Your Complete Guide To eCommerce Pricing Strategies
We explore the pros and cons of 12 popular eCommerce pricing strategies to help your brand find its ideal customers, drive sales, and maximize profits.
Figuring out the right pricing strategy for your audience is essential for your eCommerce brand’s success.
Price your products too low, and you may not be in business for long despite having a large customer base. Price them too high, and you may never capture customers in the first place, which won’t help you stick around either.
So whether you’re running a new eCommerce store or you’ve been in business for years, it’s crucial to find that sweet spot that helps you attract and convert customers while optimizing profits.
Fortunately, that’s exactly what this guide will help you figure out.
You’ll learn everything you need to create or update your pricing strategy and see why tackling this task makes such a difference for your bottom line.
We’ll also discuss a concept known as finding your ideal customer profile, which is different from a buyer persona, to ensure you use the right pricing strategy for your customer base.
As we dive into the 12 most popular eCommerce pricing strategies, you’ll discover all the pros and cons of using each one. Then we’ll explore how to improve your customer’s perceived value, so the pricing strategy you choose is as effective as possible.
Since we have a lot of ground to cover, let’s jump right in!
Chapter 1: What is a Pricing Strategy? (And Why It Matters in Your eCommerce Business)
A pricing strategy is how you price your eCommerce products or services for sale.
It can be as simple and straightforward as taking your cost of goods sold (COGS) and adding a percentage to include your profit margin. Or it can be a bit more strategic and include factors like customer psychology, competitor pricing, and more.
While you’ve probably given some thought to your pricing strategy, you may not have known or considered all your potential options. And even if you have been using one with success, there could always be another strategy that delivers higher margins.
As mentioned earlier, if your prices are too high, you won’t attract enough customers, and you’ll have trouble converting them even if you do get their attention.
Pricing too low, on the other hand, can leave you consistently missing your revenue goals. Your brand will only be seen as the cheaper option, attracting discount buyers who won’t stick around when the price inevitably goes up.
When done correctly, a solid pricing strategy helps your brand:
- Convert new customers
- Keep customers loyal for years to come
- Cover marketing costs, COGS, and other business expenses
- Maximize profits to continue growing
We’ll give you some pointers throughout this guide to help you determine the right pricing strategy for your brand. But there’s one more major factor to consider first:
Chapter 2: Defining Your Ideal Customer Profile Before Determining a Pricing Strategy for Your eCommerce Business
Before you settle on a pricing strategy, you should first determine your ideal customer profile, or your ICP for short.
An ideal customer profile outlines the perfect customer for your product. In this case, your ICP may help you define the lowest and highest thresholds of what your real customers may be willing to pay.
So, for example, let’s say your eCommerce business sells natural skincare products.
An ICP for your brand may be women in two different categories: those between the ages of 21-35 and those around 40-65 years old. One pricing strategy may work best for those in the former category, while another may be more effective for those in the latter.
A buyer persona takes your customers’ demographics, traits, and needs into account to help your team craft marketing messages that speak to your target audience and get them to convert.
You may have several different buyer personas within your ICP, such as women fighting acne or dry skin versus those combating wrinkles and sun damage.
You don’t need to get this granular to determine your pricing strategy. An ICP is much more effective because you can cover multiple buyer personas at once.
So if you already have buyer personas for your business, which most eCommerce brands do, try to come up with overarching categories that these personas fall under. Work out what your ICP looks like and whether you have more than one.
Once you uncover your ICP, you’ll be better equipped to determine which pricing strategy is right for your eCommerce business.
Chapter 3: The 12 Most Popular eCommerce Pricing Strategies
Now that you have a better idea of your ICP, you can narrow down the best pricing strategies for your business and customers. Keep your ICP in mind as we walk through the upsides and downsides of using these 12 popular eCommerce pricing strategies:
1. Manufacturer Suggested Retail Price (MSRP)
Manufacturer suggested retail price is a pricing strategy that factors in the cost of goods sold (COGS) and adds a profit margin that works for both the manufacturer and the retailer selling it.
Most people are familiar with MSRP. It’s helpful for pricing items that are mass-produced and then later sold to other retail outlets. And it’s often used in car pricing where the sticker price is the MSRP, but that’s not really what the dealer sells the car for.
Pros: The MSRP makes price-setting easy for retailers because they’re given a benchmark for where they should price their items to make a profit.
While this may be more legwork for your eCommerce store to figure out, your retailers will find it easier to know how to price your products, making them more likely to do so accurately. They’ll also earn a profit and stay with you.
Cons: Your MSRP must remain consistent for all retailers you sell your product to. This means they won’t be able to compete with other retailers on price. So you’ll make it easy on one hand, but a bit harder on the other.
2. Anchor Pricing
Anchor pricing is where you show both your original price and the discounted price next to each other.
This pricing strategy takes advantage of a psychological principle known as anchor cognitive bias, in which people use an anchor as their reference point for making decisions.
The original price serves as the “anchor” and becomes the reference point for customers to decide whether the discount is enticing enough to take action.
Pros: Customers quickly see they’re not paying full price and there’s a deal going on, which makes them more likely to buy.
