A comprehensive guide to pricing your ecommerce product for success.
Setting the right price for your e-commerce product is a critical aspect of your business strategy. Finding the balance between attracting customers and maximizing profits can be challenging, but with a well-thought-out pricing strategy, you can set your online business up for success. In this article, we’ll explore the key factors to consider and the best practices to help you price your e-commerce product effectively.
Understand Your Costs
Before diving into pricing, it’s crucial to have a clear understanding of your costs. Calculate all direct and indirect expenses associated with producing and selling your product. Direct costs include manufacturing, shipping, and packaging, while indirect costs involve marketing, website maintenance, and overheads. Knowing your costs will provide a solid foundation to determine the minimum price you need to set to avoid losses.
If you plan to advertise, then we suggest understanding your break even return on ad spend (or BROAS). This is the multiple of revenue return that you need to cover costs. Essentially this is the ad spend + COGS (cost of goods sold).
Analyze Market Trends and Competitors
Research the market to gain insights into your target audience’s preferences and behaviour. Study your competitors’ pricing strategies to see how your product compares to similar offerings. Get granular with this exercise by using a pricing comparison sheet, compare at least 3 competitors at every product and note where there is little or no competition. If your product offers unique features or superior quality, you might be able to justify a higher price point. Conversely, if the market is saturated with similar products, you may need to adopt a more competitive pricing approach.
Competing on price is not always the best way to determine a pricing strategy. Remember that 70% of your customers are cold audiences that have never seen your brand before and of these audiences it is estimated that 50-60% of your buyers are impulse buyers. This means they may not shop around at all and even see your competitors pricing. This is where your offer and understanding the value equation plays a crucial role.
Consider Perceived Value
Customers’ perception of value plays a crucial role in their willingness to pay a certain price (and can play a role in setting pricing expectations). Understand your value equation which is the customers dream outcome multiplied by the perceived likelihood of achievement (divided by the time to achieve that outcome and the effort to get there). For example, the ultimate outcome of a beauty product might be looking younger, the value lies in the product convincing a customer they are likely to look younger with little effort, time or sacrifice.
Understand the benefits and solutions your product provides to customers and highlight them in your marketing efforts. Position your product as a valuable solution that justifies the price. Offering exceptional customer service, warranties, or guarantees can also enhance the perceived value.
Set Profit Margins Wisely
Profit margins are the difference between the cost of your product and its selling price. While it’s tempting to aim for higher margins, excessively high prices might deter customers. Strive for a balance between profit margins and a reasonable price that attracts your target audience. If you anticipate selling a high volume of products, lower margins might be acceptable. Conversely, niche or luxury products might allow for higher margins.
It is essential that you include the cost of marketing in your calculations. This can be anywhere between 3% to 50% in the first few years. If you can achieve an 80% profit margin whilst still being competitive then you may have hit the jackpot.
Utilize Pricing Strategies
Various pricing strategies can be employed based on your objectives. Some common approaches include:
- Cost-plus pricing: Adding a markup to the product’s cost to determine the selling price.
- Value-based pricing: Setting the price based on the perceived value to the customer.
- Competitive pricing: Pricing your product in line with or slightly below competitors’ prices.
- Penetration pricing: Offering low initial prices to gain market share and visibility.
- Premium pricing: Positioning your product as high-end and charging a premium for it.
- Hybrid pricing: This is a term we describe to consider multiple strategies (see below).
Monitor and Adjust
Pricing is not a one-time decision. Continuously monitor the performance of your product and its pricing. Analyze sales data, customer feedback, and market trends to identify areas for improvement. If necessary, be open to adjusting your prices to stay competitive or respond to changes in demand.
Dynamic & Hybrid Pricing
Dynamic pricing involves adjusting prices in real-time based on various factors, such as demand, inventory levels, and customer behavior. This approach can help optimize revenue and ensure you’re always offering competitive prices.
Hybrid pricing involves setting your pricing based on multiple pricing strategies. The key to hybrid pricing is understanding each of your customer personas and developing pricing in a way that can aligns with their perceived value, whilst still covering costs and being competitive in the market.
A client of our agency offered a far superior collagen product to the market at 50% of the market price. The product was sold in 1kg bags that lasted for 90 days, if consumed daily. Their margins were only 40-50% which placed a strain on their marketing budget. Here are some key factors we considered.
- Cost-plus. Increasing pricing would allow the retailer to have a larger marketing budget. Despite the customer feedback that the pricing was significantly cheaper than the rest of the market, the percentage of difference may be too high.
- Competitor positioning. Does the product lose perceived value if it is too much lower in price than the rest of the market. If 50% of cold audiences are impulse buyers, do they care about the 50% lower price?
- Value pricing. Is the product meant to be consumed in bulk by every audience? Will offering it in bulk hinder the retailer’s ability to retain customers over the long term? If the product is designed to last for 90 days per bag, there’s a higher risk of customers losing interest or being tempted by competitors. Moreover, a bulk offering may deter customers from signing up for ongoing subscriptions due to the higher price and longer usage frequency.
- Outcome: The final approach was to carefully assess every product at a competitive level. Each product set more than 20% lower was increased at a bulk level by 10-20%. New product packaging was developed to cater for specific audiences that were looking for 30-day programs (inclusive of additional value like recipes and exercise tips). Overall, we were able to increase revenue by 20% within 30 days.
What are the pricing models?
There are 5 known pricing models plus a hybrid model we introduce in this article.
Cost-plus pricing: Costs plus profit.
Value-based pricing: Based on the value equation or perceived value.
Competitive pricing: Aligning pricing with competitors (or slightly above or below).
Penetration pricing: Offering low initial prices to gain market share and visibility.
Premium pricing: Pricing above competitors to increase perceived value.
Hybrid pricing: Using multiple models across different products.
How to determine the price of a product?
The best way to determine the price of a product is to understand your costs and profit, get to know your competition, understand the value equation and know your customers well so you can evaluate how they wish to consume your product.
What is the value equation?
The vale equation can be looked at in many ways however essentially it describes how much a customer believes that they will reach their desired outcome or solution by using your product, and how much effort, time or sacrifice it takes for them to achieve it. If you can increase perceived value, then you can potentially increase price.
Pricing your product correctly can be crucial to your long- and short-term ecommerce success. Careful research of your customer wants, competitor offerings and an agile mindset will be the key to success.