Every business out there has a pricing issue. Why? Because pricing is both a science and art which makes it difficult to determine. We believe once you get the science part right you open up space for art and creativity. So, how do you determine a price? Or how do you calculate the value of the product you are selling?
There are common factors that you need to take into consideration before deciding on your pricing strategies, such as production, purchasing, distribution, and marketing costs. In this post, we'll guide you through and help you set the right price for your products.
Before starting out let's understand what a pricing strategy is.
What is a pricing strategy?
A methodological approach a company uses to price their products or services. As one of the P's of marketing pricing is also considered a marketing strategy to project a perception.
Why is it important?
If you don’t have any strategy chances you're leaving money on the table. If you price too high, you might have no sales whereas if you price too low, you might lose from your profits.
Where should you start?
We live in a world that is driven by data. Therefore, you need to know which data affects the final pricing of a product for what purpose. There's also a point of view from the consumers' willingness to pay.
Before moving on to determining our final pricing based from a business perspective let's see the motivations behind a purchase.
What insight do we get from this?
21%’s motivation to purchase is something that makes them happy and it can be anything from a new shoe to a mobile device. The consumers' lifestyle and demographic data can say a lot about this motive.
17%’s motivation to purchase is something that is bought out of a necessity to keep or survive which also depends on the lifestyle. Everyone needs toilet paper. The difference is whether they choose to buy the cheapest, average, or the most expensive one.
16%’s motivation to purchase is about a discount/promotion which is something that might seem like it's made for bargain hunters but it appeals to most of us right?
To make discounts you must first know your costs and this is where we start looking into a cost-based pricing strategy.
It is a pricing methodology in which we calculate our total business cost and add it up with a certain profit margin to set its selling price.
It is the most basic way to set a price unless you want to pursue a loss-based pricing strategy. With this strategy, you can build a solid layout for growth or persist in a harsh market.
How to do it?
Any type of cost-based pricing strategy begins by calculating the costs attached to the product you’re selling. In order to calculate the costs of your products, you need to include the costs of many E-commerce businesses. Below are the common expenses.
- Salaries and payments
- Sourcing products
- Platform fees
- Returns and refunds
- Bank and processing fees
Now, let’s take a look at margins. How do you really know how much you should profit from each item? The ideal scenario is you want to make as much as possible, but you have to make it buyable for potential consumers.
- It’s simple.
- Doesn’t need in-depth customer or market research.
- Ensures a minimum return on each product sold.
- Acts as a buffer that grows beyond initial expectation.
- Better coverage and tracking of costs.
- Possibility to lose from profits.
- Lower awareness of the market.
With around 860,000 E-commerce companies around the world, cost-based pricing is not so efficient to determine on how you price your products. That’s why we need to look at what the market is offering at what price.
It is a pricing strategy based on market conditions and competition. You compare the prices of similar products that match with your product assortment offered in the entire market. Because of this approach this strategy is sometimes referred to as competition-based pricing.
How to do it?
First, you need to know who your competitors are both directly and indirectly. Then you need to know how your product prices compare against your competitors. To figure this out, you can first do a basic search of each product you have in a search engine and record them into a spreadsheet. Then you can enter all that data in a pricing software which will provide data consistently about your competitors’ prices and assortment every day.
With a software, you will know exactly where your prices are among the others. You’ll see each product, brand, or category pricing position which will take your competition to a different level. Also, if it can track the stock availability of your competitors, you have another leverage.
- Helps avoiding price competition that can damage the company.
- Combined with cost-based pricing it can be a powerful strategy.
- It enables you to make your own competitor research and stay a step ahead of everybody.
- Might be difficult for smaller companies with low budgets.
- You rely on the assumption that competitors have priced their products correctly.
You know well where you and your competitors are standing, so let’s take a look at the customers.
Also known as value-based pricing is a strategy which you set prices according to the perceived or estimated value of the product or service you’re providing to the customer. This is where most of the science and art of pricing is most experimented.
How to do it?
To benefit from this strategy, you need to understand your customers better than anything. And your customer segments probably wouldn’t be equal. Some will do a comprehensive research before selecting their store while others might look for coupons or discount sales only.
So, for this approach to work well, you have to know your customers well, which means you have to know who they are and what they value about your product.
We already analyzed some of the reasons for purchasing motivation at the beginning of this article, but there are still a proportion of customers that don’t care much about the price. Like luxury products. If your customers are among the later, you don’t have to emphasize on price too much. So you should avoid deals and offers.
- Consumer-oriented pricing enhances your customer loyalty.
- There is a good chance that you’ll work with higher profits.
- Takes a lot of time and resources to determine an optimal price.
- Understanding customer habits in a fast-paced environment is hard.
- Might lead to ignoring your competitors, as they might start offering similar products for a much lower price.
What’s in it for Dropshippers
Everyone knows the highest benefit of drop shipping is that you never have to store inventory or spend time managing it. So, you focus more on selling and increasing your profit margins. Your financial risk is minimized as you don’t have to buy a product until you make a sale. This gives you the opportunity to set your pricing strategy in a way that is most beneficial to make your drop shipping business prosper and for you to earn a profit.
There is no single pricing strategy that will fit every type of drop shipping business. However, there are a number of ways that you can improve your pricing and cater it better to your products.
The product: The type of product itself determines the pricing strategy that can be implemented, as not every product can be priced in the same way.
Discounts: Discounts, deals, and offers can put a spark on getting fast traffic.
Shipping: Shipping costs always reduce the profit margin, so it’s always better to focus on the products with no shipping costs as it will be preferred by your customers too.
Returns: It can be very stressful as a drop shipper to get products returned. The aim here is to focus on the satisfaction of the customer, so keep that in mind.
Change: Change is the only constant. You might not benefit from sticking to the same strategy forever. Try new strategies and explore new areas, especially in terms of your product line.
Customer service: Pay close attention to the needs of your customers and aim to provide the best customer service.
Cheap products: Simply listing cheap products might not work wonders for your dropshipping business. You need to work on building a reputable image as a drop shipper, and continuing to list your products at the cheapest price may lead to your customers feeling that you offer low-quality products.
Supplier relations: Before getting started it is advised to talk to your supplier and share your pricing strategy thoughts with them. By contacting your supplier directly, you can get to know whether they have any pricing recommendations for you, which are more specific to the type of product that you are selling.
As you have seen throughout this article, pricing is a decision that has a lot of factors to take into consideration. The company itself, competitors and customers are the three top areas to think about. I don’t think there is a single person in your business that is an expert on all three. So take advantage of the fact that a group makes better decisions than a single isolated person, and make pricing a strategic decision that involves the full company.
If you nail your pricing strategy for e-commerce your conversion rates will rise, and your company will be more efficient.
Besides, you will have a better knowledge of your business. Mix the approaches mentioned above and set the prices as they should be set. Good luck!