If you are a beginner in ecommerce and just planning to start your business, you might be surprised that there are more than two pricing strategies. You shouldn’t put the lowest price in your niche to win the audience from your competitors, and, vice versa, put the highest price if you want to get fast revenue. You can’t make it unduly, the system doesn’t work this way. Only calculation is not enough, humans’ behavior is also a crucial detail: manufacturing costs, the average price in your niche, latest tendencies, seasonal events, expectations of prospective buyers, and other variable factors.
To prepare you for this goal we gathered the most popular kinds of pricing strategies in one post. This information will help you figure out what your target market expects from the product’s price and decide which one suits your business expectations.
#1. Keystone pricing
Keystone pricing is the frequently used pricing strategy. Its calculation formula looks in this way:
The wholesale cost of the product x 2
So, you just double the cost and get the same amount as you spent at best. Or, you get a too low or too high price at worst. This formula isn’t a one-size-fits-all solution.
Let’s see several situations where you can use this formula:
- slow turnover of your product
- high costs of storage and delivery
- this product is something rare and unique (in this case, you can find more profitable pricing than this one).
If you work with popular products that customers can easily find on the marketplace, with this strategy they will look overpriced.
#2. Retail pricing
This is the second basic strategy that you can calculate with the help of this simple formula:
Product cost / (100 – markup percentage) x 100
But don’t hurry up to choose this kind of pricing: there are so many products on the marketplace, each of them is unique, needs close attention and marketing research. You should be ready that this simple formula won’t bring the expected results for your company.
#3. Manufacturer suggested retail price (MSRP)
This strategy also has a clear name, and there is no formula to calculate: a manufacturer recommends retailers to use the same, consistent price. As a rule, it is about home appliances, brand products, etc.
According to it, the customers can get the product at a reasonable price anywhere: at the large store or the shop. So, it’s hard to attract an audience, you should find something to highlight your store’s offer among others at the marketplace. Also, there can be additional costs with shipping or storage, so the MSRP won’t give you the needed profit. You can change this pricing, make it higher or lower according to your situation if this point isn’t mentioned in your agreement. As a result, the manufacturer can cancel your contract, if your goals don’t match.
But if you agree with the MSRP, you can save your time on the pricing research and calculation.
#4. Bundle pricing
The example of the bundle or multiple pricing strategies you can see at the store when retailers sell two or more things at one price: two or three pairs of socks, frying pan with lid, shampoo and conditioner, etc.
As research shows, the customers like these sets and prefer to buy products with “addition”. This schema works with other kinds of products, even more expensive than socks.
By doing this way, retailers increase perceived value and get large volume purchases. Also, they can sell these products one by one at a higher price: there are a lot of customers who search for just a new pan or shampoo without conditioner, and so on.
Before using this pricing strategy, make sure that it doesn’t reduce your store profits. If your sales volume doesn’t scale up, it can be a risky moment for your business.
#5. Discount pricing
Discounts and markdowns are win-win scenarios to attract the audience to your store. Seasonal pricing, coupons, gifts are always on demand. According to the research, discount pricing is used by retailers in all categories.
This strategy increases traffic to your store and helps to sell off unpopular or irrelevant things from your inventory.
Also, the discount pricing strategy helps new brands to get customers and profit. By doing so, you can introduce a new product to extend the target audience.
But don’t use it on a full-time basis: permanent low prices and sales can create a negative perception of your products, customers can question the quality. Another weak side is that clients won’t buy the goods at regular price, without discount. So, you should think well about your strategy before its implementation.
#6. Loss-leading pricing
Despite the name, this pricing strategy is used for increasing the average transaction value. Retailers reduce the price for a certain product and this sale attracts customers to the store where they purchase this item and also take complimentary products at regular price.
It makes the loss-leading pricing strategy similar to bundle pricing one: the product set gives more profit than the sale of one item. So, by selling more additional products, retailers can cover the profit loss that gives the price reduction.
