Three Pricing Models You Can Implement in Your Online Store

Posted 4 years ago by Robert Brandl

Product pricing is听often a听tough egg to听crack for听ecommerce business owners, as听it听can often make or听break your whole business model. If听implemented right, you can see your revenue climb quickly; but poorly priced products can scare off even the听most avid buyers.

There are several pricing strategies out there, 补苍诲听choosing the听best one is听not always straightforward. In听this article, we鈥檒l focus on听three proven pricing model strategies that can help you take your online store to听the听next level, or听at听least make sure your pricing makes sense.

The Importance of听Price Optimisation

Price is听not the听only factor consumers consider when making a听purchase. But most of听us听do听use price to听compare similar products.

According to听, 80% of听consumers say that the听most important factor influencing their purchasing decisions is听competitive pricing. In听addition, name pricing as听a听major influence when they are making their purchase decisions.

Your strategic pricing decisions affect your bottom line in听various ways. Your pricing strategy can be听implemented to听ensure maximum profitability. Likewise, if听you don鈥檛 price your products or听services competitively, you can end up听losing customers 补苍诲听lowering your profit margin.

Three Common (and Effective) Pricing Models for听Ecommerce

Take guesswork out of听pricing your products: check out three methods for听coming up听with fair 补苍诲听competitive prices for听your online store.

Cost-Based Pricing

Cost-based pricing is听one of听the听most popular pricing strategies adopted by听businesses across the听world. This pricing model is听used to听determine the听price of听products 补苍诲听services, based on听their initial cost. Cost-based pricing is听essentially a听process of听marking a听product, by听either a听percentage or听a听monetary amount above the听original price of听the听manufacturer or听provider.

Cost-based pricing can be听classified into three distinct categories:

Markup pricing
Margin pricing
Planned-profit pricing

Markup pricing
Markup refers to听the听difference between the听selling price of听a听good or听service 补苍诲听its cost. It听is听expressed as听a听percentage above the听cost. Markup pricing calculates the听markup percentage between the听price a听company sets for听an听item 补苍诲听its cost.

The following formula is听used to听determine the听markup amount:
(Selling Price)听鈥� (Original Cost)

In听other words, if听the听original cost is听set at听$10听per unit, 补苍诲听you sell your product for听$15, your marked-up price is听$5: ($15听Selling Price)听鈥� ($10听Original Cost).

Therefore, the听markup on听the听product will be听50听percent: ($5听Markup Amount) /听($10听Original Cost) x听100.

Markup pricing is听especially useful to听deal with cost fluctuations. Since it听is听expressed as听a听percentage, you鈥檙e guaranteed to听generate a听proportional amount of听revenue on听each sale you make.

Margin pricing
A听price margin is听similar to听the听idea of听markup. Both markup 补苍诲听margin pricing refer to听the听amount that is听added to听the听cost of听a听product to听calculate a听selling price.

However, the听price margin takes this a听step further. It听takes into account the听cost of听the听particular product 补苍诲听all other costs that must be听covered. Additionally, margin pricing considers the听volume of听business 补苍诲听your profit margin.

To听find out your maximum margin, you must first know your gross margin:
(Selling Price)听鈥� (Cost of听Goods Sold)

This number would then be听divided by听the听price 补苍诲听multiplied by听100:
(Gross Margin) /听(Selling Price) x听100

Using the听example from above, your gross margin would be听$5: ($15听Selling Price)听鈥� ($10听Cost of听Goods Sold).

Your margin percentage would then be听33.33%: ($5听Gross Margin) /听($15听Selling Price) x听100.

Using margin pricing allows you to听determine the听actual profit percentage per unit sold.

Planned profit
Planned-profit pricing requires businesses to听determine the听total profit they expect to听earn from the听sale of听a听particular product, 补苍诲听then adjust the听price of听each individual unit accordingly.

The formula for听planned-profit pricing is:
(Cost) +听(Desired Profit Margin Per Unit)

For instance, if听a听clothing company intends to听earn $10听per shirt sold, 补苍诲听each shirt costs the听company $2听to听purchase (or have made), the听planned profit price would be听$12听($2听+听$10).

When deciding whether or听not to听use cost-based pricing in听your own business, it鈥檚 critical to听weigh the听benefits 补苍诲听drawbacks.

Pros:

Allows you to听easily determine the听price.
Ensures profit from each sale.
Enables you to听justify price increases, since you factor in听all your costs.

Cons:

Does not consider the听competition.
May lead to听overpricing or听underpricing.
May not always consider actual consumer demands.

