Commerce, Platforms

Competitive Pricing Strategies for Online Retail

Learn how to price in the best way for your online store.

Ana Paula Souza

April 9 2018 · 6 min read
   

Better prices can be considered one of the main reasons many people like to buy online nowadays. Besides the fact online stores usually require less administrative costs and can sell directly to consumers without middlemen involved, which helps to reduce the final price charged to consumers, it is already very common to associate online shopping with discount coupons and generous rebates.

To complete the picture we could still add the tough competitive pricing strategies some companies have, with e-retail stores like Amazon and eBay haunting small and medium companies with their aggressive pricing dynamics and powerful marketing strategies.

Because of all that, it is not easy making decisions on this regard. Nevertheless, knowing the right pricing strategy and setting the best price for products and services has a major significance for the success of any online business.

Drawing up a pricing strategy plan for ecommerce

Pricing right doesn't mean pricing cheaper. Despite the common sense notion that suggests most consumers purchase only based on price, we can safely deny this statement. Firstly because of the numerous quality products, services and well-known brands that do not have cheap prices and promotional discounts as their flagship pricing strategy. For instance, Apple, Samsung, Nike, and Gucci. These are brands that usually cost more than the market average and still, people continue purchasing regradless, which boosts the company's profitability. 

Secondly, as you probably know, online shoppers are getting more and more demanding every day. They know where to look for information about your products, your background, values and defects. They will hardly buy something without checking past references from other users and they are often willing to pay more for better services, such as efficient delivery services and customer support.

This point made, it is time for you to think what could be your ecommerce unique selling propositions (USPs) and the added-value your product might have. Therefore it is important to understand the reasons why your customers would choose you over the competition. If you cannot easily point out these inner strengths, you may consider reevaluating your business path or just simply try to compete for the cheapest price in the market.

Traditional pricing strategies

As an ecommerce owner or pricing manager, you must consider the many aspects of this task, not only to cover your expenses, but also to make a good profit without overcharging your clients. Even though it might sound simple, it is always good to remember the basics of it.

The most common models to set prices are based on costs, competitors and value. They can be used separately, but the ideal is to mix them accordingly to the type of business you have and the market you are in. Let’s take a brief look at each one of them:

Cost-based Pricing

Because of its simplicity and easy application, cost-based pricing is a very popular strategy in the online retail industry. By using this method, companies need to calculate their costs of production and delivery of the products, add an adequate margin to have a profit, and that is basically it.

Even though it looks like a guaranteed method not to lose money, this pricing strategy does not take into consideration external factors and the market situation, and it does not foresee the case you do not sell enough products or the possibility that you could profit more, if you are selling something unique that your audience would pay more for it.

Competitor-based Pricing

On the other hand, for online companies that face strong competition and believe customers are sensitive to this factor, competitor-based pricing can be a good alternative to get into the market, especially when selling very similar products and cannot provide a significant, positive product or service advantage for the shoppers.

In order to adopt this strategy, you will need to monitor and price what you sell depending on the prices of your main competitors. However, by pricing your products and services like that, you are assuming you can stand reducing these charges – and your profit margins consequently. Another risk that you are taking is to enter a “race to the bottom”, that is when stores keep lowering the prices to beat each other until a point where it is almost not worth it to sell that product anymore.

For this reason, we recommend you to be cautious with this strategy and play with the prices if you have a wide catalog to offer. For instance, controlling the quantity of products a single shopper can buy so more people can enjoy the offer and you can control the stock. Or if you realize your customers usually buy two or more, maybe it is possible to set a loss-leader product to attracts the shoppers for your online store, but retail your profits with the other two or more products they buy with it, or on the average sales ticket.

Value-based or Value-optimized Pricing

Different from the first two models, a value-based strategy requires more than just good knowledge in economics and math. Once this method of pricing is built from the motivations and desires of the target audience, a more subjective perception of the market is fundamental.

So if you want to understand what is important for the people that are buying from you and what they would pay for it, you can simply start investing on customer studies and market research. With these studies you can establish what could be additional sources of benefits to deliver with your product or service.

Besides this market “feeling”, you will also need a marketing scheme and some time to enrich your brand value and its products, in order to maximize your profits.

If you are able to increase your customer’s perceived value of your product, besides being able to raise your prices with more confidence, you will be also strengthening your brand, which is always a good thing.

Non-traditional pricing methods

There is nothing wrong in trying these strategies mentioned above, but if you want to learn further strategies to spice the market up a little bit, we can also suggest the following options:

Unique price

If you are selling just one type of product like flip-flops or online courses for example, setting the same prices for all of them is not a bad idea. The first advantage is that your customers will never get confused or hesitate when choosing or comparing what to buy, and you will have the convenience to not worry about pricing every product.

Free products

Yes, I am being serious here. Having some free products in your store is definitely a powerful appeal for online stores and helps to bring a lot of new customers. Of course the point is to use this strategy as a way to sell more things with it or give the chance for people to try product they don't know yet, with small samples and trials.

Pay what you want

Another similar method that can sound crazy at first is to ask people to pay what they want, or what they think it is the fair price. Even though some customers will certainly take advantage of that, it has been proven that profits usually are the same or higher than traditional pricing methods, and that lots of customers appreciate and value that. This can be interesting for online services, apps and other non physical goods (e-books, movies, music). Besides, it also an excellent way to promote your brand.

Auction sales

The difference between this method and the “pay what you want” is that you can set a minimum price and that you are free not to accept all the bids, so you can control your sale price better. The positive thing is that even if your buyer is getting a price you would consider fair for a determined product, it also makes the customer feel good and happy, because he or she has won the auction. In addition to that, it can be also a great word-of-mouth strategy, as many people like this kind of “shopping game”. Like real auctions, it works better for antiques, art and collectible articles.

Pricing intelligence softwares

If your ecommerce does not fit the models that we have mentioned before or if you have a more complex product list to manage, pricing softwares can be a good option to help you with the work, assisting you to monitor the market, competitors and your own pricing strategies results. They also give valuable pricing insights to help you to optimize the profits.

Some of the softwares you can use:

Conclusion

Even though we know that building a online business and determining the right pricing strategies depend on experiences and repeated attempts, we also believe it is important to have a good knowhow to avoid silly mistakes and regulate the optimal prices as soon as possible.

Besides that, we can assure not even the most advanced, brilliant pricing software in the world can solve all issues the ecommerce market brings these days. Only people can be really prepared and find creative paths for everyday challenges, so we hope this article was helpful for you in presenting updated information and some new tips about the subject. 

Sign-up for our newsletter.

Get the most relevant info on ecommerce.