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 to the question is “very important.”
Implementing a tremendous retail pricing strategy will dramatically help entice visitors to click “add to cart.” We have some great techniques to increase your online storefront profitability for emerging ecommerce titans or companies with multi-million dollar annual revenues. Let’s discuss the key terms you need to know and our top strategies to dominant your ecommerce competitors and optimize your listings for profitability.
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?
Although selling as much inventory and making the most profit is the most apparent pricing objective for any company, there are many other goals to pursue when setting your retail cost. A small business may offer a heavily discounted price as part of a paid promotion to get more traffic to their website, increase market share, and obtain new customers in their CRM. They may also offer a discounted price to move old inventory and increase sales volume.
Some of the most common retail pricing objectives include:
- Pricing for Profit: A price point that maximizes long-run or short-run profitability.
- Survival: Setting a price for survival. Businesses may need to accept short-term losses to increase sales and cover essential operating costs. Once the business weathers the storm, they can 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: If sellers sell a product that other businesses sell, they may have to set a price that matches their competitors or is below their price point. For instance, if your company sells a particular product for $5 and a competitor sells it for $4.50, you will have to lower your price or provide additional value to entice your audience.
Before setting your price, make sure you have identified the product’s objectives in relation to your business to reach your goals.
What is Optimal Price?
The optimal price is a price point that helps sellers maximize profits. It takes some experimentation to figure out the ideal price point for an item. Selling at a heavily discounted price will help you move more inventory, but your profit margins will be slim. Conversely, if you sell too high, you may have a lot of units sitting around.
Price optimization is the process of setting a price on an item that strikes the perfect balance—it gives customers a sense of value while giving you a good profit. How your business optimizes prices may be different from how another business does it—there are many factors to consider, including prices at other sites, demand for an item and your company’s sales goals, and the parameters you’ve chosen by which to segment your customer base. Nonetheless, there are some core tenets that all e-retailers should keep in mind when developing a successful price optimization strategy.
How to Calculate Optimal Price Point
First, you’ll need to establish a price range for each item that you sell. How low can it be priced to attract customers without a loss of profit on the sale? Conversely, how high can an item’s price go that isn’t considered too high by shoppers?
This kind of flexibility helps because price optimization is a fluid, never-ending process. Knowing your parameters allows you to be responsive to demand and change prices quickly when needed. Marketers call this dynamic pricing.
There will also be certain times when you will want to change your prices. Perhaps a competitor has lowered its prices, and you want to remain a viable option for potential shoppers, so you may also drop your prices. You can also adjust prices for sales to make way for new stock and attract new customers. Dynamic pricing can take various factors into account and use specific algorithms to determine the best prices to use at certain 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 as they deplete, competition for the remaining resources increase. Sellers must consider the marginal private benefit (MPB) of their goods 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 are willing to spend money on the goods or services.
3 Online Retail Pricing Strategies to Optimize Your Ecommerce Listings
Online retailers must know their audience and price their products not only to keep them interested but drive them to purchase.
Use Your Analytics and React To Your Customers’ 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 product and use data and consumer insights to inform their pricing strategies.
For instance, if they notice that Friday is their most profitable day for a particular item, they could run a social media campaign only on that day to maximize their budget. If they notice that bundling their humidifier with a free bottle of essential oil drastically increases sales in a Costco, they should use the same strategy on their 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.
Leverage 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 itself 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.
You can also group similar items such as purses together to do a mini-price comparison, highlighting the most popular product. Sellers should always strategize towards the ultimate goal of improving their conversion rate and profitability.
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 smart to keep an eye on the marketplace and see what other e-commerce sites like yours are selling and how much they are selling it for.
What Are the 3 Types of Pricing Strategies to 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 types of pricing strategies you can use if your main goal is to sell more and make more profit.
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 different from the competition but superior.
You must specify and highlight unique selling points (USPs) that separates 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’ price 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. The best way to leverage below competition pricing is to present it as a temporary price to make visitors feel more inclined to purchase and not get accustomed to bargain rates.
Above Competition (Prestige) Pricing
Above-competition pricing is always ideal for profits, but it only works if you are moving 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’s equity. The diamonds may not necessarily beat the competition in quality, but customers will pay the higher prices 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.
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 the cognitive agitation and increase the likelihood their visitors make a purchase.
In his book Priceless, William Poundstone documents that charm pricing helped increase sales by 24% compared to rounded price points. Additionally, researchers at MIT and the University of Chicago 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).
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 was on sale. However, do you think they would 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 have 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 bundling the items together, you are selling more inventory, the customer saves money, and your profit margins increase.