How to build pricing strategies that increase business profitability?

Mateusz Wróbel
How to build pricing strategies that increase business profitability?

Is introducing pricing strategies into your e-commerce a good way to increase sales? Of course, it is. How to do it? That’s a more complicated question. A cursory check of competitors’ prices and a one-time rate adjustment is not enough. By doing so, we may act on an ad hoc basis, rather than on a long-term basis, and as a result, deprive ourselves of profits and customers.

Knowledge first, action later

Knowledge allows us to make smart decisions. If you want to act on your e-commerce pricing… first check how your competitors are doing. Monitoring other vendors will allow you to determine the rates they give on specific products. Unlike the offline market, online stores allow buyers to quickly and easily compare offers from multiple vendors, and so the risk of buying at inflated prices is significantly lower here.

In this case, a professional monitoring system will be useful. You can check prices on a particular sales channel or directly at the selected e-store. Through such a practice, you will be aware of how your assortment ranks in the e-commerce arena.

Most products do not maintain a fixed price network-wide. It’s a wise idea to follow the competition across the sales channels that interest you. If you sell in marketplaces, closely track prices on these platforms.

Does the price work wonders?

Not much needs to be said about the key role of price in e-commerce, to put it bluntly it is an extremely important buying stimulus.

Statistical studies regarding which factors Internet users consider when shopping indicate price as one of the main elements.

If you are an entrepreneur and sell a product online, you need to know how to optimize the prices of your goods. It is necessary to keep an eye on the minimum prices in order for your actions to generate real profits. However, the amount paid by the buyer should be based on the current market behavior, not on a one-off value added to the price at which the goods were bought.

In order to properly establish the minimum price, it is worthwhile to dig into the figures of your purchase or production prices. This will enable you to plan long-term pricing strategies. After analyzing your competitors, you may find that your prices are too high to implement a given pricing strategy model. If you don’t plan to consciously undercut the market, you need to ensure that you make a tangible profit on your sales.

Remember!

  • Margin, mark-up and profit expressed as an amount are identical.
  • The markup expressed as an amount is calculated using the same formula as the margin expressed as an amount.
  • Profit expressed as an amount is always identical.

It is very important to distinguish between a margin and markup expressed as a percentage. Many entrepreneurs confuse these two concepts, thereby miscalculating the minimum price. In such a situation, the use of competitive monitoring and pricing strategies will not be helpful, because of the basic error.

  • The percentage markup is the ratio between the sales profit and the purchase price of the goods.
  • The percentage margin is the ratio between the sales profit and the selling price.

Preparing a plan is the basis for an effective action

It is important to consider whether you want to offer all your customers the same rates or diversify them depending on the sales channel. In this case, you can choose one of two options.

  • Equal pricing strategy — as the name suggests, it allows you to set a single, standardized amount that a buyer will pay for a given product on every sales channel that displays your offer.
  • Differential pricing strategy — involves displaying the same products at different prices. The price discrepancy may be due to a different sales channel or customer relationship (for example, when you offer loyalty discounts).

Price is the basic element of the strategy

Pricing strategies are decisions about your company’s pricing policy and their correlation with the goal you want to achieve. For example, you may want to rapidly boost profits, build your brand among consumers, increase market share relative to your competitors, or introduce a new commodity to the market.

The product prices you set for your e-commerce must reflect a value-for-money benefit to the customer. These are the choices you need to make as an entrepreneur to aptly solve the problem of pricing. On the one hand, the price has to attract buyers, on the other hand, it has to generate benefits for you.

Remember!

We can distinguish between three framework pricing strategies:

  • high pricing strategy,
  • neutral pricing strategy,
  • low pricing strategy,
  • imitator strategy.

High pricing strategy

The high pricing strategy involves setting relatively higher prices than the competition. In this model, we can distinguish two strategies:

  • Prestige pricing — involves setting prices higher than average. It works well for luxury or limited edition products. The purchase gives the consumer a sense of prestige, so they are likely to pay more for the product;
  • Skimming pricing — a tactic usually used for innovative, newly introduced on the market and in-demand products. The inflated price of an item is attractive to the customer because it makes them feel exclusive and special. In addition, the assortment is not commonly available from competitors, which increases its attractiveness in the eyes of the buyer.
In the high price strategy, the sense of luxury that accompanies the buyer is extremely important. When choosing this model, you need to provide additional qualities that will catch your customer’s attention. The right color scheme of the offer, a careful description, the purchaser’s comfort, high quality service or fast and elegantly packaged shipping will help you gain a satisfied customer.

Neutral pricing strategy

With the neutral pricing strategy, we offer an average market price for the product. The strategy will work well for mid-range goods or substitutes for prestige products. It is the result of combining the quality and price of a given assortment.

Using this strategy, you should offer a product that stands out from your competitors thanks to additional features (or effectively highlight them). Importantly, in this case, you don’t have to worry about starting a price war with your competitors, as the prices you are setting do not pose a threat to them.

Low pricing strategy

This is one of the most popular e-commerce pricing strategies. It can refer to:

  • the desire to make a quick profit,
  • discourage competitors from introducing a particular product into the market,
  • increase brand recognition,
  • to build a position in the industry.

The strategy involves setting the lowest prices possible on a given product.

In its extreme form, can be demonstrated in the following strategies:

  • Preventive pricing — involves setting the lowest prices to prevent new competitors from entering the market;
  • to eliminate competitors — when well-played, allows eliminating competitors from the market. When you get rid of other bidders, you can increase prices.
You need to carefully consider your company’s budget before pursuing the above strategies. In both cases, expect that they bring financial losses and are risky in the long run.

The low pricing strategy does not have to manifest itself in extremely low prices set to eliminate other vendors. If you want to use this solution, you can balance prices within a small range. By doing so, your offer will be favored over other sellers. If you additionally take care of the other factors affecting buyer satisfaction, you can expect to increase your business profitability.

Imitator Strategy

This strategy relies on imitating other vendors and taking over their pricing policies on given products. The method is based on monitoring the competition, as it cannot be implemented without knowing what prices they set.

E-commerce is all about diversity

You don’t have to apply only one pricing strategy within your business. You can tailor your assortment pricing to meet the expectations of your particular consumer group and sales channel.

Whether you want your prices to be equal, higher or lower than average market prices, you shouldn’t withhold from other promotional methods that will help you boost sales. Using a product assortment group, the so-called traffic generators, to attract customers’ attention is one popular pricing tactic.

Competitor monitoring is the foundation for conducting pricing strategies

While there is no single, simple and proven method for e-commerce pricing. It is a complex process, based on a variety of factors. Undoubtedly, automating some of the work will help you efficiently manage your e-commerce, and ultimately save time and money and increase profits.

Checking what prices the competitors are setting on specific products is the basis for effective management of the pricing policy. Professional systems for competition monitoring and price automation will allow you to accurately manage your chosen pricing strategies.

Mateusz Wróbel
Head of Sales | LivePrice
I have been involved in the e-commerce industry for many years. I advise clients on the most effective ways to develop their e-commerce, so they can boost profits.