Being a fresh self-made e-commerce website owner is tough. It really is.
There are so many parameters you need to keep in mind if you want to make a profitable e-commerce business.
First, you need to think about how you are going to build your e-commerce website and choose the right hosting provider. Then, you need to spend $$$ on making products and investing in promotional activities (because it’s never too early to start promoting your e-shop!).
Once you do all these steps, you are going to face even more money draining activities.
And that is why you’ll need to think fast about how you are going to cover all these costs.
The one factor the has a particular impact on your revenue and profit is how you price the products.
Now, if you have been following major e-commerce websites, you know that those platforms are not only thinking about covering their costs but also about adjusting the price to the consumers’ wants and needs. They make constant price changes.
A bulk discount, user role discount, a discount based on customers’ purchase history… those e-commerce sites have done it all!
But, do you know what pricing strategy YOU should use? Do you know when to raise the prices and when to lower them?
If you blow hot and cold when it comes to making a pricing strategy, don’t worry. Today, we are going to get to the bottom of the price changes and help you get the most out of your online store.
Shall we begin?
When defining prices, you need to think about…
… the three most important factors 一 the products you are placing on the market, consumers you are offering the products to and the competitors you are trying to beat.
Let’s analyze all of these parameters.
Since product specifications vary from company to company, we are not going to get into too many details about what your product should look like or what features they are supposed to have.
Instead, we are going to mention the one element that plays a huge part in your pricing strategy and has an effect on how you make price changes 一 Unique Selling Proposition (USP).
If you have read our blog post on seven questions you need to answer before you start making your own website, you know that a USP is the one element that makes your business unique. In this step, all you need to do is find a USP for your products, as well.
Are you offering an environment-friendly product package? Or perhaps a next day delivery? Do all your products have some innovative features? No matter what the case may be, you need to discover the one characteristic that differentiates your products from all the other ones.
Why is this element so important?
Because it can, and probably will be the reason your customers keep coming back. A USP is The One feature buyers find beneficial, to the point they are not even going to bother to check your competition or have the need to “replace you”.
But, what does a USP have to do with the pricing strategy?
Well, if you offer products that have some special (potentially premium) features, you are probably not going to tag them with Walmart-like prices. And with premium products comes a premium pricing strategy and price changes.
If, however, you offer standard products that don’t have a significant USP, you are probably going to sell them at lower prices. That is why you have to be aware that even if you manage to sell a bunch of them, at bulk price, your revenue is not going to be as high as you might expect.
Bonus tip: Keep in mind that, in most cases, the intangible features of a product are the ones that make consumers emotionally connected to a brand.
When it comes to making sales on your e-commerce website, you always need to think about whom you are selling the products to.
As you might know, before you can even start selling, you need to define buyer personas (by conducting market research
Creating a pricing strategy and deciding to make price changes based on the information you have on your ideal customer is known as the value-based pricing method. This method is extremely effective because it allows you to create a pricing strategy that meets the expectations of your potential buyers which will, then, help you build consumers’ trust in your brand.
Shortly put, keeping an eye on your consumers’ motivation to buy a product is the one factor that will remind you that product prices MUST align with the consumers’ perceived value.
Let’s talk more about your consumers by adding your competitors to the picture.
Products your competitors offer have an impact on your consumers’ perception, and that is a fact.
Why? Because customers tend to compare your price tags (and price changes) to other brands’.
Since you are a new brand on the market, you need to be aware of the fact that consumers will try to fit your business into “a box”, by comparing it to other brands. For example, if you are selling sneakers, your product prices and quality can get compared to Nike, Adidas or some other. This phenomenon is called reference pricing.
The good news (or the bad, depends on how you see it) is that if your brand doesn’t fit into any of the predefined boxes, you most likely won’t be even considered as a brand worthy of consumers’ time.
That is why you need to take into account competitors’ prices before you start creating your pricing strategy and deciding when to make price changes.
