There are so many pricing strategies out there for eCommerce businesses. But many of them leave you devaluing your business or even damaging your customer’s perception of your brand. In this blog, we discuss two popular pricing strategies and why you shouldn’t use them.
Cost Plus Pricing
What is Cost-Plus Pricing?
Cost-Plus pricing is one of the oldest pricing strategies in business. Despite its age, cost-plus pricing is one of the most popular pricing strategies in eCommerce. It works by taking the cost of production and adding a fixed margin or dollar amount to create the retail price.
Why not cost-plus pricing?
Cost-plus pricing is a simplistic method of pricing which ensures a profitable retail price for your products. However, the challenge with this approach comes when defining what are the cost and the profit margin values.
eCommerce businesses who use this approach must be able to measure and define these two parameters accurately. Otherwise, risk miscalculating a profitable retail price for their product. For example, the cost of the product is not only the unit purchasing price but also all overhead expenses associated with the product.
The second calculation is the profit margin calculation. Factors such as the competitive landscape, product category, brand image and consumer needs and wants all impact the profit margin an eCommerce business can put on their product.
To conclude, cost-plus pricing provides your product with a profitable price tag. But you risk overvaluing or undervaluing your product in the eyes of the consumer which will result in either poor sales if undervalued or a lot of sales which are not profitable.
Competitor Based Pricing
What is Competitor Based Pricing?
eCommerce is a competitive space, which is only getting more competitive each day. Competitor based pricing is when a product is priced at a level similar to a competitor’s product.
Should I use competitor based pricing?
Competitor based pricing is described as “ethical, but ineffective plagiarism.” by priceintelligently.com. If I was the owner of a new or growing eCommerce business, I would stay as far away from a competitor based pricing strategy as possible. The only upside to competitor based pricing is that your business can focus more on the sales service provided, to create loyalty to encourage customers to shop repeatedly with you. This is seriously it. Competitor based pricing is described as “ethical, but ineffective plagiarism.” by priceintelligently.com
The Downsides to competitor based pricing?
Running a competitor based pricing strategy relies on constant checking of competitors, pricing of products. Which, depending on the competitive landscape can be a time-consuming task. Competitor based pricing also runs the risk of pricing your product at a level where it is no longer profitable. This will most definitely be the case if you price your product similar to a big player. Big players in your space can afford to price their products at a low price and still make a profit as they have the resources to bulk buy which reduces the initial cost of the product and they can get away with smaller profit margins as the volume of sales that they process still allow them to be extremely profitable.
Consider The Customer’s Perceived Value
When pricing your products consider your customer’s perceived value. Once you have created a price point for your product, you can present your price is a different way. For example, if you have a product which is $25 and the cost of shipping is $4.99 you can bundle the price of the product and shipping together and present it as $29.99 plus free shipping. Or you can take it one step further and offer the product for free, and charge the shipping as $29.99. The latter in particular works well when selling trial items.
What are your thoughts on these pricing strategies? What are some good alternatives? Let us know in the comments below.