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23.01.2024
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Top 10 Ecommerce Pricing Strategies for Online Businesses

With over 26 million online stores worldwide — a number that continues to grow daily — the size of the global e-commerce market is expected to increase by an average of 15% per year over the next decade, growing from $14.14 trillion in 2022 to approximately $57.22 trillion in 2032.

To stay visible to customers, e-commerce businesses face intense competition, as standing out among thousands of similar companies worldwide is no easy feat.

Thus, a well-thought-out business strategy (including a strong e-commerce pricing strategy) is indispensable. Businesses employ various pricing strategies to maximize profit. This guide will assist you in navigating the various approaches to price setting.

Contents:

What Is a Pricing Strategy?

Why Do You Need a Pricing Strategy?

10 Best E-commerce Pricing Strategies to Help You Grow

What Affects E-commerce Pricing Strategies?

What Is a Pricing Strategy?

A pricing strategy comprises a set of rules and methods governing the determination of market prices for specific types of goods produced or sold by a business. The primary objective of a pricing strategy is to establish an optimal price that aligns with the goals of the pricing policy. Within the framework of a pricing strategy, the following elements are defined:

  • Factors influencing the choice of price levels
  • Guidelines for price formation
  • Methods and algorithms for setting prices
  • Strategies for responding to market dynamics

Interconnection of Pricing Strategy with Pricing Policy

A pricing policy is a fundamental component of any enterprise’s marketing activity. It describes how to set prices according to the company’s business objectives. Implementing a pricing policy involves creating a pricing strategy, which defines a set of actions for setting and adjusting prices, accompanied by a set of rules guiding pricing decisions.

Why Do You Need a Pricing Strategy?

As author, professor, and economist Philip Kotler once said, “If the product is the heart of marketing, then price is its lifeblood.” A pricing strategy is essential for any business, guiding how prices are set.

Depending on the goals, a pricing strategy can aim to:

  • Capture a larger market share, thereby increasing the volume of product sales
  • Maximize current profit
  • Stabilize price levels to ensure the business occupies (or maintains) a certain position relative to competitors
  • Ensure the survival of the business

Achieving these goals is only possible through the skillful use of pricing strategies.

10 Best E-commerce Pricing Strategies to Help You Grow

Cost-Based Pricing

Cost-based pricing is a strategy where the selling price of a product is determined based on its production cost, adding a markup to ensure profitability. This is one of the simplest methods of price calculation, often involving the addition of a fixed percentage to the production cost.

For example, in clothing manufacturing, costs for raw materials, labor, electricity, rent, operational management, marketing, etc. are calculated. After accounting for all these expenses, the company sets the price of goods to cover all costs and achieve the desired profit margin.

Suitable for: Manufacturers or enterprises for which controlling costs and maintaining a fixed profit margin are decisive and sufficient.

Advantages: Pricing is easy to calculate using this strategy, and it ensures comprehensive cost coverage.

Disadvantages: Cost-based pricing overlooks consumer demand, competitors’ prices, and the perceived value of the product to consumers.

What you can achieve with this strategy: Cover your costs and ensure a minimally acceptable profit margin.

Competitor-Based Pricing

Competitor-based pricing, also known as competitive pricing, is a strategy where competitors’ prices serve as the foundation for determining one’s own prices.

Competitive pricing can be executed through three methods:

  • Setting prices lower than competitors (low-price strategy)
  • Setting prices equal to competitors (mid-market price strategy)
  • Setting prices higher than competitors (premium price strategy)

Competitive pricing requires continuous monitoring of competitors’ prices and adjusting one’s own offerings in line with price fluctuations. An online store employing this pricing model must possess up-to-date information on competitors’ prices and have the technical ability to quickly change prices for goods in accordance with price changes on competitors’ sites.

To achieve this, today’s businesses leverage technological solutions like Pricer24 that collect data and compare prices automatically (saving managers’ time) and create visual reports for monitoring that open opportunities for analyzing and comparing competitors’ prices, discounts, promotions, and special offers.

Case Study
🚀 How Pricing Optimization Helped KTC Increase Sales

Suitable for: Retailers operating in highly competitive niches where price is a crucial factor for customers and the profit margin is sufficient to cover most standard costs.

Advantages: This approach helps maintain competitiveness and enables a quick response to market changes.

Disadvantages: Competitive pricing ignores the unique value proposition of the product, may lead to price wars, and limits profit potential.

What you can achieve with this strategy: Remain competitive in markets where price is a decisive factor.

Value- (Consumer-) Based Pricing

Value-based (or consumer-based) pricing is a strategy in which the price is determined by the perceived value of products to the customer. In other words, prices are based on the unique benefits, quality, and features of products offered to customers. The consumer pays not only for the product itself but also for the additional value they gain from purchasing it.

This approach is grounded in an understanding of customers’ preferences and perceptions of product value, enabling businesses to capture customers’ willingness to pay.

Suitable for: Brands relying on unique value and distinctive characteristics of their products and that have high customer loyalty (e.g., luxury goods manufacturers or producers of environmentally friendly products).