As Brandingstrategyinsider.com suggests, when it comes to reference pricing, you need to keep in mind the following factors:
- the frame of reference, that is, how the price of your product compares to competitors’ prices,
- the channel-specific prices and substitute product prices,
- the prices of some other products you sell are (those products don’t necessarily have to be in the same product line),
- how you are going to present the price and what the psychological effects you are expecting to see.
Once you define all the previously mentioned parameters, you move onto creating a pricing strategy.
Different types of pricing strategies
If you want to know when and how to make price changes, you first need to define a pricing strategy.
We have prepared for you several pricing strategies you can use and separated them into three groups 一 lower, higher and dynamic pricing strategies:
Lower pricing strategies
Brands place lower prices in different situations 一 as a part of their market penetration strategy when they are offering poor quality products, when they offer similar products as their competitors or when they have a lot of low- or medium-quality products.
Market penetration pricing strategy is the one companies use when they are offering the products to the market for the first time. The goal of this strategy is to attract competitors’ buyers by offering budget-friendly prices and induce them to try products for the first time. Once customers get emotionally attached to the products (and the brand), the company will raise the prices.
A loss-leading strategy is the one companies use when they are lowering the prices of not-so-quality products from time to time to attract the buyers who will, later, buy more valuable products.
Discount pricing strategy is like a floatation device brands use to save themselves from drowning. You should use this strategy only if you didn’t find a way to differentiate your products from the competitors’.
🚫 Discount pricing strategy can often be a trap since it can change buyers’ perception of a brand 一 before a brand even knows it, the online shop can be perceived as a “discount brand”.
Everyday low pricing strategy is the one store chains use. They offer a wide range of products with lower price tags, intentionally positioning themselves as lower price brands. Keep in mind that this strategy can make a success for a grocery shop that offers multiple products, not an e-shop.
Higher pricing strategies
Higher pricing strategies include a premium pricing strategy, a skimming strategy, and a cost-plus pricing strategy.
Premium pricing strategy is the one brands use when they release a premium product (which justifies the higher price). This is also the strategy high-end brands use all the time.
The skimming pricing strategy is the one that brands pull off when they are introducing new products to the competitor-free market. Being the first one to offer a particular type of product to a market with no competitors certainly comes with benefits.
A cost-plus pricing strategy consists of calculating the costs of the products and adding a markup, an additional $$$ to the price, so a company can cover all its costs. We would advise you to consider this strategy only when you have significant production or shipping costs.
Dynamic pricing strategies
All of the previously mentioned strategies are a good starting point. But, since you are planning on building an e-commerce shop, static pricing strategies aren’t going to cut it. You need to maximally adapt to your customers’ needs while keeping an eye on your possibilities.
That all being said, did you know that Amazon changes its prices every 10 minutes? There’s a good reason for that! If you want to be just as competitive as the other brands that already made a name for themselves, it’s time you start thinking about price changes and dynamic pricing strategies.
Here are some pricing strategies to think about:
Market segmentation pricing
Market segmentation pricing is a strategy in which you offer the same products to different consumers with different prices.
How is this possible, you may ask? Well, let’s say you are selling a vase for $35 and you know for a fact (by analyzing the results you of market research) that some consumers are willing to pay five dollars more while some think the vase should be priced around $25.
What can you do in this situation?
The logical move is to make some price changes and offer three different prices to three different types of consumers. But, what if those consumers are friends that really like to share what new stuff they got in the past week? They begin talking, and soon enough they get to the bottom of your little “magic trick”. The consequences? You being characterized as a money-chasing brand.
So, instead offering three different prices to different market segments, try to implement the following:
- Offer a discount for large orders. This is especially a popular move because it creates an image in consumers’ minds that they are getting good value for their money.
- Sell products in a bundle, or as a part of a collection.
- Win your consumers over by offering free shipping, while raising prices of the products.
- Offer basic packages with additional options.
The next dynamic pricing strategy is limited-time pricing, which is the oldest trick in the sales book. If you want to implement this strategy, all you need to do is offer incentives, which should motivate customers to buy (even more).
