How to Create a Working Ecommerce Retail Pricing Strategy

Imagine that you’ve invested thousands of dollars to set up your online store, sourced products you believe in, optimized your website for SEO, and crafted your own content strategy. And when it’s finally time to start making money, you simply pick prices that sound nice. It doesn’t make much sense, does it?

Here’s what a real retail pricing strategy looks like.

An effective retail pricing strategy factors in the real cost of the products, the willingness of consumers to pay a certain amount, and what competitors charge for the same products to land on a price that is profitable.

if you are interested in pricing concepts and creating an eCommerce retail pricing strategy that makes money. Keep on reading.

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What Are Ecommerce Retail Pricing Strategies?

An eCommerce retail pricing strategy refers to the methods and formulas retailers use to determine the prices at which they’ll sell their products online.

The final goal of such a strategy is to systematically arrive at an optimal price that covers both expenses and the right balance of profitability to achieve sustainable business growth.

12 Ecommerce Pricing Strategies to Pick From

When it comes to eCommerce pricing strategies, there are several options to choose from. The choice of strategy often depends on the nature of the product or service, the target market, and the overall business objectives. In some cases, a hybrid approach to pricing may be the most effective to help businesses maximize their revenue potential while remaining competitive in the market.

Here are 12 of most common pricing strategies:

Premium Pricing

Premium pricing involves setting a higher price for a product or service that’s apparently superior in quality, exclusivity, or unique features. The aim is to position the product as a status symbol and to attract customers who are willing to pay a premium for perceived value, brand prestige, or exceptional customer experience.

• Pros: Higher profit margins; brand image enhancement; perceived value, reduced price sensitivity.
• Cons: Limited market reach, increased competitive pressure, risk of overestimation, economic sensitivity.
• Best situations to apply: Unique value proposition, strong brand equity, limited competition, targeted segments.
• Real-life example: Apple, high-end luxury brands.

Cost-plus Pricing (or Markup Pricing)

This type of pricing is based on adding a standard markup or profit margin to the cost of producing or acquiring a product.

• Pros: Simple to calculate and ensures a consistent profit margin.
• Cons: May not account for market demand or competitive pricing.
• Best situations to apply: Useful for businesses with stable production costs and limited competition.
• Real-life example: IKEA

Competitive Pricing

Competitive pricing involves setting prices based on pricing research to align with prevailing rates in the market, thereby enabling a business to remain competitive with other businesses.

• Pros: Helps businesses stay competitive and can attract price-sensitive customers.
• Cons: May lead to price wars and reduced profit margins.
• Best situations to apply: Suitable for industries with many competitors and products that are similar across brands.
• Real-life example: Walmart

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Penetration Pricing

Penetration pricing is a strategy where a product is initially offered at a lower price to gain market share and attract customers.

• Pros: Attracts customers and can quickly gain market share.
• Cons: May not be sustainable in the long term, and could devalue the product.
• Best situations to apply: Effective for new products entering competitive markets and when rapid market penetration is crucial.
• Real-life example: Disney+

Price Skimming

Price skimming is a strategy where a company sets a high initial price for a product and then gradually lowers it over time as the product becomes more widely adopted.

• Pros: Can maximize early profits from price-insensitive customers.
• Cons: May limit market reach and requires a careful pricing strategy.
• Best situations to apply: Suitable for innovative or unique products where demand is relatively inelastic.
• Real-life example: Xiaomi

Value Pricing

This is a strategy similar to premium pricing where a retailer sets the price based on the perceived value it provides to customers, rather than focusing solely on production costs or competitor pricing.

• Pros: Reflects the perceived value of the product and can lead to higher profits.
• Cons: Requires a deep understanding of customer perceptions and value drivers.
• Best situations to apply: Ideal for products with unique features or strong brand loyalty.
• Real-life example: Louis Vuitton

Discount Pricing

With discount pricing products are sold at a reduced price, often through promotions or sales, to attract customers.

