Crafting pricing strategies for your eCommerce store is a tricky process.
Price them low and you risk losing out on meeting your cost margins and scoring healthy profits.
Price them high and you risk losing your competitiveness, market share, and price-conscious customers.
How to come up with eCommerce pricing strategies that help you wade through all these obstacles?
Make sure you’re taking into account these two factors when coming up with a pricing strategy:
- Business overheads such as manufacturing and production costs and processes, marketing and promotional advertisements, etc.—the internal factors for any business. These are mostly within your control and can help calculate your baseline and determine your profit range.
- Competitor price ranges and proximity or the purchasing power of your customers, etc.—the external factors for any business. These will hardly be in your control. But you can monitor macro trends such as changes to global or national economic conditions to stay on top of these.
In this post, we’ve compiled 8 eCommerce pricing best practices that can be a game-changer for your business.
8 eCommerce pricing best practices that every founder can blindly follow
1. A smart way to upsell and cross-sell: Bundle pricing
There’s a strong psychology behind bundle pricing. Customers always purchase based on the perceived value they get from the product. Hence, several items clubbed together and sold at a reduced price—in comparison to their individual prices—can seem worth the cost.
That’s exactly what the Nintendo experiment—executed by Vineet Kumar from Harvard Business School—proves. When customers were given the option to choose from either individual and bundle video game units, the sales went up to 100,000 units. However, when the option was taken away and customers were forced to choose only from the bundle units, the sales declined by 20%.
How to choose the right bundle pricing model?
a) Pure bundling - Use this when you want your products to be clubbed together and not purchased separately. Like what television packages do.
When you head on to Comwave’s website, there are lots of options for packages. But the customer won’t be able to choose any individual channels separately.
b) Mixed bundling - Want to keep the option open for both individual and bundled products? Go for a mixed pricing model.
This is what Crate & Barrel does.
While they offer a cost-saving option of a utensils set, they also suggest the individual options below in case you want to go ahead with that.
c) Cross-brand bundling - Choose this when you’re bundling products from multiple categories
d) Premium bundling - Opt for this when you’re selling the bundle at a higher price than the individual items put together. This works in case of special holiday seasons or promotional offers.
Like how William Sonoma does for their Thanksgiving Day turkey roast set.
e) New/unpopular bundling - This pricing model is ideal for clubbing popular and best selling products with new or unpopular ones to push movement in the latter.
f) Complementary bundling - A great way of cross-selling similar products in the same bundle. For example, if someone is buying a pair of headphones, it makes sense to bundle a speaker and a charger along with it.
For example, if you’re buying a Bluetooth speaker, a travel case for carrying it around will be worth it as a package.
Bundling is closely related to upselling and cross-selling techniques. In several cases, bundle pricing can be used to upsell and cross-sell your products. You can both upgrade the average order value of the customer as well as suggest auxiliary products to accompany the main product.
How to get the most out of Bundle Pricing?
- Offer multiple bundle options - Providing them with a wide range of bundle options helps customers figure out which products to pair together.
- Focus on savings - Use figures and percentages to show how the bundles can offer a better deal than the collective individual products.
- Ensure that the perceived discount is 10% or more - Make the savings obvious for the customer by highlighting the price comparison separately for individual products and bundles. This applies both to pre-set bundles or separate add-on products.
- Use the Buy More and Save pricing model - Keep the Rule of 100 in mind while fixing the price in this case. Offer a percentage discount if the total price is below $100 and offer an absolute discount if the total price is above $100. This induces customers to add more to their cart and increases the average order value.
- Make sure the discount price is easy to calculate - Select a price that’s easy to compute, even if it means lesser savings. Studies reveal that customers found the perceived difference between 4.86 and 3.67 to be smaller than 5.00 and 4.00.
