Friday 22nd April 2016

How to Develop an Effective eCommerce Pricing Strategy

Joe Callon

Knowing how much your products are worth, and how much potential customers are willing to pay, is key to starting a successful eCommerce business. No one is going to buy from you if they can simply open a new tab, go to Amazon, and find a similar item for half the price that they can receive in half the time. It's time to win the battle with your customer's wallets.

Margins matter

Pricing your products as low as possible shouldn’t be the end goal when developing a strategy, in fact, you could be underselling yourself, which is inherently bad for business. To accurately calculate your margins, you need to factor in the time it takes to develop, create, manufacture and advertise a product before it even hits your online store.

Some retailers decide that by slightly underpricing their products on launch, therefore losing money, they can hopefully help boost repeat purchasing. This may seem like a good idea on the face of it, however it's not always sustainable when trying to scale your business. Customers will expect to see these low prices every time they return, and when the day comes that you decide that you can no longer justify knocking off that extra 10%, you start to lose the battle.

To decide whether this is the right method for your business, you need to evaluate what the average lifetime value of a customer is and whether it’ll be worth the risk in the long run. If you’re selling products that consumers buy on a regular basis, such as cleaning supplies or tea bags, you’re much more likely to see success from using a low margin pricing strategy.

If you're not sure how to calculate your gross profit margins, Shopify have created a simple calculator to make the process incredibly simple.

Should I use keystone pricing? 

Retailers often use keystone pricing as a simple and painless way of generating profit from their products. Essentially, keystone pricing is the process of taking the wholesale price of your product, and doubling it. This is a good way to ensure you'll earn a profit, and will work in a very niche market where customers are happy and expecting to pay more, but it's a terrible way of maintaining a successful business in a competitive market.

If you're selling something that's available on a wide range of online stores, it's almost impossible to justify keystone pricing as a strategy, however if you're offering bespoke, high-ticket items such as furniture or jewellery, it can be a simple and surefire way to generate a profit.

Using psychological pricing 

It's an age-old method that as a consumer you'll see everyday, but psychologically pricing products is still an effective way of "tricking" your customer's brains into seeing a lower price. This is a great way of selling your products for slightly more than you might usually consider, without having any negative influence over your customer's decision making.

mac pricing min

Psychological pricing is used by some of the world's biggest online retailers, including Apple, who use the tried-and-tested method of not rounding up their prices to put their products into a different price column. For example, instead of pricing the 21.5-inch iMac at £900, Apple use £899. In a customer's mind, this is much closer to £800 than reality. This works thanks to the "left-digit effect", something that's been studied by many researchers over time and is a proven way of getting customers to buy more, without actually reducing your sale price (much).

Define and show your USPs to justify pricing 

Customers need a reason to pay more, but if they feel like it's worth it, they're more than willing to shell out some extra cash. Your unique selling points should consist of the key points about your business that set you apart from the competition. Whether it's faster delivery, superior customer service or an added extra, such as a free accessory or discount code.

Once you've defined your USPs, it's time to show them off. Displaying them prominently on your store's home page is a great way to communicate what's special about your business to potential customers. More and more, brand values are a big influencing factor in your customers purchasing decisions, so this is essential to consider when deciding on your strategy.

Statement client Be Beautiful Online chose to give customers several reasons why they should buy from them just below the navigation on their online store, giving visitors an instant insight into the brand.

bbo usps min

Incentivise to initialise 

Incetivising customers through a variety of techniques is a great way to drive sales and get yourself some repeat customers, although you could give yourself a reputation as the discount retailer.

Using seasonal sales and regular discounts effectively can massively increase conversions on your online store, but they're just a couple of ways you can entice customers to buy from you. Using bundle pricing is another incredibly powerful sales method for eCommerce businesses, and it's definitely one you should consider for your store. Research carried out at the Harvard Business School found that video game company Nintendo actually sold more products when they were bundled together, as opposed to selling components individually.

“Consumers might actually value the bundle less than they would value the individual component products, that is there was a "negative synergy" associated with the bundle"

As the research shows, whilst bundling might be a great way to sell stock, it can actually have a negative impact on the sale of individual products if the bundle is taken away, as customers feel they're not getting the best value for money.

What will work best for your business? 

Your pricing strategy depends entirely on the nature of your business and the products you sell, so take all of our advice and compare it against your own situation for the best results. If you’re still not sure how to effectively price your products, we recommend testing out the various methods we talked about to see what works best in practice, and analysing the results to generate a rock-solid strategy.

If you require any more help or advice regarding your pricing strategy, or any other aspect of your eCommerce business, please feel free to get in touch.

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