Landing on just the right price – one that takes into account all the costs, entices the customer and turns a profit – is one of the toughest parts of running an eCommerce business. This can be especially challenging when you’re starting out and haven’t yet figured out your retail pricing strategy.
So where to begin? Here are some top tips for ensuring that you pick a profitable price point: Creating a profitable pricing strategy Pricing strategy refers to the approach you take when calculating how much you should charge for your products. Although different strategies are more suitable for different situations, having a strategy in place will maximize profitability without excluding yourself from the competitive market. Retail pricing is a fine art that can take some tinkering to get right. Each retailer will have a different way to calculate price, but here are some of the considerations that go into a strong pricing strategy:
Production
Distribution
Competitor pricing
Brand positioning (for example, whether you’re a luxe or a budget brand)
Design and marketing
Your customer base
You also have to consider all your costs – not just the manufacturer’s sale price. These costs include:
Purchase cost
Freight and handling
Website design and maintenance
Administration
Customer care
Insurance
Storage
Equipment and software
Returns
It’s important that you have a handle on the cost of each of these elements so that you can accurately calculate their costs. Unsurprisingly, there are a number of different ways you can set pricing – here are some of the most common retail pricing strategies:
Cost-based pricing
Cost-based pricing is often the simplest way to create a retail pricing strategy. This means you simply add up your costs and apply either:
A) cost-plus pricing strategy
This involves adding your costs together and then multiplying the total by the percentage profit margin.
Price = Cost x % profit margin
b) Markup pricing
This type of pricing adds a percentage of the cost price onto the sale price. It is used when you’re selling a product higher than its cost price.
Markup as a percentage of cost = (markup/cost) x 100
Markup as a percentage of selling price = (markup/selling price) x 100
Cost-based pricing methods are easy to calculate and ensure that there’s no risk of losing out when selling a product, but it doesn’t take into account competitor pricing and uses historical costs only, which could lead to inaccurate information.
This more flexible approach prices products according to customer demand, behavior and perceived value of your product. For example, we see this in action with Uber’s surge pricing or in hotel bookings during high season. It is a more complex pricing strategy that means you also need access to demand forecasting reports in order to accurately assess how your customers might respond to higher or lower prices.
The advantages of this method are that you can make higher profits in times of high demand, and move products that aren’t selling by adjusting the price. However, demand can change so you have to monitor it closely.
This approach works well for different brands’ positions; for example, businesses that are positioned as a luxury, exclusive or boutique brand, pricing above the competition allows the perceived value of your product to increase; whereas pricing below the competition is great for products with an efficient supply chain and lower costs, that wish to increase market share.
However, you need to be careful that your pricing still allows for a healthy profit margin.
Keystone pricing
Perhaps the simplest strategy of all, keystone pricing simply doubles the wholesale cost to arrive at the retail price. This strategy may not be useful in all instances, however, due to the fact it doesn’t take into account competition and other factors, it could lead to a too-high or too-low price for your product.
Loss-leading pricing
This strategy is a little more of a gamble: it deliberately marks down one product, in the hope that it will attract viewers to your site who will add more items to their basket. This type of pricing is a calculated risk that your marketing can nudge and entice users to increase their order value, so use this strategy if you have plenty of data about your customers and a strong idea of how they’ll behave.
Multiple pricing
Bundling items can be a great way to move products as they create a higher perceived value for a lower price. This can be a fantastic way to remove dead stock from your warehouse shelves, and create demand. However, there’s also a danger that your customers will learn to only buy in a bundle, so you may need to use this strategy sparingly.
Manufacturer Suggested Retail Price (MSRP)
If you’re selling common items, for example, books, the price is commonly recommended by the manufacturer and expected by customers. Depending on your industry, this might be the right style for you. However, there’s no competitive advantage, so it may be one to use sparingly.
Whichever pricing strategy – or strategies – you use for your products, be sure to gather data first and evaluate over time. As your market and industry evolve, it may become necessary to adapt to new strategies.
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