eCommerce Pricing Strategies: How To Grow Your Profit Margins With Perceived Value
Joy Sharma
Have you ever wondered what sets a profit-churning eCommerce business apart from one that barely breaks even? It all comes down to finding the right pricing strategy for the products in your online store.
Contrary to popular belief, the true price of a product isn’t some arbitrary number that brands have no control over. Instead, you make a strategic decision to increase your profits and inspire customer loyalty from your buyers.
For many online stores, finding the best pricing strategy is fairly simple and can be done using different methods, such as researching your competitor’s prices and watching market trends. However, if you want to scale your business and take your store to the next level, you need to understand the psychological factors that impact the perceived value of your product, so you can raise this value in the eyes of shoppers.
Sound complicated? Don’t worry! This blog is here to break down everything you need to know about creating good pricing strategies for your eCommerce business and boosting your brand’s reputation in the process.
1.What Makes A “Price”
- Perceived Value
- Product Price
- Cost of Goods
2.What Is Price Elasticity?
3.Two Main Types of eCommerce Pricing
- Competitor Pricing
- Cost-Based Pricing
4.Other Pricing Strategies
- Value-Based Pricing
- Price Skimming
- Premium Pricing
- Penetration Pricing
- Loss Leader Pricing
- Cost-Plus Pricing
5.The Gold Standard of eCommerce Pricing
- Identify The Problem
- Create A Solution
- Charge The Highest Price
6. Hacks For Maximizing Your Profits
- Bundle Pricing
- Dynamic Pricing
- Use Odd Numbers
What Makes A "Price," Anyway?
Of course, the obvious answer to this question is how much your customers pay for your products. But what really goes into the price of a product?
Understanding the elements that contribute to a product’s price is essential to know how much you can charge for your products. So, we’ve taken the liberty of breaking down product prices into three main factors.
Perceived Value
This is by far the most important and misunderstood aspect of creating a pricing strategy. The perceived value isn’t how much your product is actually worth; it’s the worth it holds in the eyes of potential buyers.
Regardless of the costs of producing your product, if it can give your customers something beyond monetary value, like more free time, less stress, and better convenience, it holds much higher value to them. So, if you want to increase your profit margins, you need to increase the perceived value of your costumes, allowing you to charge higher prices.
Product Pricing
Product pricing refers to the process of picking a selling price for your item based on all of the costs associated with it. As you can see from our illustration, your pricing power lies between your product pricing and the perceived value of your product.
That means that after you’ve calculated all of the production costs and other investments that go into producing your product, you can set an average cost based on these costs and any market research you’ve gathered. After that, you can start working on increasing the perceived value of your product, steadily increasing your prices along with it.
Cost of Goods
Finally, your cost of goods (COGs) is the baseline that you’ll use to determine how much you’ll need to charge to break even after calculating production costs. Your profit margin is determined by the difference between your total costs and your product pricing. This means that the more space you can put between these two numbers, the stronger your bottom line will be.
What Is Price Elasticity?
It’s no secret that product prices have a big impact on purchasing decisions for consumers. For example, a product whose perceived value is lower than its selling price will see decreases in demand. But a product with a good pricing strategy can surge in demand, allowing the brand to upcharge even more for their goods.
This phenomenon is called price elasticity, and it plays a huge role in the way you should price products. As the name suggests, consumer demand in relation to the price of a product is not fixed. Instead, it increases or decreases depending on your marketing strategy and how you price your products.
It’s also important to keep in mind that price elasticity is very different for products that are considered commodities versus those that aren’t. For example, the brand Coca-Cola is a commodity because it’s so well-known, and most buyers are aware of the average price of a bottle of Coke. We call this “anchor pricing.” That’s why Coca-Cola can’t randomly increase its prices without leading to a huge pushback from its audience.
But in the eCommerce world, most of the goods being sold are more niche or novel, which allows business owners to use price elasticity to their advantage. Let’s look at an example of two competitive coffee brands.
If one brand is selling a bag of their coffee for $30 and seeing demand from their customers, the other brand can follow suit and increase their prices accordingly. This also gives brands more leverage for their perceived value, assuming that they can convenience buyers their coffee is the more valuable option.