Cons: You have to be especially careful with how you price your anchor. While it can be tempting to throw out a larger number so your discount seems bigger, you could lose customers who find the item cheaper somewhere else.
For example, if your competitor has that same item listed for $19.99 while yours is $25.99 down to $19.99, the discount will seem and feel irrelevant since the end result is the same price.
3. Cost-Based Pricing
Cost-based pricing is when you price your items to cover the expense of creating and selling your products, then add a small percentage for profit margin on top. This total amount becomes your price to consumers.
Pros: You know you’re always covering your costs and enjoy a built-in profit too.
Cons: While this is a simpler pricing strategy compared to some of the others on this list, it’s also hard to get right.
Price your goods too high, and you won’t attract or convert enough customers, even if you get a solid profit margin once you do. Price your items too low, and you won’t earn enough revenue per sale to make it worth it.
4. Price Skimming
Price skimming is when you charge a higher price during your product’s initial launch, but then eventually lower it as time passes.
Price skimming is often used when a new, in-demand product hits the market. Consumer interest is at an all-time high. Then, as the interest wanes, so does the price.
An easy example of this is when Apple launches a new iPhone or watch.
The price out of the gate is often much higher than it is right before a newer model comes out. By then, the price for the older version goes down substantially.
Pros: You can capture a surge of customers willing to pay a premium to be one of the first people to get their hands on your product, which Apple clearly does well.
Cons: It takes a really strong product from a well-known company (again, like Apple) for this to work.
If your customers don’t see the initial launch price as worth it, they may simply hold out and wait for the price to come down, leaving you without that immediate rush in sales. By then, your competitors may even move in and steal those customers who were waiting for a price drop.
Additionally, customers who do end up paying the high initial price are likely to feel slighted by your brand once the lower price comes out, which is never a good thing for your satisfaction or loyalty scores.
5. Market-Based Pricing or Competitive Pricing
Market-based pricing, also known as competitive pricing, is when you determine your prices based on what the market or your competition sets theirs at.
Market-based pricing is often lower than your competitors’ pricing. The goal is to sell enough products to compensate for the loss in profit margin.
Pros: If you can get your costs lower than your competitors’, you’ll capture more sales and you may even steal some from other brands.
Cons: This is a difficult pricing strategy to keep up with. If your costs ever increase, which is likely to happen, your price may not be as competitive anymore, which means customers may jump ship.
It’s also challenging when you only attract discount customers who want a deal. They may only see your brand as the cheaper alternative, which hurts your brand’s perceived value (more on this later).
6. Dynamic Pricing
A dynamic pricing model fluctuates the price of your products as often as necessary in an attempt to find the sweet spot that maximizes profits while still converting customers.
These price changes can occur seasonally, during down or up times in the market, when your competitors raise or lower their prices, or if demand increases or decreases.
Pros: Dynamic price changes allow you to adjust your prices in either direction to take advantage of certain conditions.
Have more inventory on hand? You can lower your prices to get rid of excess.
Competitors sold out? You can increase your prices to capture the extra demand and turn a nice profit.
Cons: Dynamic pricing is great for eCommerce businesses, but it’s not highly regarded in the eyes of consumers.
When they see that your prices constantly fluctuate, they may wait until the price goes down before purchasing from your brand. Worse, they may end up at a competitor brand if they know the price won’t change as often.
7. Consumer-Based Pricing
Consumer-based pricing is when you analyze your customer base (using your ICP) to gauge what people are willing to spend on your product.
With consumer-based pricing, you could change your price for each category you uncover in your ICP.
For example, when you go to the movies, you’ll notice different ticket prices for children, adults, and seniors. Despite everyone watching the same movie, theaters have figured out what people are willing to spend at different ages, and how many of them convert, to price their tickets accordingly.
Pros: Consumer-based pricing means you can adjust your prices based on your customers. This ensures your prices fit within their budget or capitalize on those who can pay more.
Cons: As you can imagine, some customers won’t feel good about paying more than others. They may choose to stop buying from your brand if they know other people are getting the same product for less.
On top of that, customers may be more likely to shop around and buy from your competitors if they can score a cheaper price.
8. Bundle Pricing
Bundle pricing is when you combine products and offer them as a bundle for one low price.
Let’s say each pair of socks costs $5 individually. You can price a bundle of five pairs of socks for $22. Customers save money buying the bundle instead of buying each item individually, and you get to sell off more inventory.
Pros: Customers love a good deal, especially when they can buy more of something they really like.
A customer may have only purchased three pairs of socks, for example, if they were sold individually ($15). But give them the chance for a bundle, and you’ll capture additional revenue ($7, in this case) that they weren’t planning to spend.
Cons: Customers may get so used to buying discounted bundles that they may not want to purchase items individually, which can pose a challenge if your margins aren’t high enough to profit off the bundles alone.
9. Penetration Pricing
Penetration pricing is when brands debut their product at a competitively low rate and eventually raise the price when they’ve captured a steady stream of customers.
If you’re launching a new product, you want as many people to try it as possible. So you lessen the risk for consumers by offering a very low entry price. Hopefully, your product generates high word-of-mouth praise and catches on. Once you notice more customers and repeat buyers, you can slowly start raising the price.
