retail pricing. However, it would be best to consider the cost of the item and the markup percentage you make to determine the net profits for any item. Use the following formula to decide on your ideal retail price: Retail Price = [(Manufacturing cost of item) / (100-markup percentage)] x 100 For example, if your product costs $1.00 to manufacture and you hope to make a 75% profit, your ideal retail price would be: [(1.00) / (100-75)] x 100 = $4.00
What Are Your Retail Pricing Objectives?
While maximizing inventory sales and profit is the primary pricing objective for any company, additional goals shape your retail costs. A small business may opt for heavily discounted prices as part of a paid promotion to drive website traffic and increase market share. Discounted pricing can also help liquidate old inventory and boost sales volume. Some of the most common retail pricing objectives include:
- Pricing for Profit: Set price points that maximize short-term or long-term profitability.
- Survival: Establish prices to cover essential operating costs, even if short-term losses are incurred. Once stability is achieved, gradually return to higher price points.
- Increase Market Share: If a business is trying to maximize customers and take business awareness from competitors. A company can measure its market share by comparing its sales to all other competitors in the same industry. Sellers may employ a penetration strategy to purposely lower price points to entice price-sensitive buyers and gain market share. Once you gain more customers, it’s imperative to maximize your customers’ lifetime value through upsells.
- Competitive Matching: Adjust prices to match or surpass competitors selling similar products. If a competitor sells a particular item for $4.50 while you offer it for $5, consider lowering your price or adding value to entice your target audience.
What is Optimal Price?
The optimal price is a price point that helps sellers maximize profits. It takes some experimentation to determine an item’s ideal price point. Heavily discounted prices may boost inventory movement but reduce profit margins, while excessively high prices can result in stagnant stock. Price optimization entails considering various factors, including competitor prices, item demand, sales goals, and customer base segmentation. Developing a successful price optimization strategy involves adhering to core tenets that resonate with all e-retailers.
How to Calculate Optimal Price Points for Ecommerce Businesses
Establish a price range for each item to determine the optimal price point. Determine the lowest price that attracts customers without compromising profitability and identify the upper limit that remains acceptable to shoppers. Flexibility is crucial in price optimization, allowing you to adapt to demand and swiftly adjust prices as needed—a practice known as dynamic pricing. Additionally, there will be occasions when price adjustments are necessary. For example, if a competitor lowers their prices, you may need to lower yours to remain competitive. Price adjustments can also be employed during sales to make room for new stock and increase customer acquisition. By factoring in various elements and utilizing specific algorithms, dynamic pricing ensures the best prices are set at the right times. Check out this great optimal price calculator to help you find the sweet spot.
What is Socially Optimal Price?
Every product or service consumed in the world has a societal impact. The social cost of any good includes the sum of two components:
- The financial costs of consumption, such as delivery, costs of material, and labor.
- The societal costs of consumption, including environmental consequences and health impacts.
Resources are limited, and competition for the remaining resources increases as they deplete. Sellers must consider their goods’ marginal private benefit (MPB) or the highest price consumers would pay for a unit. The higher the price, the fewer people are willing to consume it. The lower the price, the more consumers spend money on goods or services.
3 Online Retail Pricing Strategies to Optimize Your Ecommerce Listings
Online retailers must understand their audience and strategically price their products to drive sales and increase profitability. Here are the top three strategies to optimize your ecommerce listings:
Leverage Your Analytics and Respond to Customer Behavior
Sellers can leverage many different verticals to reach their audience. Whether it’s a social media campaign or product promotion at Costco, sellers must purposefully test their products and use data and consumer insights to inform their pricing strategies. For instance, if you notice that Friday is your most profitable day for a particular item, you could run a social media campaign only on that day to maximize your budget. If you notice that bundling a humidifier with a free bottle of essential oil drastically increases sales in a Costco, you should use the same strategy on your online storefront. Your customers’ online shopping habits can also be used in price optimization. Has a particular shirt earned a lot of likes on your social media channels? If the demand is increasing because of this exposure, perhaps the price can be adjusted upwards accordingly. Conversely, if you see shoppers are putting a particular item in their cart but not following through on a purchase, you may be able to close the sale with a lower price tag. Some businesses even set prices that are slightly less than a round number, so customers think they are getting a deal. Track your crucial analytics metrics, such as organic traffic, ROAS, and bounce rate monthly, and use it to adjust your marketing campaigns and pricing to maximize sales. Check out our guide on the key ecommerce KPIs metrics to track.
Optimize Your Layout
The layout of your ecommerce site can also play a role in enhancing price optimization. Product description content should have an action-oriented copy encouraging a purchase, and sellers should showcase the product in a “Customer Favorite” or “Buy Now” display. Use a ticking clock for prices on a temporary discount to leverage urgency. Infomercials use this strategy on TV to urge viewers to take action and call to take advantage of an offer. Additionally, Include the number of remaining inventory on the page to prompt visitors to purchase before the product is out of stock. It will help position your product as high-demand. (Check out other traditional marketing strategies for ecommerce.) You can also group similar items, such as purses, together for a mini-price comparison, highlighting the most popular product. Sellers should continually strategize toward the ultimate goal of improving their conversion rate and profitability. Master Price Setting
Another important aspect of price optimization is the model used in price setting. Some retailers use the traditional method of adding a markup to their wholesale costs to develop an item’s price. Another pricing model looks at the profit made from selling products in quantity so you can get the desired return on your investment. Well-established brands may turn to value-based pricing, which bases the decision to set higher prices on consumers’ trust and relationship with a company. Basically, shoppers will be willing to pay more for the brand they are loyal to than for a similar and cheaper alternative from another brand. And speaking of competitors, it’s always wise to keep an eye on the marketplace and see what other ecommerce sites like yours are selling and how much they are selling it for.