Pros and Cons of Bundle Pricing
- It helps in upselling and cross-selling your products and boosting your profit margins
- It helps customers in making decisions in lesser time
- Too many options can cause analysis paralysis—so keep the options limited
eCommerce businesses that use bundle pricing like pros
a) How Naturebox nails bundle pricing through customer segmentation
Naturebox does a good job at offering bundle pricing options keeping in mind various customer segments and pricing considerations. The additional member discount option helps in long-term customer retention.
b) How Walmart complements upselling and cross-selling with its bundle pricing model
The best way to understand upselling, cross-selling, and bundle pricing is from Walmart’s website.
In this example, Walmart offers the option of buying a solo Nikon camera as well as buying a bundled option along with several other accessories. Customers can get just the camera at around $2,500. Another option is to pay $1000 more and get a host of other accessories along with it.
Walmart also cross-sells complementary products along with the main product.
Again, it offers the option to include similar products to add to the cart and increase the overall cart value.
2. Add a hint of personalization: Price discrimination
Most eCommerce owners know that not all prices are made the same. Sometimes the same product is sold at different prices for different customers.
In the truest sense of the term, a price discrimination model involves charging the customer the maximum amount they can pay. In real-life scenarios, the pricing is decided based on customer segmentation. This is dependent on several factors such as demographics, location, perceived value, etc.
The value from the price discrimination model arises when the profit from selling to separate customer segments is greater than that of a single segment. However, whether the model will sustain in the long run depends on how long the demand exists and the willingness of the customers.
The price discrimination model offers plenty of scope for eCommerce personalization. There are different approaches to using this pricing strategy.
How to use the price discrimination model
a) First-degree price discrimination or personalized pricing
In this model, each customer is charged a different price for a particular product. This is typical in eCommerce sites that host auction marketplaces.
The best example is perhaps eBay. The same product is sold at different prices and will attract different bids.
In this type of price discrimination, customers are the determining factor. Another way you can use price discrimination is by A/B testing your product emails. You can send one price to a particular segment and another price to the second one to check which works best.
b) Second-degree price discrimination or product versioning
This type of price discrimination model is determined by quantity. The price differs as per the quantity sold.
For example, larger quantities are sold at lower unit prices or with absolute discounts. This is a common strategy used for selling to industrial customers.
This also works in the case of product bundling. Some customers prefer the individual product while some choose the bundled package. They pay higher or lower prices accordingly.
Check how on the Alibaba website, the price of the product changes, depending on the quantity ordered.
c) Third-degree price discrimination or group pricing
This is perhaps the most personalized of all the models and the most difficult to implement. Here the pricing is finalized as per customer segments. All customers are divided into different segments and each segment has a fixed price.
This model is widely used by the travel and entertainment industry. Think cinema tickets (separate prices for kids and adults) or hotels, flights, or packages.
For example, Booking.com charges different rates for the same hotel during different seasons.
Opting for this pricing strategy involves digging into your customer data and analyzing their behaviors and activity. This translates into the personalized price that customers see.
3. Boost your Average Order Value: Loss-leader pricing
A loss-leader pricing strategy is ideal for those eCommerce stores aiming to grab a considerable market share or new customers to their store. The prices here are fixed much lower than the cost margin.
Almost all eCommerce store owners have played around with loss-leader pricing at one point or the other. It’s an often-used tactic to lure customers away from the competitors and purchase from your brand.
Think Black Friday or Cyber Monday sales. Imagine the jaw-dropping low prices on Christmas or Thanksgiving Day—much lower than the retail prices—offered by retailers.
Pros and Cons of Loss-Leader Pricing
- It’s the ideal strategy to use for penetrating a new market
- It helps cross-sell other products in your store
- It creates awareness of your brand and product
- It may be difficult to earn profits in the case the customers are bargain hunters
- Big loss-leading discounts may negatively impact brand perception
- It may condition customers to purchase only when discounts are offered
The rationale behind loss-leader pricing is that customers will buy other products along with the loss-leading one. This will compensate for the losses.