Advantages: Allows for setting premium prices and achieving high profit margins.

Disadvantages: Since this approach involves a deep understanding of customer needs to accurately determine perceived value, it requires significant resources for collecting, processing, and analyzing data (conducting customer surveys and focus groups).

What you can achieve with this strategy: Maximize revenue by aligning prices with customer-perceived value.

Dynamic Pricing

Dynamic pricing is a flexible strategy where companies adjust product prices in real time based on various factors such as demand, supply, currency exchange rates, and geolocation. Technological advancements and the implementation of digital data analysis systems allow companies to automate pricing using AI to analyze a large amount of information and make decisions regarding optimal prices.

The primary goal of dynamic pricing is to consistently set a competitive price that maximizes the business’s profit considering the market situation. Typically, this approach is employed by the airline industry, taxi aggregators, and e-commerce platforms. To learn more, read our article about how e-commerce businesses harness the benefits of dynamic pricing.

Suitable for: Businesses operating in industries with significant price fluctuations, demand variation, and high competition.

Advantages: Optimizes revenue by responding to changes in market conditions and maximizes turnover during peak demand.

Disadvantages: Technologically complex to implement.

What you can achieve with this strategy: Maximize profit by adapting prices to ever-changing market conditions.

Bundle Pricing

Bundle pricing is a strategy wherein companies combine several products into one package and offer them at a reduced price compared to purchasing each item separately. This encourages customers to buy more while saving money.

However, developing bundle offerings requires a category manager or marketer with specific experience, analytical skills, and an understanding of the target audience’s needs. This is necessary to determine the right combination of products, set an attractive price (while avoiding undervaluing items), and manage the potential impact on profit margins.

Regularly monitoring competitors’ promotions is also crucial to compare bundled offerings with those of other market players.

Suitable for: Businesses with multiple complementary products or services aiming to increase sales volume.

Advantages: Simplifies purchase decisions, boosts sales volume and average transaction value, and enhances customer loyalty by providing attractive offers on related items.

Disadvantages: Potential for decreased profit on individual items.

What you can achieve with this strategy: Encourage customers to buy low-demand items along with popular ones to optimize sales; improve the perceived value of products by creating added value for consumers through product bundling.

Types of Bundling

Pure bundling: In this approach, products are exclusively available as part of a bundle and cannot be purchased individually.

Example: A software package containing multiple programs sold together at a fixed price.

Mixed bundling: This strategy allows customers to either purchase the entire bundle or choose individual items. It aims to encourage customers to buy the complete bundle by offering it at a price lower than the total cost of all items when sold separately. Prices are set both individually for each item and collectively for the entire bundle.

This approach enables retailers to stand out among competitors by creating unique offers that cater to specific consumer needs or preferences.

Examples: Combo meals in fast-food restaurants; gaming consoles bundled with games.

Loss Leader Pricing

Loss leader pricing is an approach where a business intentionally sells a product below its market cost or production cost to attract customers.

This strategy is a calculated risk, focusing not on immediate profit from the sale but on generating increased traffic and drawing more customers to the store by using low-priced items as bait. In other words, the seller relies on additional sales of other more profitable products when the buyer is already in the store or on the website. These additional purchases contribute to overall revenue and potentially compensate for losses incurred from selling the loss leader product.

Suitable for: Retailers aiming to attract customers to physical stores or online platforms.

Advantages: Increases traffic, enhances customer loyalty, and boosts sales of other items.

Disadvantages: May lead to short-term losses.

What you can achieve with this strategy: Attract customers and potentially establish long-term relationships with them; optimize excess inventory and keep outdated products from taking up valuable shelf or warehouse space.

Price Skimming

A price skimming strategy (or high price strategy) is a pricing strategy in which a company introduces a new product with a relatively high initial price, gradually reducing it over time.

This approach is often employed when a company brings a unique or innovative product to the market and aims to maximize profit from early adopters or customers willing to pay a premium for novelty or exclusivity. As market demand stabilizes, the price is lowered to attract price-sensitive buyers.

Suitable for: Manufacturers and sellers of innovative products.

Advantages: Captures early adopters willing to pay a premium; maximizes initial profits.

Disadvantages: May limit market penetration.

What you can achieve with this strategy: Maximize profit by capitalizing on the willingness of early buyers to pay more for exclusivity and subsequently gain a larger market share by reducing prices, striking a balance between profitability and market penetration.

Penetration Pricing

A penetration pricing strategy (or low price strategy) is an approach where companies set relatively low initial prices for their products to quickly capture significant market share.

By offering products at a lower price compared to competitors, companies attract price-sensitive customers. The lower price encourages them to try the new offering, generating initial sales and increasing the company’s market visibility. As the customer base expands, the business gradually raises prices or introduces new products, maximizing long-term profitability.

Companies typically employ this strategy in highly competitive markets, positioning their product as the best value compared to competitors.

Suitable for: Retailers aiming to enter a new market and manufacturers launching new products.

