Of all the business decisions you’ll make, the one most likely to determine your profitability is your pricing strategy. It’s also one of the trickiest to make. A classic blending of art and science, finding the ideal pricing strategy is absolutely crucial to your success. You have to balance the psychological profile of your customer against the margin you need to operate successfully.
The good news is there are a number of ways to get there.
Let’s take a look at four of the most common ones.
Manufacturer Suggested Retail Price
Also known as MSRP, this strategy was implemented by product manufacturers to ensure uniformity in the pricing of their products—regardless of where they were sold. As good as this sounds, the reality is there is a lot of room for sellers to manipulate prices and remain profitable within this framework. Smart retailers know their profit is made when they buy, rather than when they sell. If they can get a better wholesale price, they can sell below MSRP and still be OK. So while going straight MSRP makes pricing decisions easier, it could leave you uncompetitive.
If you take the price you paid, mark it up by the exact same amount and establish that as your sale price, you’re engaging in keystone pricing. As with all of the other schemes you’ll find here, there are pros and cons. If you’re dealing in hard-to-find items, you might be able to get away with charging more. Similarly, if your costs are in some way higher—such as shipping and handling for larger, heavier goods—you might need to charge more than keystone. On the other hand, if you have a lot of competition, keystone might be too much. The best play is to see what your rivals are doing and getting as close as you can to them, or come up with a compelling reason for shoppers to be willing to pay you more.
If you use a platform like Shopify to sell electronics online, consider including inexpensive accessories with a primary product to increase your potential for profit while selling at a reasonable price. For example, if you’re selling a 4K UHD Blu-ray player, your customers will need to upgrade to high-speed HDMI cables to get the most benefit from the product. Find an inexpensive source and include them at no extra cost, while pricing the player at MSRP. When customers see the bundle and do the math, they’ll feel they’re getting a bargain.
Everyone likes to feel they got a deal. Even better, people love to brag to their friends about the good deal they got. Shoppers also use the discounted price as justification for the purchase to friends. “Yeah, it normally costs $2500, but I got a closeout at $1500. No way I was going to pass that up!” Advertising discounts is a good way to get more shoppers to visit your site and move old merchandise. It also gives you the ability to tout coupons, rebates and seasonal pricing in your marketing efforts. However, if your customers get used to you being the “discount place”, it’s going to be difficult to get them to pay full price.
Those super cheap 60-inch flat screens for which people line up on Black Friday are a perfect example of the loss leader concept. Yes, a lot of the people in that line are going to grab the screen and split. However, many of them will shop for other items while they’re in the store—regularly priced items. So you take a loss on the set to get eyeballs on your site and sell them more profitable items while they’re there. Again though, you have to use this sparingly. If you get a run on those sets and nothing else sells, you could wind up taking a bath in the putrid waters of loss.
These are the four most common ecommerce pricing strategies. Another key point to make while we’re here is the psychological effect of oddball pricing. One of the ways Wal-Mart ensures its prices are consistently lower than competitors is to end them in “7” rather than the commonly employed “9”.
If you see an item you want priced at $8.99 on one site and $8.97 at the Wal-Mart site, your brain is going to say “lower price” and you’ll buy from Wal-Mart. Sure, the reality is it’s only two cents less, but people see a lower price and buy.
And finally, finding the ideal pricing strategy for your ecommerce site begins with the nature of your ideal customer. Always take that key factor into consideration when you’re making pricing decisions.