Again, it’s a great choice to increase the average order value of the customer. This happens when you suggest complementary products when a customer adds a product to the cart. You may also upsell similar products or accessories as part of the order.
For example, when a customer goes to purchase an Xbox they see several suggestions below that seem relevant to their purchase.
This also applies when a customer is purchasing a smartphone and gets suggestions for a phone cover and screen protector. This helps in boosting the customer lifetime value as well.
Free shipping is an essential aspect for customers during a purchase. Many abandon their carts if they don’t get free shipping. It’s a great add-on to your loss-leading priced orders.
4. Leverage your product exclusivity: Price skimming
One successful technique most eCommerce businesses use to stay ahead of their competitors is to lower their prices so that they have the best deals.
Some keep their prices high for the short term to build brand exclusivity. This works especially during the introductory phase when launching a product. It leverages the uniqueness and freshness of the product to boost profit maximization.
How stores can get the most out of Price Skimming
- Make customers feel exclusive. They always want to be the first to get hold of a product
- Use phrases such as an exclusive offer or limited availability along with the price
- Use the right channels—social media or your email list—to promote the campaign
- Don’t lower your prices at the first instance since it skews the image of the product as well as the brand
Pros and Cons of Price Skimming
- It helps in profit maximization
- It helps you to leverage the fear of missing out (FOMO) to increase customer adoption
- It helps boost brand loyalty
- It helps build early adopters who can become influencers and ensure word-of-mouth marketing
- It’s a time-sensitive pricing strategy and can’t be implemented in the long-run
- It’ll make your competitors alert and they can reduce their prices to draw customers back in
- When the prices are lowered later, it can upset customers and create a hit to customer loyalty
- It’s not ideal if there are already a huge number of competitors in the market
How brands use Price Skimming like a pro
a) How Sony leveraged the price skimming model for its PS4 launch
Several top brands have used the price skimming strategy. Sony used it when it launched the PS4. By setting a price tag at $399 close to the Microsoft one at $499, it ushered in a niche brand loyalty.
b) Apple: the oldest user of the price skimming strategy
Apple has been using the price skimming strategy for a very long time. When it launched the early 4 GB and 8 GB iPhone models, the price was at $499 and $599 respectively. They were sold out instantly. 2 months later, when the iPod launched, the price of the iPhone dropped from $599 to $399.
5. Build your brand identity: Premium pricing
If you’re trying to enter a field that has a lot of competitors, then you’d want to opt for a premium pricing strategy to keep your product unique and draw in more customers.
Perception of quality is a huge factor when it comes to customer retention.
It’s quite similar to the price skimming strategy—the only difference is that in premium pricing, the price doesn’t lower after a period of time but remains the same.
This really works when you’re trying to create a brand identity based on price—by charging higher than your competitors.
When to use the premium pricing strategy
- When you’re introducing a new product for the first time and want to categorize it in the premium range
- When you want to establish your products as unique
- When you want to appeal to the perceptive value of customers and establish your product in the luxury niche
- When you’re confident that your competitors will find it difficult to match your price and positioning
- When you can maintain exclusivity by limiting the production
Creating your very own brand story is the ideal way to create a niche in the competitive market. Use your channels to highlight the unique features of your product that justifies its price. Don’t just tell them but show them what kind of an experience the customer can have. Be extremely transparent about your company. For example, if you’re into sustainability, highlight that point. Finally, create a seamless story across all channels.
Pros and Cons of Premium Pricing
- It’ll help build a higher profit margin
- It helps improve brand loyalty and perception
- It can successfully raise barriers to entry into your niche
- It won’t work unless you have strong USPs to justify the price
- It’ll limit your ability to sell to a mass-market
- It can cause an adverse impact if there are other competitors who can sell similar quality products at a lower price
How brands use Premium Pricing like a pro
a) Think premium. Think Rolex.
