Making sure the price is right for selling products online, is one of the biggest challenges eCommerce businesses face, especially in rapidly-evolving markets where competition is fierce. Here, we look at four of the most common pricing methods to consider for your business and how they work.
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Pricing strategy refers to the approach you take when calculating how much you should charge for your products. Different types of pricing strategies can be used in different situations, but above all, an informed pricing structure helps you determine the price point at which you can maximize profitability without pricing yourself out of the market.
Customers aren’t likely to purchase goods from you if they can find comparable solutions elsewhere for less money, but your company can’t stay afloat if your prices don’t cover your business costs. This is why pricing techniques are a fine art and should take into account a number of factors, including the following:
Here are some examples of key pricing strategies for you to consider for your eCommerce business:
Cost-based pricing is a type of pricing strategy in which a certain percentage of the total cost of production is added to the cost of a product to determine its selling price. Cost-based pricing is split into two types:
This is usually the simplest method for determining the price of a product. With this approach, you add the cost of materials, labor, and overhead expenses for a product, and multiply the total by a markup percentage (your profit margin) to determine the price of the product.
The cost-plus pricing formula is as follows:
Price = total cost of product + gross profit margin
Let’s say a company has designed a product that contains the following costs:
The company applies a 30% profit margin to products, so the price calculation would be as follows:
Price = (20 + 10 + 8) x 1.3 = $49.40
Markup pricing involves adding a markup percentage to the cost of a product to determine its sale price. Typically, markup pricing is used in situations where a retailer sells a product for a higher amount than its cost price.
The markup pricing formulae are as follows:
Markup as a percentage of cost = (markup/cost) x 100
Markup as a percentage of selling price = (markup/selling price) x 100
For example, if a product is sold for $500 and its cost was $400, the markup is $100.
The markup as a percentage to cost would be:
Markup = (100/400) x 100 = 25%
The markup as a percentage of the selling price would be:
Markup = (100/500) x 100 = 20%
Pros of cost-based pricing
Cons of cost-based pricing
Demand-based pricing is a pricing strategy that relies on customer demand and perceived value of the product to determine a sale price. The success of demand-based pricing relies on having the right tools to analyze demand (such as demand forecasting reports). Industries such as hospitality and travel often use demand-based pricing in line with seasonal fluctuations of demand. Demand-based pricing helps businesses to earn more profit during those peak periods when customers are likelier to accept a product at a higher price.
Pros of demand-based pricing
Cons of demand-based pricing
Some businesses develop a pricing strategy dependent mostly or entirely on competitors’ prices. Pricing above the competition can be a smart approach for businesses that position themselves as a luxury or exclusive brand.
Pricing below the competition, on the other hand, could work if you can secure a good deal with suppliers that still allows you to make a healthy profit margin. Direct-to-consumer eCommerce businesses like Everlane, Casper, and Dollar Shave Club, for example, are able to undercut competitors’ prices due to their lack of a middleman and efficient supply chain management practices.
Pros of competition-based pricing
Cons of competition-based pricing
These pricing methods are some of the most common, but there are many other types and best practices of pricing techniques out there that you might find useful for your business. For most businesses, it’s a case of testing and learning over time – just keep in mind that it can be difficult to change a price point once it’s established, so take the time to research and establish a solid pricing strategy that ensures a healthy profit margin so you can continue to grow your business.
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