October 19 by Shreyans Parekh
Pricing products and services online is one of the most exciting and complex exercises you will take as a business general manager. Utilizing an effective online pricing strategy requires both a test-and-learn mentality paired with an intuitive feel for how you would like your brand and products to be perceived. An online pricing strategy can pave the way to omni-channel selling success. In an online marketplace, the price of a product can captivate the interest of a customer or make them exit to another website. Whether you are a B2B e-commerce site or a B2C online store, a pricing strategy is an effective driver of growing profits and influencing inventory turnover. We will expand upon five different eCommerce pricing strategies that can be implemented for online pricing: Cost-Plus Pricing, Target Return Pricing, Value-Based Pricing, Competitive Pricing and a Lead Generation Model.
5 eCommerce Pricing Strategies
This strategy entails the retailer placing a mark-up on top of the wholesale cost of the product that they paid for. This is also known as Keystone Pricing. If you are experiencing slow inventory turnover online, have substantial shipping and handling costs, and own products that are scarce, you may be able to provide a higher markup in price. Cost-Plus Pricing ensures that you are implementing an ample profit margin at all times. For example, McMaster-Carr is a supplier of industrial and commercial facilities worldwide, specializing in next day delivery of Maintenance, Repair and Operations materials and supplies.
Target Return Pricing
This price strategy includes a goal for a return on cost. You can determine a price that yields its target rate of return on investment. The product of desired rate of return and the capital invested provides the required total return, and hence the desired return on investment. A disadvantage of this strategy is that it does not take into account price elasticity and competitor pricing. The manufacturer would need to consider different pricing scenarios and estimate the probable impact on sales volume and profits. Grainger is a leading B2B E-Commerce site and the largest retailer of maintenance, repair and operations supply on the web. In addition to monitoring competitors on their pricing patterns, Grainger has a specific expectation on target return that they look to obtain from their products, particularly on products in which they can drive larger profit margins.
The pricing strategy entails pricing a product or service to appeal to customers over alternative products or competing prices. It takes into account a very deep understanding of customer value. Value-Based Pricing establishes prices for products and services largely on perceived value. This strategy works best for products that have a highly emotional component or that exist in a controlled environment. The cost of production of products, shipping, tariffs and other expenditures dictate how you price your product and how your competitors price their product. At a very basic level, this strategy depicts the intersection between supply and demand in the marketplace. The pricing should reflect the value that customers feel the whole product and service package is worth, and hence takes into consideration all products in the marketing mix. This model may be best suited for your brand if you:
- have an existing cult-like follower base
- are an established brand known for quality in the marketplace
- sell your product in a controlled environment
For example, Under Armour is a consumer products use case in which the company leverages value-based pricing for their product lines. Under Armour is confident that its customers will pay for the value they perceive they are obtaining through the integrity of the product and brand, and not based on competitive influence or target return. Hence, they are able to price according to this value perceived by the customer:
This pricing strategy is the practice of setting a price based on what your competition charges for similar goods or services. It results in a narrow gap between cost and profit. When a good or service is offered by many vendors at a relatively similar price, you can charge competitively. For instance, a computer retailer can decide to sell hardware at a loss if they can sell their software or services for a higher margin order to capture the sale and result in a projected positive lifetime customer value. For example, CDW Corporation is a B2B use case in which the company sells technology products with solutions and services for the business, government and education markets. They utilize competitive based pricing very well. Users can select from a variety of large screen monitors for example, which are also offered my competitors in the marketplace including some Apple, Dell and Insight Enterprises. Hence, CDW has to monitor competitor’s pricing strategies very closely in order to win business from it’s clientele.
Lead Generation Model
This strategy is the practice of engaging users to actively request additional information online. As pricing is contingent upon terms and conditions stipulated in pre-determined contracts, this strategy ensures that the visitor does take action and click to request information expecting to hear back from a sales representative in regards to product details and pricing terms. Users can adopt this strategy online if they require a portal login for their customized pricing needs. For example, Neopost USA is a B2B use case powered by the Apttus E-Commerce solution in which the a leading provider of mailing, business communications management and shipping hardware and software solutions worldwide, engages visitors to request information and learn about their solutions further online. Neopost USA deploys lead generation as each of their clients has unique pricing depending on terms and conditions stipulated upfront in their contract. Hence, Neopost requires their users to login to their portal to view their negotiated pricing terms prior to purchasing:
Successful Online Pricing Strategy
A successful online pricing strategy can be a strategic advantage for your e-commerce store. There are a variety of pricing strategies for your business to choose from, so select the method that fits your business use case the best. Remember, there are a few pros and cons for each pricing strategy depending on your business. Nevertheless, include how you’re going to price your products in mind when running your online web store.