Notice: you should attentively choose the product which price you want to make lower. If you take a random one, the strategy might not work. The size of customers’ orders doesn’t increase, and, as a result, your revenue doesn’t grow.
Also, don’t make the loss-leading pricing strategy your ongoing action: as in the case with discount pricing, customers can get used to it and wait for a price reduction.
#7. Psychological pricing
This strategy is about the magic of odd numbers: the psychological issues show that these numbers help customers easily perceive the purchase. When clients see the price at $49, it seems more attractive than $50, and $9.99 is better than $10.
Such numbers as 5 and 7 also work well: it makes the impression that the retailer takes care of customers and offers reasonable prices, saving their money. So, the customers’ feeling of loss from the purchase is not so painful, and people can make impulse purchases.
When you work with psychological pricing, it’s crucial to find a balance: a lot of clients don’t trust the stores where retailers use only odd numbers in prices. This can seem more suspicious than the “clear” price at $42, $44, or $50.
#8. Competitive pricing
It means, the retailer monitors the pricing of the competitors and makes it lower to attract customers to his or her store. The competitive pricing strategy can work when your product isn’t something rare, and the price is your only way to attract customers. To implement it, you should make agreements with your supplier, bet on the sales volume and number of products.
Maintenance of competitive pricing can be challenging for beginners in ecommerce or small store owners: low prices lead to low-profit margins. Also, the low price can be not enough: a good brand reputation and proof of the quality are required.
#9. Above competition pricing
If you can provide premium services and position your product as high-quality, you can try to use a premium pricing strategy for your online store to increase your revenue. People always want to get the best things, it gives the feeling of deep satisfaction and their exceptionality. Just imagine: on a sunny weekend you want to take a rest after working days. What will you choose: to treat yourself to a delicious coffee drink from Starbucks or a simple drink from the cheapest cafe? It is how this strategy works.
So, if you can offer exceptional services to the audience, your brand is perceived as premium, the customers will prefer you to your competitors.
But you don’t achieve this goal if you’ll misidentify your target market. If the price is important for the customers in your niche and there are analogs, they’ll choose another store.
#10. Reference pricing
Another name of this strategy is anchor pricing. The business owner displays regular price and price with a discount to show “before” and “now” to highlight the customers’ profit of the purchase. The clients see how much money they save and are more inclined to buy the product.
Also, you can put together expensive and cheaper goods to attract attention to this position. When the profit is obvious, people tend to use this opportunity to make a good deal. But be honest with them, don’t make the first price too high: the audience can check this information in the network and compare your prices with other stores. Take care of your brand’s reputation.
#11. Price skimming
This strategy can give you a high short-term profit: you put a high initial price and make it lower gradually. It works in case of high demand for the product when customers can’t find it elsewhere and don’t want or can’t wait for sales. When the product becomes more available at the marketplace, and the competitors appear, it’s time to reduce the price and extend the number of prospective buyers.
The price skimming strategy works when customers are searching for exclusivity and ready to pay for it. But if your product doesn’t match their expectations, try another strategy.
But if it’s your case, you should attentively reduce the price, and don’t make it too early: first customers can take it negatively.
#12. Markup pricing
This strategy can be implemented if you are not only a retailer but also a manufacturer. The strategy is also known as cost-plus pricing, which means that you add a certain fixed amount to the cost of manufacturing. This is the simplest way to calculate your products’ pricing and get a stable profit.
This approach is time-saving, but by doing so, you miss competitors’ prices and other marketplace nuances.
#13. Economy pricing
If your production costs are low, and the profit of your company depends on the volume of sales and attracting new customers, you can use the economy pricing strategy.
Its formula is similar to the previous one and looks like this:
Manufacturing cost x profit margin
According to it, your price is easy to understand, but customers can doubt the quality of your product. Also, you should use marketing tools to constantly attract a new audience, so you need to find a budget for this goal.
Now you know more about pricing strategies and can use this information in your business goals. As you see, there is no clear answer about what pricing strategy is better and more suitable for your online store. But you can use a bland to achieve the best results, monitor the marketplace and new tendencies.