What Are the 3 Types of Pricing Strategies for Profitability?
There are many different types of pricing strategies. As we discussed earlier, picking the best one for your product comes down to several factors, including pricing objectives and the socially optimal price. Let’s examine three highly effective strategies to boost sales and maximize profits:
Competitive Pricing
A competitive pricing strategy is a standard approach, and sellers can leverage it differently depending on the products they are pushing. The key to a competitive pricing strategy is to position your product or brand not only as different from the competition but superior. You must specify and highlight unique selling points (USPs) that separate your product from the rest of the pack. Also, investing in a premium online storefront, graphic design, and packaging can provide a valuable impression on your customers, especially for luxury ecommerce brands. It’s also essential to have stellar onsite customer service to help reduce ecommerce return rates. There are two main types of competitive pricing strategies:
Below Competition Pricing
Pricing below the competition is an excellent way to undercut your competitors’ prices to simply position your product as the best possible deal. To leverage this strategy, you must negotiate with your supplier for the lowest possible wholesale price, reduce operating costs, and execute a marketing strategy highlighting the market value. A below-competition pricing strategy can sometimes become a sticky situation if your competitors try to retaliate by lowering their price and start a price war. It’s essential to present below-competition pricing as a temporary offer to create a sense of urgency and prevent customers from becoming accustomed to bargain rates.
Above Competition (Prestige) Pricing
Above-competition pricing is always ideal for profits, but it only works if you move inventory. Sellers must justify higher prices with factors such as exclusivity, superior customer service, elevated brand experience, and scarcity. Jewelry is an excellent industry to use prestige pricing, especially if you have sufficiently developed a luxury image. Brands like Tiffany can command higher prices due to their brand equity. The diamonds may not necessarily beat the competition in quality, but customers will pay higher costs due to a sense of prestige. Beauty is in the eye of the beholder, and so is your brand’s value. Focus on developing an elevated brand image to charge higher prices and increase profit margins.
Psychological Pricing
The brain is a mysterious thing, and there are some clever tricks marketers can leverage to price items in a particular way to sell more. Psychological pricing positions a product at a price point that conveys a fair, attractive bargain. Here are several techniques you can apply to help increase sales:
Odd or Charm Pricing
Customers prefer prices that end in odd numbers, such as 5, 7, or 9, and trigger impulse buying. It also gives the impression that they are receiving a deal. The most common way retailers leverage this method is to change an item’s price from a whole number, such as $9, to $8.99. The brain interprets the $8.99 as $8 and rounds down, making it appear as a better bargain price. Studies show that when people spend money, they may feel a sense of pain or loss. Retailers can leverage charm pricing to help lessen cognitive agitation and increase their visitors’ likelihood of purchasing. In his book Priceless, William Poundstone documents that charm pricing helped increase sales by 24% compared to rounded price points. Researchers at MIT and the University of Chicago also found that the best number to leverage charm pricing is 9. During an experiment, they tested a woman’s clothing item at three different price points: $34, $39, and $44. They discovered that $39 outsold the $34 price point.
Decoy Effect or Introducing a “Useless” Price
The best example of the decoy effect to price items is at the movie theater. The cinema wants you to purchase as much popcorn as possible, but most people will never finish the large bucket of popcorn at the theater. However, using a useless price will help customers rationalize picking the large size. National Geographic conducted a study to prove the effectiveness of the decoy effect. They ran the first test and offered a group of customers the option to purchase a small popcorn for $3 or a large one for $7. Most customers decided to buy the small option. However, things changed once they introduced a medium bucket into the equation. For the second group, they presented three options: a small bucket for $3, a medium bucket for $6.50, and a large one for $7. Since the medium size is only 50 cents cheaper than the large, customers purchased the large option more than the previous group. The decoy effect of the medium price helps customers rationalize buying a large bucket because it appears to be a bargain (even though it’s the most expensive option). https://www.youtube.com/watch?v=33aaQdtD20k
Anchoring: Include a Reference Price
Including a reference price compared to the actual price point of your item has a significant effect. The anchor price is juxtaposed with the current price rate, and the visitor perceives it as a better deal than without one. Retail stores utilize this technique and sometimes include more than just one reference price. Let’s say you find a luxurious, brand-name cashmere sweater in a department store. You notice that the original price tag is $150, the sale price is $110, but the final price is $70. The anchoring effect makes the person base their decision on the original anchor price they encounter. Since they know it was initially $150, they would jump at the opportunity to purchase it at the heavily discounted rate, especially since this is the second time it has been on sale. However, would they feel as compelled if the only reference price was $70? They would feel more reluctant to purchase because $70 is still $70. Sellers can increase sales by presenting a higher reference price to give a perceived discounted value and take action while the item is on sale.
