P is for Pricing

The ABCs for Online Merchants

P is for Pricing
March 17, 2020 Laisa Lopes

If you’re thinking of setting an online business or you’re looking to expand your sales funnel by listing on price comparison websites, this guide will get you started on the basics of pricing. 

Setting the right prices for your products is essential for a successful business. However, creating a pricing strategy is a balancing act – and not a simple one. 

A good pricing strategy will keep you competitive and keep your business sustainable. Creating the perfect pricing strategy is never easy, however. This is especially true for e-commerce businesses in the early days. 

If it’s your first time listing your products on an online platform, coming up with a suitable pricing strategy is a tricky task. When facing the competition, your first thought might be to reduce the price to attract customers. 

However, a low price isn’t ideal since you might see a rise in sales without turning any profit. (Be careful not to fall into a pricing war!) On the other hand, a high priced product can see fewer sales and lose market share. 

>> Are you looking to diversify your sales channels and you’re not sure what your next step is? Check out our article ‘Reach Ready-to-Buy Shoppers with PCWs‘.

In this article, we’ll dive into the popular pricing strategies that can help you kick off your online business. 

But first, what is a pricing strategy? 

First things first, a pricing strategy is the set of rules or methods you can adopt to price your products and services. 

Pricing strategies are marketing tactics. This means that getting your pricing right is crucial to improving your conversion rate. Here are some effective ones for your e-commerce businesses.

Cost-based pricing 

Cost-based pricing is a simple strategy that involves adding the total cost of your product (including shipping and marketing costs) and the margin you want to make from each product. It is a simple method that will let you arrive at a price that will bring profit. 

The biggest advantage of this method is its simplicity. The disadvantage is that it’s not consumer-focused.

💡 Note to merchant: Make sure to include marketing costs in this pricing strategy; otherwise, you can ruin the chance of making a profit.

Let’s have a look at an example of how cost-based pricing works. 

Let’s say you run an online sports clothing store and you’re selling leggings. If you’re drop-shipping, that means you purchase your products directly from your supplier every time there’s a sale. 

It cost you $10 to source your leggings from your supplier and $5 to ship it to your customers. The total is $15.

To attract traffic to your online store and land conversions, you pay $5 per product on Facebook ads.

In total, you’ve spent $20 to source a product, make a sale and ship it to your customer.

Pretty simple so far, right? Next step is to decide the amount you want to charge per product. This will complete your cost-based pricing strategy. 

You can try selling the legging at $25 or even $30, and see if you can land sales. You’ll be earning a profit at both prices. 

Competition-based pricing 

This strategy involves researching fellow competitors in your niche and pricing your product based on how they price theirs. It is one of the most common practices in e-commerce and is highly effective. The advantage of this strategy is that it helps you sell products around the market rate and remain competitive. This can be disadvantageous to a new entrant who doesn’t have enough customers as margins can be too low to keep the business sustainable. 

So how do you go about comparing prices? You can manually look through your competitor’s websites or listings on price comparison platforms. Checking prices one by one can take a while, so if you need to spend more time on other aspects of your business, you can use price tracking tools. They collect data about your competitor’s price – with no manual work from you.

When you have a good idea of what the average price of your product is, the next step is to compare it against the cost it takes for you to make a sale. The difference between these two figures is your buffer. 

For example, the average price for a homemade candle is $30, but it only costs you $15 to source it – or produce it – and sell your product. You can then price your candle anywhere from $20-$40. 

Value-based pricing 

This is a strategy that blends elements of the cost-based and competition-based strategies to arrive at a price that is good for your business and customers. It is perhaps the best pricing strategy for companies that are looking for a long-term, scalable solution to price their products. 

Also, value-based pricing requires complex research and analysis to determine the value you are providing to your customers by selling the products to them and pricing them accordingly.  You need to figure out what your baseline price is and the median price of the competition. 

The baseline price is the lowest price you can sell your product. To do that, jump back to the cost-based strategy and think of how much

  • it cost to source / produce your product
  • it cost to ship
  • you spent on marketing

These figures together give you the baseline price. Next step is to apply competition pricing tactics and do some market research. Get the median price of your product (add all of the prices together and divide the sum by the number of prices). That’s your competition price.

Let’s say your baseline is $25, and your competition price is $50. You can price your product between $30-$40 and you’ll make a profit. 

Where you put your price on that scale will be based on the value you bring to your customers.

By juxtaposing the two, you will arrive at a price that will be good for your business and value-oriented for your customers. The advantage of this strategy is that it is fair to your brand and your customers. The only possible downside is that it requires some work. 

Ready to start testing your pricing strategy?

Figuring out the perfect pricing strategy for your business can be a daunting task. However, it can be rewarding in the long run. Keep in mind that pricing is fluid and seasonal. Customers interest can peak according to periods and trends, so make sure you’re on top of your competition. 

Also, remember that your shoppers are also looking for value, so setting a good pricing strategy will help you build trust around your brand. This way you will remain competitive and grow your e-commerce business. 

If you’d like to list your products side-by-side to established companies in e-commerce, check out Shopbot’s monthly plans specifically tailored for small businesses!