Guest writer Catalin Zorzini provides helpful tips for pricing your products for eCommerce success
Various pricing strategies and why they might be right for you
By Catalin Zorzini, ecommerce-platforms.com.
As with any pricing strategy, the ideal goals for any enterprise or B2B online store include maximizing short term profits and gaining market share.
This sounds like an easy enough task, but where do you start? Is it best to simply look at your competitors and go based on what they're selling products for? Would it be wise to make an educated guess and hope that your buyers are willing to pay?
The problem with pricing for an online store is that starting too high or too low can put your company in a hole that's difficult to dig out of. However, a few wonderful pricing strategies exist that are not only proven, but useful for setting a standard for pricing your products without scaring away your buyers.
Keep reading to learn about the best methods for finding the perfect pricing strategy for your online store.
The Skimming Strategy
The skimming strategy is most often used in the technology industry, so it's a viable option for companies that may sell software to other businesses in a particular niche. The basics of the structure is for the online company to start the product pricing at a very high number.
Over a period of time, the business gradually lowers the pricing (usually as the supply increases) until you find a sweet spot that buyers are comfortable with. This strategy has both pros and cons. It's often better than starting your pricing too low and moving it up because buyers feel like they are being tricked into paying more, or they may not feel your product is worth the price increase.
On the other hand, if you take too long to lower your pricing, another company may create a similar product and undercut your pricing model. A more real-world example would be how the new PlayStations are sold at around $450 or $500, but the pricing gradually decreases.
The Rising Price Model
The Rising Price model is the exact opposite of the skimming strategy, but it tends to only work for certain products and business niches. You price your product at an insanely low price for a small amount of people. This builds buzz and helps you penetrate the market.
After that first batch of buyers, you raise the price a little, and continue to do so until you reach your desired price. The benefit to the Rising Price Model is people are more likely to buy from relatively unknown sources for the low price. You also gain the advantage of learning what your customers want. This is a common strategy when selling digital products, since you may be able to build up reviews and generate a following.
The Pre-launch Pricing Strategy
Sometimes a new product is tough to price since it is completely new to the market, so people aren't able to give you a good idea as to how much they would spend on the product. Therefore, you must grab a small group of test subjects and give them a price to buy your product.
Stay away from ridiculously low prices (or free prices,) since this puts those customers in a mindset that they should continue getting the product for free, or close to free. Keep in contact with the buyers and ask them later whether or not they felt satisfied with the price and if they would be willing to spend more. The strategy works well for digital products and educational materials, since you can loop the beta-testers into a recurring plan if needed.
Anchoring is actually a strategy for presenting your already established prices, but it can work to figure out which of the items people are more likely to buy based on the prices.
The goal is to reveal expensive items first (or near the less expensive items,) so that the less expensive items are not as intimidating.
You'll find this quite often on restaurant menus, where the pricey meals are placed in large print in a border, in turn making the rest of the menu appear more affordable. It also works quite well for online businesses, since you can present some of the more expensive products up front (like in a slider,) then quickly provide the alternative to push more sales.
Reducing Pain Points for Consumers
When a buyer lands on your online store they are hoping for a painless shopping experience. Whether purchasing enterprise software or supplies for the office, the goal is to save money and get the shopping done quick. What's a pain point? There are plenty of them, but for example, it's a pain for buyers to place multiple items in a single shopping cart. What if you offered bundled items for them to save a little time and money?
Here are some other ways to reduce pain points:
- Price subscriptions per month as opposed to per year, since it's easier to understand the value received.
- Bundle together items that are commonly bought together.
- Include messages that tell buyers that the product will solve problems. For example, "This software can cut your operating costs by 50%."
The Simplest of All Strategies
An easy, and common, pricing strategy is the simplest of all the options on this list. Follow this formula to make it work:
The Retail Price = [(cost of item) / (100 – the markup percentage)] x 100
This is actually similar to the more popular keystone strategy we will discuss below, but it provides flexibility for those companies that may want to modify their margins, compared to the "set-in-stone" keystone pricing. Since the markup percentage is open-ended, you can type in 40%, 60% or whatever you'd like the markup to be.
The Keystone Pricing Strategy
Many of the biggest online stores use the keystone pricing strategy, making it quite popular and credible. Simply take the wholesale price you spent on an item and double it.
Keep in mind that this is a huge markup, so if you have lots of tough competition, it probably won't work. The makeup and jewelry industries have the best luck with the keystone pricing strategy, yet B2B software companies can generally boost their markups depending on development costs.
Go With the MSRP
Although this doesn't give you much control over your pricing, it's a fine way to cut down on the time needed to discover a reasonable price. In short, if you don't make your own products, you can look at the manufacturer suggested retail price.
It's quite simple, and you can always jump to a different pricing strategy later if needed.
Competition Pricing: Going Above and Below
Many companies enjoy the competition pricing strategy since it only requires a bit of research and you know that competitor pricing is generally credible. All you do is pick a price for each product either slightly above or below said competitor.
When you price below your competitors you can grab buyers who are more price sensitive. If you go above the competition many buyers may think your product is of a higher quality.
That's it for the best methods for finding the perfect pricing strategy for your online store. Drop a line in the comments section below if you have any questions or thoughts on what pricing strategies work for your online store.
About the Author
Catalin Zorzini is the founder of Ecommerce Platforms, a daily blog about the eCommerce industry. He's also a big fan of hot jazz and hot soup.