Bundle and Multiple Pricing
Bundle pricing is an excellent way to sell multiple products and make each conversion more significant on your site. Sellers can give a lower rate for customers to purchase items together rather than individually. It is not only a great way to move inventory, but your customers will perceive more significant value and savings when they purchase bundled packages (even though they are spending more money). To execute an excellent bundle pricing campaign on your ecommerce site, include several bundle options on the same product page and specify how much they’ll save when they purchase a package. For instance, if you sell a premium Charcoal smoker grill, you can easily present a bundle package that would entice your visitors. Since they are purchasing a new grill, you know they will need other tools and products to cook a meal, such as a spatula, charcoal, grill cleaner, and grill table. If a visitor chooses to purchase a big green egg, they have already committed to the activity, knowing they will eventually need the bundled items when they cook. By pairing several items together, you sell more inventory, and the customer saves money, and your profit margins increase.
Other Ecommerce Examples of Retail Pricing Strategies
Here are some insightful examples of retail pricing strategies employed by ecommerce brands to attract customers, optimize revenue, and enhance the overall shopping experience.
Example of Penetration Pricing in Ecommerce
Penetration pricing is a retail pricing strategy where products are initially offered at lower prices compared to competitors. The goal is to gain market share and attract customers by offering a more affordable option. Over time, prices may be gradually increased to match or exceed competitors’ rates once a solid customer base and market presence are established. One ecommerce website that exemplifies penetration pricing is Dollar Shave Club. With its subscription-based model for razors and grooming products, Dollar Shave Club entered the market with significantly lower prices than established competitors. By offering affordable yet high-quality products, they aimed to disrupt the shaving industry and gain a solid customer base. The initial lower prices attract customers seeking a cost-effective alternative, allowing Dollar Shave Club to penetrate the market and expand its customer loyalty base. 
Example of Dynamic Pricing in Ecommerce
Implementing a dynamic pricing strategy allows retailers to adjust prices based on real-time market conditions, demand, or specific customer segments. Using data analytics and algorithms, prices can be optimized to maximize profits during peak demand periods or to stimulate sales during slower periods. eBay uses dynamic pricing strategies, allowing sellers to set prices based on supply and demand dynamics. The platform also incorporates features such as bidding and “Buy It Now” options, where prices can change based on user interaction and market conditions, ensuring competitive pricing and flexibility for buyers and sellers. 
Example of Freemium Pricing in Ecommerce
This strategy offers a basic version of a product or service for free, enticing customers to try it out. Additional premium features or upgrades are then offered at a cost. Freemium pricing can help attract a large user base, build brand loyalty, and encourage customers to upgrade for enhanced functionality. Warby Parker offers a freemium pricing model by allowing customers to try on glasses at home for free. Customers can select up to five frames to be shipped to their homes, try them on, and make a purchase decision. This approach lets customers experience the product firsthand before committing to a purchase. 
Most Common, Successful Online Retail Pricing Strategies
We’ve gone over many types of retail pricing strategies. Here’s a quick summary of some of the most common and effective retail pricing strategies for D2C Ecommerce:
- Competitive Pricing: Setting prices based on the rates offered by competitors to attract customers and stay competitive in the market.
- Penetration Pricing: Introducing products with lower initial prices compared to competitors, aiming to gain market share and then gradually increasing prices over time.
- Bundle Pricing: Offering products or services in bundles at a discounted price, encouraging customers to purchase more items.
- Anchoring: Setting a higher-priced item next to a lower-priced item to make the lower price seem more attractive.
- Odd and Charm Pricing: Pricing products just below a whole number (e.g., $9.99 instead of $10) creates a psychological perception of a lower price.
Online Retail Pricing Strategies FAQ
We’ve explored many of the most common retail pricing strategy questions people have for D2C ecommerce. Let’s dive into some other common questions retailers have around retail pricing strategies:
What Factors Impact Retail Pricing?
Setting retail prices involves considering various factors such as production costs, market demand, competition, target audience, and desired profit margins. Additionally, external factors like economic conditions and supply chain disruptions can also impact pricing decisions.
What is a Retail Pricing Strategy?
A retail pricing strategy is a planned approach to setting prices for products or services offered by ecommerce businesses. It involves considering factors like cost, value, market positioning, and customer perception to determine the optimal pricing structure.
What is the Most Common Pricing Strategy in Retail?
One of the most common pricing strategies in retail is competitive pricing. This approach involves setting prices based on what competitors charge for similar products or services. Retailers aim to attract customers and gain a competitive edge by aligning with or undercutting competitors’ prices.
Ecommerce and Retail Price Setting Strategy: A Summary
Setting prices for ecommerce businesses requires careful consideration and a well-defined strategy. Factors like market research, target audience analysis, cost analysis, and competitive positioning play a crucial role in determining the optimal pricing structure. Businesses can maximize profitability and meet customer expectations by leveraging pricing models and strategies.
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