We’ve talked a fair bit about various pricing strategies over the last while, but every once in a while it’s good to do a quick recap for those who don’t have much time for research. Today, let’s quickly cover some of the most common strategies for pricing in online retail.

 

Product pricing in the online world is one of the trickiest things to nail down, as prices fluctuate dramatically as retailers seek to gain advantages and balance themselves against the market. However, there are two basic models that are used by online retailers. First, the most common practice is simply using static prices with occasional discounts to entice customers. This is a tried-and-true model that everyone relates to.  The second and less common practice involves dynamic competitive pricing. This is less common, but Amazon’s successful use of the technique is driving other retailers to adopt the same strategy to win over price-conscious customers.

 

Reward programs are also a major part of online retail, just as they are in brick-and-mortar stores. The online factor allows for much more targeted and personalized rewards and promotions, however, as online retail has the obvious benefit of creating a database of customer purchase history and browsing habits. Be sure to dynamically segment your customer list based on interest and send out specialized promotions.

 

Finally, we come to the biggest issue that online retailers face: shipping fees. Shopping cart abandonment is often highest at checkout, and one of the main reasons for this is ‘shipping shock’. Fortunately, there are a number of ways around this problem:

 

However, for the busy pricing manager, remember the bottom line: your pricing strategy should align with the overall goals and structure of your business. What works well for some companies may not be advantageous for you. Be sure to take the time to get it right, as pricing can make or break your business.

 

Every product has its price, whether it’s a high-end computer or a coffee mug – but determining those prices can be a challenge for any business. It comes down to a constant balancing act between profit margins and the price your customers are actually willing to pay.

In order to find out what price the market will bear, you’ll have to be honest with yourself about what products or services you offer. If they are truly unique offerings, then you have a great deal of flexibility when it comes to pricing. This doesn’t mean you can set them arbitrarily and expect huge profits, as today’s price-conscious consumer is extremely sensitive to high price tags, but you won’t need to immediately compete in the marketplace. However, establishing an extremely high profit margin for a unique product will inevitably cause other manufacturers to duplicate your product and undercut your pricing scheme – one only needs to look at the current rivalry between Apple and Samsung in the smartphone and tablet markets to see an example of this process in action.

If you’re considering competing in a market that is already well-established, as is usually the case, then your pricing structure has to be modelled off of that of your competitors. In order to determine whether or not this will be profitable, you have to closely examine your profit margins for each product or service you plan to offer. There are three main calculations you’ll need to consider: direct cost, break-even product pricing, and profit margin pricing.

Simply put, direct costs are what it actually costs you to purchase the product from a manufacturer. If you are the manufacturer, then the direct cost is the cost of the materials required to produce your product, including the labour cost of any employees. If you’re selling at the direct price, you’re essentially saying that your time and energy have zero value, so avoid this.

Break-even product pricing is the direct price plus a percentage of your overhead costs, such as rent, electricity, and other necessities that come with their own price tag. If you can sell at the break-even price point, then at least you’re not losing any money – but you’re definitely not generating a profit, either. Break-even product pricing might be useful if it entices customers to purchase other products at the same time that come with a high profit margin. One common example of this is the North American practice of mobile providers offering smartphone discounts, provided the customer also signs up for a three-year contract. The company “breaks even” on the cost of the device, and then has 3 years to generate profit on the services that must be purchased with the smartphone.

Finally, there is profit pricing – this is where the real money is generated! Profit pricing takes into account your direct costs, overhead costs and your desired profit margin. If you can sell at your chosen profit price and still stay competitive in the marketplace, then you’re on your way to success!

 Our pricing intelligence tool monitors thousands of websties and millions of products on a daily basis. Every now and then, we notice some alarming price changes, which can often be quite amusing.

 

Take a look at this cracking saving on Debenhams, yesterday we saw the price change from £38471.97 to £362.. quite a reduction! We can't imagine many people would have clicked 'Add to Bag' when the price was £38k, but you never know..

 

 

This is clearly an error but just shows you what can slip through the cracks, even on a very large retailer's website.

Much like location in the real estate game, retail can often seem to come down to ‘pricing, pricing, pricing’. It’s one of the most important fundamentals of your business, but for the beginner entrepreneur - and even a few old hands – setting the best possible price for your merchandise can seem like an overwhelming project. We’ve compiled a few of the most popular and proven strategies to help you make sure you’re leveraging all the profit you can from your business.

No matter what strategy you choose, the first step in any pricing plan is to determine your cost, both in terms of total cost of the product you’re selling and the cost of operating your business. Obviously, your price needs to take both of these factors into account, or you’re going to be out of business in a hurry.

The most popular pricing strategy is mark-up pricing, although it comes in a couple of different flavours. Typically, mark-up pricing involves added a fixed profit percentage to your product cost, sometimes defined by the market or other industry standard. The other version is known as mark-up on retail, and is calculated by dividing the dollar mark-up by the retail price. Whichever method you choose, ensure that the mark-up is large enough to cover unanticipated expenses and sales or discounts.

The next pricing strategy is known as competitive pricing. This strategy is very popular in competitive markets, and depends on some accurate competitor monitoring. Pricing below the competition, also known as ‘undercutting’, is a convenient way to bring price-conscious consumers to you. Pricing above the competition is another option, but generally only when you have added value that the competition doesn’t offer, such as convenience or exceptional service, and in some cases, perceived value.

Psychological pricing is linked to the idea of perceived value, although it is more commonly seen in prices that end in .99 or .97 instead of being rounded up to the nearest figure. Perceived value however is when the customer attaches value to a product that is much higher than the actual cost of the product, as in the case of many high-end consumer electronics.

Multiple pricing is another tactic that is related to psychological pricing, as it often causes customers to increase the volume of their purchases. Typically, offering one of a product at one price and offering three of another at a slight per-unit discount will result in the customer choosing the larger volume option.

Keystone pricing is a pricing strategy that can rarely be used anymore, as market globalization has driven margins down in most industries, but it used to be a common tactic in wholesale industries. It simply means doubling the cost paid (effectively a 100% mark-up), named after the keystone of an arch which was double the length on one side.