Pros: You’ll be able to successfully penetrate the market and get your product in front of your target audience at an attractive price point. Your low initial price may then build a quick following and rack up glowing reviews for your product, so others are encouraged to try it too.
Cons: It may be challenging to get people to pay more down the line when they didn’t pay full price to begin with.
10. Loss Leading Pricing
When brands put out a “loss leader,” they sell a product at a loss to them hoping that it leads customers to purchase additional products that make up for the hit in revenue.
A loss leading pricing strategy means you’ll go in with a lower-priced item and market others with a higher price tag. Hopefully you’ll gain some profit back and increase the number of items per order.
Costco is famous for its loss leader, rotisserie chicken. It’s priced so low that Costco actually loses money on it, but they know their customers won’t leave the store without buying something else they can make money on.
Pros: Because the initial loss leader is such a good deal, customers are often encouraged to add other items to their cart, increasing the average transaction amount.
Cons: Unfortunately, some customers may only buy your loss leader and nothing else, which means you won’t be earning enough to stay afloat. If you’re going to use this strategy, you should market your other relevant products strategically, so your loss leader is worth it in the end.
11. Price Discrimination
Price discrimination is where companies charge a range of prices depending on where they think a customer’s max price will land.
This pricing strategy is similar to consumer-based pricing and relies heavily on ICP. By putting customers into categories, such as seniors or children, for example, you’ll determine a fair rate to charge for each particular group.
For eCommerce businesses, a price discrimination strategy could be offering VIP customers or first-time customers a special discounted price while others pay something slightly higher.
Pros: Price discrimination helps you maximize profits with each customer. If some customers can pay more, they’ll make up for the discounts other customers receive.
Cons: Customers who are stuck paying full price won’t appreciate the situation if they find out other people pay less for the same products.
12. Psychological Pricing
A psychological pricing strategy uses simple tricks to capitalize on consumer behavior.
For example, people believe that prices ending in odd numbers, such as 5, 7, or 9, tend to be a better deal than full-priced items with 00’s at the end.
So a $19.99 item feels like a better deal than one priced at $20.00, even if it’s just a penny difference.
Pros: It doesn’t take much to implement this strategy, and it shouldn’t affect your profits. After all, it could be as little as a 5, 3, or 1 cent difference in price, but the consumer will see it as a much bigger value.
Cons: This strategy won’t work for premium products or luxury items because it has the opposite effect -- it will make your goods appear cheaper than they are. So you should be careful with this strategy if you’re trying to set a higher standard.
Before you decide on a pricing strategy to go with, there’s one more big piece of the puzzle to consider:
Chapter 4: Understanding Customer Perceived Value and How Reviews and User-Generated-Content Impacts This
Customer perceived value (CPV) refers to whether your customers believe your product meets or exceeds their expectations for the price.
CPV helps customers decide whether a product is worth buying or re-purchasing. It also determines how much they’re willing to pay for your product.
A lack of sales is a key indicator that your price may be too far off, or the CPV just isn’t there. You can always adjust your pricing strategy to remedy this, but you may need to do more to boost your CPV and command a higher price.
So how do you do that?
Most brands focus on cutting their prices and hammering their customers with the features and benefits of their product, which may not always work.
A better approach is to show new customers how valuable your product is. And instead of taking your word for it, they can see this from other customers who have already purchased from your brand.
That’s exactly what User Generated Content or (UGC) can help you do.
With UGC, your current customers can submit their product reviews (which can be anything from a glowing write-up to pictures and videos), and you can place these testimonials throughout your website.
This simple but effective technique helps you:
- Build trust. New customers will see that others love your product and that your brand and product images/descriptions are legit.
- Boost CPV. When customers rave about your product, it boosts the perceived value of it.
One of the best parts about UGC is that you don’t have to lower your prices to see an uptick in CPV. Instead, the reviews will do the heavy lifting for you and share why customers love your product/brand in their own words, which is much more believable than any sales pitch or marketing copy.
So in addition to getting your pricing strategy right, it’s also a good idea to work on improving your reviews management system and UGC collection. You can boost sales while building a solid reputation for your products simultaneously.
If you’re wondering how to weave in UGC, find a review management tool that comes with its own stellar customer reviews and features you won’t find anywhere else.
Final Thoughts on Using These eCommerce Pricing Strategies
Now that you’ve made it to this point in our guide, you have some work to do.
First, try to uncover your ideal customer profile. This will make it much easier to weigh the pros and cons of each pricing strategy and determine which may be best for your brand and customers. Are there specific upsides or downsides that will affect your revenue/margins/customers more?
No matter which strategy you choose, start improving your customer perceived value, or the pricing strategy won’t make much of a difference. Just because a product is priced well or uses the right strategy doesn’t mean it’s guaranteed to sell. That’s especially true if your CPV is low.
For more help here, consider using a review management tool that seamlessly weaves user generated content throughout your website.
Follow these steps, and you’ll increase sales, grow your customer base, and elevate the perceived value of your brand simultaneously, perks every eCommerce store can benefit from.
So roll up your sleeves and get to work! We know you can do it!