When it comes to luxury pricing, Rolex is a household name. For timekeeping, any watch brand such as Timex would do. But Rolex is much more than that. It has been able to equate owning its product as one akin to something of prestige and status symbol.
b) How The Row builds a luxury niche with premium pricing
There are plenty of shirts similar to the one The Row sells. At cheaper prices too. But what makes theirs exclusive from the others is the luxuriousness. This makes customers choose them, even at the insane price, over their competitors.
6. Know your customer to sell better: Psychological pricing
It’s difficult to predict the purchasing habits of your customers. Even if you understand shopper psychology, you still need to experiment with several tactics to know what works for your business.
How to implement Psychological Pricing like a pro
a) Charm them with the number 9
Have you ever wondered why prices for items are sometimes labeled $9, $99, $499, $999, or anything with a 9 at the end?
This is known as charm pricing.
The University of Chicago and MIT conducted studies in which they discovered that customers gravitate towards prices that end with the numerical number 9.
The physiology behind this is that human beings normally start reading from left to right. Therefore, if the price is indicated as $399, we interpret it as being closer to $300 than $400 since we look at the first number from the left, which is 3.
This is proven to result in high conversion rates, as you can see in the example below.
Brands use it to the full extent. Take a look at these refrigerator prices displayed on Best Buy and you’ll know what we mean.
b) Scarcity principle
The scarcity principle explains that people place a lot of value on a scarce product. That is why demand usually goes up for products with low supply.
You can employ this principle by indicating that there’s limited stock available for a product. Or say something like, ‘only a few left,’ ‘only 5 pieces remaining’ and such.
Here’s how Donald Pliner does it.
c) Sense of urgency
Creating a sense of urgency makes potential customers feel like they need to have the product ASAP because they might miss out on the opportunity if they don’t buy it at that time.
You can create this urgency by setting a deadline for the end of a discount or sale, using a countdown timer to the deadline, or indicating that the price will go up the next day.
d) Fear of missing out (FOMO)
No one wants to be left out of amazing things that others are enjoying. That’s why FOMO exists.
You can let potential customers know that they’re staring at exclusive deals and they may not get it again. Having a time limit (deadline) is another way of activating FOMO.
Some of the words you can use to maximize people’s fear of missing out include, ‘Time’s running out, 2 days left! and don’t miss this offer.
Check out how Mejuri leverages FOMO to entice their visitors to sign up for the gift card reward.
7. Choose a customer-first approach: Value-based pricing
Most customers have several options to choose from when to plan to purchase a product. So why will they specifically choose your brand?
Only if the value you provide matches the price. As an eCommerce business, your job is to understand the factors that affect your customers’ choices and use them to your advantage to enable customers to choose your brand. This is where value-based pricing comes in.
Value-based pricing refers to a situation in which businesses set prices for their product based on the perceived value. So, this means that the focus is on the customer’s perception of a product’s worth and not the time or cost incurred in producing the product.
Pros and Cons of Value-based Pricing model
- Makes it easy to penetrate a market because of the research and consideration given to understanding the perceived value of the product
- Helps to focus on revenue maximization since all production considerations are customer-oriented
- Ensures products are of the best quality
- It can be complex and time-consuming to implement
- It can be difficult to justify value added when you increase the price
- The perceived value is subjective and can be dependent on several external factors that may be difficult to control
How brands can implement Value-based Pricing
- Conduct research on your target customers - To come up with a price for your product using the value-based pricing method, you need to know the value your customers place on your product. This is where research comes in. Through research, you will know what customers think of your product, how much they are willing to pay for it, if your product solves their problems, and areas you can improve on.
- Conduct research on your competitors - If customers can get a product similar to yours at a way cheaper price, there are high chances they will pick that unless there’s something significantly unique about yours. Assessing your competitors also helps you to know their strengths and weaknesses, why customers buy from them, and what aspect of their marketing is working that you can use to improve your own.