Advantages: Ensures rapid market penetration, establishes a strong position compared to competitors, and quickly builds a customer base.

Disadvantages: May lead to initial losses; entails the risk of brand perception issues and customer churn when prices increase; requires internal resilience (a buffer) within the company.

What you can achieve with this strategy: Rapid business growth and a strong presence in a highly competitive market.

Difference Between the Penetration Strategy and Loss Leader Pricing Strategy

At first glance, these strategies may seem identical: both involve selling products at reduced prices. However, they significantly differ in their objectives. The loss leader pricing strategy aims to attract customers by offering a specific product at a discounted price, intending to increase sales of other products concurrently. It is motivated internally and is not directly tied to competitors’ offerings.

In contrast, the goal of the penetration strategy is to quickly capture market share by setting a low initial price for a new product or service. In this case, prices are lowered in relation to competitors’ prices as a means of rapidly entering and establishing a presence in the market.

Price Discrimination

A price discrimination strategy is an e-commerce pricing strategy in which a business sets different prices for the same product for different customers despite the product’s identical cost (to the business) and quality.

Price differentiation is based on the existence of several customer segments that react differently to price changes. Therefore, it makes sense to set a custom price for each segment.

The following variations of a price discrimination strategy are possible:

  • Pricing considering consumer differences: Offering discounts to specific customer categories
  • Pricing based on product variations: Setting different prices for various product versions without a direct correlation between costs and price differences
  • Pricing considering location: Offering products at different prices in various locations, even when sales-related costs are the same
  • Pricing considering the time factor: Adjusting prices based on season, month, day of the week, or time of the day

Examples include price discrimination through targeted discounts, loyalty programs, or coupons tailored to specific customer segments, as well as based on purchase history or membership status in a loyalty program.

Suitable for: Retailers operating in industries with high price elasticity and the ability to segment customers.

Advantages: Can increase the seller’s revenue by capturing a significant portion of consumer surplus.

Disadvantages: Risk of negative consumer reactions and perceptions of the strategy as unfair or discriminatory.

What you can achieve with this strategy: Maximize revenue by adjusting prices according to customers’ willingness to pay.

Geographic Pricing

A geographic pricing strategy involves companies setting different prices for their products based on customer locations. Pricing decisions are influenced by factors such as shipping costs, taxes, and distribution expenses. Companies adjust their prices to reflect local market conditions and align them with a customer’s willingness to pay.

Suitable for: Companies operating in different geographic regions.

Advantages: Considers regional economic differences, varying market demand, and local competition.

Disadvantages: May lead to customer dissatisfaction; challenging to manage.

What you can achieve with this strategy: Optimize profitability, ensure competitiveness in different markets, adapt to various economic realities, and provide a strategic and localized approach to pricing within target regions.

It’s worth noting that European Union legislation prohibits sellers from charging EU citizens or residents a higher price for purchasing products or services within the EU solely based on citizenship or country of residence, provided the purchase is made online without cross-border delivery. In other words, if the buyer plans to pick up the order directly from the seller, they should have access to the same prices and special offers as any other buyer residing in the EU country in which the seller is operating.

What Affects E-commerce Pricing Strategies?

The starting point for choosing an e-commerce pricing strategy is your goal.

Business goals and pricing strategies to help achieve them

The choice of strategy is also influenced by the following aspects:

  • Cost: Understanding the costs associated with procurement, storage, marketing, and product delivery is fundamental. Costs influence the minimum price at which a product can be sold to ensure profitability.
  • Market demand: It is important to have an idea of how strongly demand reacts to price changes for a specific product. The degree of this reaction is referred to as the price elasticity of demand. The higher the elasticity, the more strongly demand reacts to changes in product price.
  • Competitor prices: Companies must remain competitive by adjusting prices compared to competitors while offering value that distinguishes their products.

By understanding demand, costs, and competitor prices, you can effectively establish an appropriate price for a product. It should be neither too low to ensure profitability nor too high to hinder demand.

The choice of e-commerce pricing strategy is also influenced by various factors, including the nature of the market’s competitive structure, the product’s life cycle stage, intermediaries, and government price regulations.

Choosing an e-commerce pricing strategy is selecting a way to dynamically change the price of a product in response to market conditions, aligning the price with business goals.

Conclusion

Pricing strategies play a crucial role in shaping consumer behavior, influencing purchasing decisions, and ultimately contributing to the success of an online business. Each approach has its own strengths tailored to specific business goals and market dynamics. Therefore, mastering pricing strategies involves understanding when and how to use each specific approach to achieve desired outcomes.

 

In the broader context of an entire business, a combination of the aforementioned strategies is often applied, taking into account factors such as seasonality, product category, and overall business conditions. An exception may arise for brands or sellers offering a unique product; they may choose to mostly follow a single strategy but periodically transition to another.

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  • Market analytics
  • Price parsing
  • Product visibility
Take a consultation
  • Market analytics
  • Price parsing
  • Product visibility
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