Dynamic Pricing

Dynamic pricing is听also known as听聯market pricing聰 or听聯competitive pricing聰. This framework uses industry data to听competitively establish prices.

To听get started with dynamic pricing, it听is听important to听invest in听dedicated software that allows you to:

Easily collect 补苍诲听analyze data from the听industry.
Calculate the听profitability of听various price ranges for听various items.
Segment pricing data that allows you to听analyze your target audience.

Regardless of听the听niche you work in, you want to听know the听average price (mean price) 补苍诲听the听most common mid-range price of听each specific product you need to听price. The data you gather enables you to听price your product slightly lower than what is听offered by听most competitors for听the听same product.

Of听course, with dynamic pricing, you still want to听think about your desired profit margin, as听well as听the听total revenue you want to听generate by听selling the听product in听question. Completely outselling your competition with a听heavy price cut may lead to听increased sales volume, but if听your profit margin is听too low, your sales revenue will suffer.

It鈥檚 important to听take your store鈥檚 reputation into consideration when going for听a听dynamic pricing strategy. The better your brand reputation is, the听more flexible you can be听with your end price.

In听any听case, once you have determined the听price point for听your products, you want to听closely monitor your conversion rates 补苍诲听revenues, as听well as听market fluctuations.

Again, as听for听all pricing models, it听is听essential to听consider both the听pros 补苍诲听cons.

Pros:

Allows you to听find the听聯sweet spot聰 for听pricing your products.
You won鈥檛 be听uselessly undercutting the听competition.
You won鈥檛 be听losing sales by听setting your prices higher than the听market average.

Cons:

Implementing dynamic pricing can be听time-consuming 补苍诲听labor-intensive.
This may also be听costly, as听you鈥檒l almost certainly need to听invest in听a听software solution.
Dynamic pricing is听not a听聯set 补苍诲听forget聰 model.
Can sometimes lead to听price wars, as听competitors may hit back by听under-pricing you again.

Value-Based Pricing

Value-based pricing is听the听process of听establishing prices for听your products based on听their perceived value by听the听customer. Once you have defined the听value your customers get from your product, your goal is听to听find out how much money they are willing to听pay for听it.

From a听value-based perspective, of听course, you will want to听define 补苍诲听engage your customer personas first. This includes digging deeper into your clients鈥� psychology 补苍诲听behavior patterns, such as:

Their goals of听using a听particular product.
The advantages 补苍诲听disadvantages of听using the听product.
Why customers need 补苍诲听want to听spend money on听the听product.

After analyzing your customer personas, the听next step is听to听figure out how your products will meet their expectations. When implementing value-based pricing, you must also consider any听value-added.

For example, if听you provide excellent customer service, money-back guarantees, 补苍诲听other services that go听above 补苍诲听beyond what your competition provides, you should certainly factor that into the听end price of听your product.

You have to听be听certain that your target consumers consider this additional service to听be听valuable. One way to听do听so听is听by听incorporating these value-added elements into your marketing strategy. Whether it鈥檚 by听printing it听on听your packaging or听highlighting them on听your social profiles, ensure they are clearly visible. If听not, customers may not be听willing to听pay for听it. As听usual, this model also comes with its pros 补苍诲听cons.

Pros:

Value-based pricing allows you to听meet your customers鈥� expectations.
The price you set is听normally the听price your customers are willing to听pay.
This allows you to听justify your pricing of听the听value-added services.
Customers are likely to听be听much more receptive to听increases in听your prices over time.
Ultimately, this allows you to听be听lean in听terms of听product 补苍诲听service development.

Cons:

Resource-intensive pricing framework that requires more research 补苍诲听needs to听be听ongoing.
Trends fluctuate 补苍诲听you need to听stay on听top of听this at听all times.
聯Value聰 is听subjective to听each of听your individual customers.

Over to听You

Proper pricing of听your products has a听direct impact on听the听success of听your ecommerce business. So, it鈥檚 critical that you assess each pricing framework carefully before making final decisions on听pricing. Never try to听forcefully implement a听pricing strategy if听it听doesn鈥檛 actually make sense for听your online store. And always consider your overall business model, trends in听your industry, 补苍诲听your customer profile as听you make your pricing decisions.

Keep in听mind that whichever pricing mechanism you choose may not stay current forever 补苍诲听that it鈥檚 okay to听change your mind later: though often a听change in听pricing strategy calls for听a听re-branding or听other big shift in听the听way your business operates.

听

About The Author

Robert's passion has always been web tools that make your life easier. That's why he founded the , where you can find reviews and tutorials for the world's best website builders and e-commerce platforms.

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Three Pricing Models You Can Implement in Your Online Store

The Importance of听Price Optimisation