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“A 1% improvement in price optimization results in an average boost of 11.1% in profits”.

Ecommerce as an industry is highly competitive with new entrants and entrepreneurs ‘giving it a go’ every day. USA and Canada have about 1.3 million e-commerce companies. It is estimated that there will be 1.92 billion global digital buyers in 2019.

The figure has seen a steady increase and is expected to reach to 2.14 billion people in 2021. Online shoppers are increasing rapidly, which means the time to start an ecommerce store is ripe. In spite of this, a staggering 50 per cent of small American businesses do not have an online store.

If you already are a player in the ecommerce market, great! You have the advantage of experience over a new entrant. But does that mean you’re doing everything right?

How do you compete with thousands of resellers online or with huge marketplaces like Amazon?

How do you price your products in this volatile environment with everyone trying to undercut each other?

Various factors play on consumers’ mindsets before they make a purchase online. The average amount of time between a Google product search and a purchase is 20 days.

“An important factor that influences the buying decision is pricing”.

In a competitive e-commerce space, the challenge is to get consumers onto your website. The next step is to keep them hooked on your ecommerce store and eventually convert. What helps consumers make up their minds is pricing.

There are various pricing strategies you can implement on your ecommerce store. We’ve outlined a few below:

Value-based pricing

Value-based pricing is a pricing strategy where the price of the product is determined by the perceived value of the product or service for the consumers. It is not based on the cost of the product, competitor prices or historical prices but solely on the perceived value it holds for the customer.

It is also called ‘customer-based’ pricing as it relies on what you estimate a customer will pay for your product or service.

The fashion industry hugely uses a value-based pricing strategy. Cosmetic, SaaS, pharma and personal care industries also use this pricing strategy.

The foremost thing to consider when pricing your product or service based on value is not to price it unreasonably high. To be able to this, you will have to know your customers well.

Invest time and effort in creating a buying persona. Research your target market and your competition. Ensure that no one else sells the same product at a considerably lower cost, thus taking away the ‘value’ from your product.

Read more on value-based pricing strategy here.

Competitive pricing

Competitive pricing also called strategic pricing is a pricing method based on prices set by other businesses in the same sector and adopting a price similar to theirs.

It focuses on competitor and market pricing than the actual cost of developing the product or the value of the product.

In this method, you can price your product or service the same as your competitor or slightly lower or higher.

Pricing your products lower than the competition will lead to more conversions, but you will lose your profit margin. Pricing it higher may not result in volumes, but your profit margin will be higher.

When every e-commerce store sells similar products at fairly similar prices, the price variable is taken out from the decision making process for the customer.

The differentiator then will be customer support, after-sales service, marketing efforts, your brand value, etc.

Read more on competitive pricing.

Psychological pricing

Customers have an innate manner of responding to certain types of pricing. Psychological pricing is based on the psychological impact of reading numbers in a certain way.

Psychological pricing makes consumers believe that what they will pay for a product is significantly less than the actual price of the product.

This is achieved by pricing products lower than a whole number to make the price appear closer to the lower number.

For example, consumers perceive a product priced at $ 79, closer to $70 and not $80.

Limited-time offers are another psychological pricing strategy tactics to get customers rushing to buy fearing the loss of a great bargain.

Read more about psychological pricing principles.

Cost-based pricing

In the cost-based pricing method, a profit percentage is added to the per-unit production cost of a product to reach a target profit margin.

Cost-base pricing strategy calculates costs like operational, product development or product sourcing, distribution, shipping, etc. Then adds a profit percentage, and determines the price of the product based on the above calculations.

This strategy ensures that all operational and overhead costs are calculated before adding profits.

Bundle pricing

Why sell one product when you can sell more and increase the average order value on your ecommerce store?

Bundle pricing method is ‘bundling’ products together and selling them at a price lower than the combined price of individual products bought separately.

A McDonald’s meal is a classic example of bundle-pricing.
The pricing strategy is beneficial to consumers as they not only get a bargain but also save time shopping. The retailers benefit as well as they sell more.

There are various ways of bundling products together. You can bundle the same product, for example, 1 printer for $150 or 5 for $700, saving the customer $50.

Or you can bundle complementary items. For example, 1 printer costs $150 and the toner cartridge costs $50. By using the bundling price strategy, you price both these products if both together at $175. That’s a $25 savings for the customer.

Loss leader pricing

Pricing a product lower than cost is called loss leader pricing. It is an aggressive pricing strategy to attract customers onto your e-commerce platform in the hope that they will buy other products on your website.

When consumers also buy other products, you make up for the loss of the low pricing of your product.

For example, if a consumer comes to your e-commerce platform to buy a USB cable priced low, and also buys a flash drive, wireless mouse and headphones,  you cash in on impulsive buying patterns of consumers and leverage on the low cost of one item.

In short loss-leader pricing of one product has translated into more sales overall.

Dynamic pricing

Dynamic pricing also called real-time pricing, is a pricing approach where you set flexible prices depending on your cost, the demand for your products, and your competitors’ prices.

This pricing strategy is used extensively by ecommerce businesses. Amazon uses dynamic pricing and changes the prices of products every 10 minutes based on real-time demand.

It may seem overwhelming to manage a huge catalog of thousands of products and keep an eye on real-time prices and supply, but it can easily be achieved with the right software.

VARStreet offers direct integrations with 40 distributors and real-time price and inventory updates for your ecommerce store, so you can always price right.-

To conclude

Brand reliability, value for money and perceived significance of a product are important factors for consumers to make their choice before they hit the buy button.

In most cases, consumers research products, compare them on various e-commerce platforms and only if they are satisfied with various aspects of the products on your e-commerce platform will they convert.

In the competitive e-commerce space, the prices of your products determine the conversions on your e-commerce store.

Be wise while pricing your products to strike a balance between profit margins and attracting buyers.