• Pros: Attracts price-sensitive customers and can increase sales volume.
• Cons: May reduce profit margins and impact brand perception.
• Best situations to apply: Effective for clearing excess inventory or during promotional periods.
• Real-life example: Costco

Bundle Pricing

This is a strategy where multiple products or services are sold as a package at a discounted rate.

• Pros: Encourages customers to purchase multiple items and can increase overall sales.
• Cons: Customers may only want one item in the bundle, leading to lost sales.
• Best situations to apply: Useful for products with complementary or related items, such as software and its add-ons.
• Real-life example: Adobe

Keystone Pricing

Keystone pricing is when products are priced at double the wholesale cost.

• Pros: Provides a consistent profit margin and is straightforward to implement.
• Cons: May not reflect the true value of the product and could result in overpricing.
• Best situations to apply: Commonly used for products with stable wholesale costs.
• Real-life example: Warby Parker

Vendor Pricing

With this strategy in which a retailer negotiates lower prices or discounts from its suppliers or vendors.

• Pros: Allows for negotiation and potential cost savings.
• Cons: Relies on suppliers’ willingness to negotiate and may lead to dependency on specific vendors.
• Best situations to apply: Suitable for businesses with a focus on cost efficiency and strong supplier relationships.
• Real-life example: Alibaba

Psychological Pricing (Charm Pricing)

Charm pricing is a marketing psychology strategy where prices are set slightly below a round number to make them appear more attractive to consumers.

• Pros: Influences customer perception and can improve sales.
• Cons: Requires careful consideration of cultural and regional differences in perception.
• Best situations to apply: Effective for products with elastic demand.
• Real-life example: Amazon

Odd-even Pricing

Odd-even pricing or fractional pricing, is a strategy where a company sets prices ending in odd or even numbers, such as $4.98 or $4.99, to influence consumer perception and purchasing behavior.

• Pros: Affects customer perception of value and can create a sense of a lower price.
• Cons: May not be suitable for all products or markets.
• Best situations to apply: Commonly used in retail and can be effective for impulse or non-essential purchases.
• Real-life example: Macy’s

5 Tips to Create a Working Ecommerce Retail Pricing Strategy

Creating a working eCommerce retail pricing strategy involves several key steps. Here’s a list to guide you:

1. Understand Your Market and Customers

Before developing a pricing strategy, it’s essential to thoroughly understand the target market and the needs of your customers. Conduct market research to analyze competitors, customer preferences, and purchasing behavior. Identify the value proposition of your products and determine how they align with the demands of your target audience.

2. Determine Your Costs and Profit Margins

Calculating the costs associated with your products or services is fundamental to setting the right prices. Consider all your expenses, including production, shipping, marketing, and overhead costs. Once the total costs have been determined, establish the profit margins that you aim to achieve. This step involves evaluating the balance between pricing your products competitively while ensuring that your business remains profitable.

3. Choose an Appropriate Pricing Strategy

Selecting the most suitable pricing strategy is important as each one has its advantages and considerations, and the choice depends on factors such as the nature of the product, target market, and business objectives.

For instance, if your product offers unique features or benefits, a value-based pricing strategy might be more appropriate. On the other hand, if you operate in a highly competitive market, competitive pricing or dynamic pricing strategies could be more effective.

4. Implement a Dynamic Pricing Model

In the dynamic eCommerce environment, implementing a dynamic pricing model can be highly effective. It involves adjusting prices in real-time based on market demand, competitor pricing, and other external factors. By leveraging data analytics and automation, you can optimize prices to maximize revenue and stay competitive.

5. Monitor, Analyze, and Iterate

Once your pricing strategy has been implemented, it’s important to monitor its performance and make adjustments. Utilize analytics tools such as Google Analytics to track sales, customer behavior, and the impact of pricing changes. Analyze the data to gain insights into the effectiveness of your pricing strategy and identify areas for improvement.

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Wrap Up

Setting the right prices for your online store is crucial, but it is not easy either. You have to know your customers, costs, and what pricing strategy works best to achieve your business goals. Remain flexible with data-driven dynamic pricing, track how it’s working, then tweak as needed. Get your pricing on point and watch the sales roll in.