- Set a price for your product - Since you know how much option B costs, take that amount and add the value of the key features that your product has over the next option. you will now have a total when you add the price for option B to the value of the advantages your product has. Remember we have the advantages of option B too. So, give these advantages a figure and subtract it from the total you have. That’s how you arrive at a value-based price for your product.
- Test the price - Arriving at the right price will take time and maybe even trial and error. That is why you need to test the price you have set and see if it’ll favor both you and your customers. If it doesn’t work the first time, brainstorm again, play around with the first figure, and test again until you get a good price.
How Everlane generated brand loyalty through Value-based Pricing
This is an eCommerce brand that prides itself in being radically transparent with its customers. The company does this by showing a breakdown of the cost of raw materials, and transportation. This shows how much it costs them to produce each item of clothing as well as the profit they get from the product.
The value that Everlane customers get include:
- Quality clothing made from the finest materials.
- Knowing that they are dealing with a trustworthy company because of their ‘radical transparency’ policy.
- The comfort of knowing that they’re buying from a brand that deals with ethical factories.
Fast Company, a magazine company in the US that publishes content on business, design, and technology, did a piece on Everlane under ‘most innovative companies.’
8. Create hype around your new products: Penetration pricing
Not all products you launch in your store are as easy to sell as your best-selling products.
This is when a market penetration pricing strategy comes into play. You enter a product market at below-average prices to capture a major portion of the market or grab an early customer base.
Here’s a scenario where penetration pricing works. Suppose in a handmade soap market, there’s already a store that sells soap units at $15. Now a global brand with a higher production capacity enters the market. They start selling the soap units at $6.05—the cost to produce the soap being $6. The profits are negligible but it cements the brand in the long term as the cheapest option available.
Why choose a Penetration Pricing model
- Capturing the market share
- Building brand loyalty
- Gaining customers from competitors
- Generating demand
- Driving competitors out of the market
Pros and Cons of Penetration Pricing
- Faster adoption of products by customers
- Offers little time for competitors to react
- Helps businesses generate higher sales by lowering marginal costs and realizing economies of scale
- Boost goodwill among customers through word-of-mouth marketing and increases customer retention
- Improves inventory turnover rate
- Customers mostly expect lower prices throughout and may leave when prices increase
- Can attract bargaining customers and those with lower loyalty
- Can impact brand image and portray the company as offering low-quality products
- Can lead to a price war with the winners mostly being old companies with a sizeable market share
- Doesn’t work as a long-term strategy as it bears the risk of financial instability
Penetration pricing works best when clubbed with other eCommerce pricing strategies. For example, discount pricing works really well. Once you grab customers with a penetration pricing model, you can incentivize them to purchase more by offering discounts on other products.
eCommerce businesses that use Penetration Pricing like pros
a) How Walmart led to 15% grocery savings for customers through penetration pricing
Walmart has been a household name in the penetration pricing strategy. They’ve been nailing the strategy for years. It resulted in 15% of savings in the grocery cart for customers. The price reduction by Walmart resulted in savings of around $957 per person and $2500 per household.
As per research, the key strategies they used were leveraging economies of scale, low-cost suppliers, and state-of-the-art IT systems for shelf and inventory management. This was complemented by cost-cutting measures both at the internal and the supplier level.
Combined, Walmart was instrumental in driving about 4% of growth to the US economy.
b) How Gillette earned massive profits from Vector and Vector Plus through penetration pricing
Gillette is another example of a business doing penetration pricing right. They introduced their low-cost options—Vector and Vector Plus—to lure customers away from the competition. They increased their market share and sales figure by increasing brand awareness about their new product in the segment (at high quality and lower prices). Post the initial period, they recovered profits by selling razors at a low cost but blades at a higher cost.
Test your eCommerce pricing strategy
Now you have an eCommerce pricing strategy for every season. But don’t get comfortable with a plug-and-play approach.
The most successful eCommerce brands are the ones who keep on testing everything. This also includes the pricing for your products. Use a smart A/B testing tool like CRO360 by ConvertCart to compare different pricing strategies.