Two Main Types Of eCommerce Pricing
In most cases, eCommerce stores use two main pricing models to determine how to set prices for their items.
Competitor Pricing
Competition-based pricing is a strategy where brands set their price points based on the average prices of similar products in their industries. During the market research process, you should be able to determine what most of your competitors currently charge for their items, giving you an idea of a reasonable price for your online store.
You can also use this information to your advantage by creating marketing strategies that make your products appear more valuable than others in your niche. For example, offering a slightly lower price than your competitors or using pricing bundles that can help you increase your average order volume, resulting in better profits.
Cost-Based Pricing
Before you can work on boosting your profit margins, you need to evaluate the total co4sts associated with your products, including raw materials, production costs, and other manufacturing-related expenses. After that, you would add a “markup” to your product, allowing you to create a reliable profit margin.
The downside of this pricing strategy is that the economic costs of producing goods are always going through fluctuations, which could force you to charge higher prices in the future, regardless of the demands of your consumers.
Other Pricing Strategies
While these different pricing strategies aren’t as common in the eCommerce space, they are popular tactics for mainstream retailers, and it’s a good idea for online business owners to be familiar with these options.
Value-Based Pricing
Remember how we said that the value your product gives to your costumes could be more important than the actual sticker price? This is called value-based pricing, and it’s on
e of the easiest ways to increase your profits.
For instance, if your customer sees your product as being worth a million dollars, but your COGs are only a fraction of that, you can still charge a higher markup for your product based on the perceived value.
To use this method effectively, it helps to have a thorough understanding of your market conditions and the behaviors of your target demographics. These factors will help determine what the perceived price of your product should be based on its value.
Price Skimming
Unlike other eCommerce pricing strategies, price skimming is typically reserved for innovative products that have little to no competition in the marketplace. These new products are usually tech-related or have some other kind of groundbreaking quality that puts them in a completely new product category. If you want a really good example of this, look at the way that Apple rolls out its new technologies. Since they’re often the first to release an innovative product, they can use price skimming to charge higher prices until new competition emerges.
With price skimming strategies, brands can start by charging higher markups on their product, then steadily lowering prices once new competitors enter the market. However, if your product isn’t new or already has some competition, this strategy is probably not for you.
Premium Pricing
This strategy can be a bit of a gamble, but it may be effective for brands selling products that are considered luxurious or high-end. Premium pricing is a strategy that involves setting your price points significantly higher than competitors, creating the illusion that the product is of a higher quality.
Even if the product isn’t of higher quality than its competitors, the price alone could be enough to convenience new customers that it’s worth their money. However, this doesn’t always lead to good customer loyalty, which is essential to scaling your eCommerce store.
Penetration Pricing
If you’re launching a new product, penetration pricing is a good option for encouraging customers to try it. This strategy starts by offering a lower price for your initial launch and then raising the price after a specific period of time.
Unlike price skimming, penetration pricing can be used for any new product launch, regardless of whether there is already competition. You can also take this as an opportunity to upsell the customer on some of your regularly priced items since they already feel like they’re getting a bargain on the new product.
Loss Leader Pricing
It may seem counterintuitive, but loss leader pricing is a strategy that works by offering products below the cost of their production to entice customers to try them out. This is most commonly used for brands that are just entering the marketplace and need to establish a customer base from scratch. However, since this can be a risky approach, we don’t often recommend it to your clients.
Cost-Plus Pricing
Usually, when we look at profit margins, we’re looking at the picture of our entire eCommerce store. But with cost-plus pricing, brands focus on each individual item sold. That means taking the COGs for that particular product and charging just enough of a markup to turn a profit. Most of the time, brands use this method to determine how much of a markup percentage they should be charging for that item, but there are certainly more effective ways to go about this process.
The Gold Standard For eCommerce Pricing
Now, all of these pricing strategies are a good line for eCommerce brands. But in our experience, psychological pricing is the best way to increase the perceived value of your product, leading to bigger profit margins and better brand awareness. In simple terms, psychological pricing refers to the way we influence the perception of our product value based on the pain points of our customers.
To sum it up:
“Be the best, and charge the best price.”