With limited pricing, you can offer different types of price changes 一 xx% off a particular product for a couple of days, providing two products for the price of one, or offering customers to buy one product and get the other one for free.
The third strategy is competitive pricing, which is, as the name suggests, based on the prices your competitors have. If you want to apply this pricing method, you’ll need to:
- define who your competitors are and what products they offer,
- track competitors’ standard prices,
- track when and how much competitors’ prices change (whether they are focused on the seasonal discounts or not, how much of a discount they usually offer, etc.),
- keep an eye on the additional values competitors offer.
As you can see, you need to do an in-depth competition analysis. Keep in mind that the goal of this analysis is to the possibility to make predictions so you can be one step ahead of your competitors.
Real-time pricing, a strategy Amazon uses, is the one that relies solely on the data and can help you increase sales and, therefore, profit.
When we say data, we mean the information on stock availability, competitors prices, previous customer purchases, etc. Basically, a real-time pricing strategy contains all the previously mentioned methods, combined into one system. This strategy is the most efficient one, as it completely adjusts to buyers’ needs and takes into account competitors’ prices, as well.
Here are some benefits of real-time pricing:
- You are going to offer better prices than the competitors which will, most likely, raise the demand for your products.
- Constantly updating prices and other information regarding products (like stock availability) can build buyers’ trust and respect in your brand. Not to mention, when you offer great promotions and deals (not too often!) you will instantly be more noticed and have a competitive advantage.
- Real-time pricing is a powerful tool for mouth-to-mouth marketing. Not only will your customers give positive reviews but they will also be more likely to recommend your products to friends and family.
Where to begin when creating a pricing strategy and making price changes?
In the end, there is only one question left to answer: how are you actually going to create a pricing strategy and make price changes on your e-commerce website?
Here are the steps you need to take:
- Start by defining the tangible and intangible features of your product so you can find the one specification (or more?) that differentiates your product from the ones that are already in the market.
- Define buyer personas to see what your customers actually look for when they are buying a product, what their motivation is. Discovering this information will help you build a value-based pricing strategy. When doing this step, try to think of a few different market segments. That way, you can apply the market segmentation pricing strategy later on.
- Define who your competitors are so you can adjust the prices (reference pricing). In this step, you should also find out when competitors make price changes and how.
- Once you have defined the starting price strategy, it’s time to think about when and how you are going to make price changes. We would advise you to implement the real-time method.
We are not going to lie 一 defining a pricing strategy and deciding when and how to make price changes is a time-consuming process. However, if you plan your next moves in details, you can get excellent results.
But, your journey is not over yet. There is one more step you need to do 一 monitor the results of a dynamic pricing strategy. You have to be aware of the fact that sometimes, even if you planned each step in details, you won’t get the results you expected. That is why it is important to track results and make changes if needed.
What is the easiest way to make pricing changes on your website?
By now, you are probably thinking How am I going to implement all of these changes to my e-commerce site? There’s so much I need to think about!
The first plugin, which has over 10,000 active installations, can help you create bulk discounts, percentage discounts, user role-based discounts or advanced discounts for your products. You can also quickly change prices of your product categories, make cart based discounts and track purchase history so you get the best deals to your loyal customers. There is a free and a pro version of this plugin that comes with some fantastic features.
The second plugin, Advanced Dynamic Pricing for WooCommerce, does pretty much the same thing as the first one. The pro version allows you to add some new rules, and import or export some additional statistics about your products and consumers.
Disclaimer: Themes Kingdom team is not affiliated with any of the mentioned plugins nor do we earn a commission if you end up purchasing any of the tools plugins through referral links in this blog post. We merely wanted to name some services that can help you set up a dynamic pricing strategy on your e-commerce website.
Hopefully, all the tips we mentioned will help you get to the bottom of the dynamic pricing strategy and price changes on your website.
Now, go sweep the customers off their feet with some amazing deals.