The most effective way to achieve this is to increase the perceived value of your product more than your competitors. You can do this in three steps:
Step 1: Identify The Problem
Shoppers don’t buy products for the sake of having them; they buy them to solve a problem in their lives. So, before you can increase your perceived value, you need to understand what problem your product is solving for your customers.
You can do this by researching similar products and checking for any reviews or testimonials from happy customers. In most cases, these reviews will have a common theme, which should give you a good idea of what problem the product is solving.
But if you already have an existing customer base, we highly recommend conducting customer interviews or surveys of your own. Whether you choose to use your email list or a pop-up during checkout, collecting customer surveys will give you a unique insight into your buyers’ needs.
Step 2: Create A Solution
Now, this is where having a good creative strategy is important. Everything from your copywriting to your offers should show new customers why your product is the solution they’ve been looking for. The more clearly you can state this, the more likely they’ll be to pick your product over other options.
Some of the strategies we how to achieve these include:
- Creating a strong brand persona
- Producing ad creatives at a high volume
- Running A/B testing on ad iterations
- Using merchandising to better market products
If you want a better look at how we approach the creative process, check out our blog here.
Step 3: Charge The Highest Price
While charging the highest price possible for your product is the goal, that doesn’t mean you should go off the rails with your product pricing. Our pricing model includes creating a threshold that keeps your prices above average for your industry without becoming unrealistic for the current market conditions. This is the sweet spot that allows your business to thrive.
Ultimately, you should try to avoid going above the perceived price of your product, leading to a decrease in demand. That’s why we monitor these trends regularly so that we can adjust the pricing strategy of our eCommerce clients when necessary.
TIP: Keep Your COGs Low
Outside of raising the perceived value of your product, another way to improve your profit margins is to keep your COGs as low as possible. Now, this doesn’t mean skimping on the quality of your products. Instead, there are a few strategic steps you can take to get the most value out of the manufacturing process.
First, don’t be afraid to shop around for different vendors, especially when it comes to things like payment processing and third-party software. Many of these services come with steep fees, so we always recommend keeping your options open and negotiating new deals whenever possible.
Next, take a look at your production costs and see if there’s a link in your supply chain that may be costing you too much money. For instance, if your products are being manufactured in another country, then shipped to a separate business to be packaged and branded, why not try having them sent directly to your warehouse instead? These adjustments can lead to big savings during the production process and more money in your pocket.
Hacks For Maximizing Your Pricing
Bundle Pricing
Product bundling is one of the most powerful ways to increase the perceived value of your offer by creating a more positive outcome for your customers. These types of offers cost more than the original price of a single product but give customers a more personalized buying experience.
Let’s say you own a coffee brand, and all of your competitors sell single-packaged coffee products. But you also have a few different teas that you think your customers will love. So, you start by offering a bundle deal that gives your shopper the product they were looking for (the coffee) and also allows them to try new products that also relate to their interests.
You can even take this a step further by building bundles based on specific lifestyles, like energy boosting, relaxation, and detox. This makes them feel like your brand understands their needs and creates a higher average order volume for your store.
Dynamic Pricing
Sure, discounted prices are a good way to entice new customers to try your brand. However, you don’t need to rely on these tactics to keep your conversion rates up. Dynamic pricing works by using specific time periods to increase the retail prices of your products based on consumer demand.
So, if there’s a particular holiday that always leads to higher product sales for your shop, you can use dynamic pricing to subtly increase your prices during these times. For example, a brand selling at-home spa treatments will most likely see a higher demand around holidays like Mother’s Day. If they use dynamic pricing, it leads to a huge surge in revenue for your business and still gives you the freedom to use low prices when you need to, like during time periods when you naturally sell fewer products.
Use Odd Numbers
It may seem strange, but there actually is a strategic reason why brands often charge $19.99 as opposed to $20 for a product. That’s because psychology has shown that odd numbers are perceived to be of better value than even numbers by most consumers, and they’re less likely to try to negotiate the price of an odd number versus an even one.
Hacks For Maximizing Your Pricing
Of course, the only way to know if your pricing strategy is successful is to monitor your results in real-time. Our team has helped countless eCommerce businesses maximize their earnings by creating the right pricing strategy for their unique needs on platforms like Shopify and Amazon, and we’re here to help you do the same. Connect with us to get started today.