Google has been constantly evolving its product names over the years. Some of these changes have been minor, while others have been more significant. Let's explore these name changes and some of the reasons behind them.
It goes without saying that Pricing is a very important element of your marketing strategy and an often overlooked aspect in the eCommerce process. As a business owner you need a pricing strategy that fits in with your target market and isn't simply based on your competitors (competitive pricing) or what the supplier recommends.
While the price is not the only factor a buyer considers when making a purchase decision, it is a major one. Consumers nowadays are increasingly price-conscious.
But why is that...
- People are worse off financially than previous generations
- Expenses and living costs are on the rise
- So much choice and competition online - there are more competing stores online than ever before. Not just in your own country but globally, and it's growing daily.
- Many online stores sell the same products and people can compare prices at the click of a button
Ecommerce Pricing Strategies & How To Price a Product to Sell Online
What are the most common pricing strategies and why do I need them?
When asking yourself how to price a product for your own eCommerce store, on Amazon, a markeplace, ebay or etsy, the below price strategies will guide you through the process of finding the optimal price for your products. First, you'll discover the best price strategies in use, then we'll show you how to calculate the profit with an easy to use profit margin formula.
By the end of this article you should have all the tools and knowledge to know the true cost of your products and be able to optimally price them for maximum sales and profit margin - ie getting you to a price that's profitable and considers the most important costs and external factors involved.
Below is a list of the most common and powerful pricing methods that are used by top eCommerce and online businesses. The idea is not simply to "choose one" and go with it but to be aware of them and fit them into your strategy based on your target audience and product mix. There are a lot of factors to consider when pricing your product, so let's take a look at some of the best ones to use.
#1 Charm Pricing (0.99 or 0.95)
A good old classic pricing strategy and also known as "Psychological Pricing" that uses the power of odd numbers and mostly "9s" or "5s". This has been shown to give the perception of a lower price than if it were rounded up to next whole number. For example: $99 is perceived as being cheaper than $100 despite being only 0.01 less.
Charm Pricing Excel Formula
MROUND will round it up to the multiple you define (10 is used in below example) and the ODD formula ensures it's an odd number.
#2 Dynamic Pricing
Dynamic pricing is a pricing method where you adjust the selling price of a product based on market factors, the most common of which are demand and seasonality.
- Demand & Availability: where the price of the item is set slightly higher than normal "when the going is good'" and when it is in-demand; and then is lowered when the demand starts to taper off or as competitors begin selling the same or an alternative version of the item. This is a common tactic and is normally dictated by sales levels. There are also some less savoury and underhanded tactics used when demand is high, such as "Surge pricing" - a questionable tactic used by the likes of Uber to increase fare prices during peak periods. An extreme method utilised is that of "price gouging" where prices are increased to unreasonably high levels due to unforeseen circumstances in the market or supply shocks.
- Time-based Pricing & Seasonal Pricing: this is where pricing is influenced by such things as holidays, school holidays, major events or seasons. An obvious example would be swimsuits in summer or Christmas decorations leading up to Christmas.
#3 Cost-plus Pricing
The cost-plus pricing approach is a simple and popular method where you calculate all your input and variable costs such as the cost of goods, shipping costs, packaging costs, marketing costs etc then add a markup to arrive at the selling price. It's a fast and simple way to price products but it does have some drawbacks, these are mainly:
- Does not account for marketing factors such as demand or competitor prices
- Not all products can (and should) have the same markup % applied - ie electronics will have a lower margin than jewellery
- Not all products will have the same perceived value by the customer
- Does not account for bestsellers - ie your better selling products could be priced slightly higher and return a higher margin, otherwise you're leaving profit on the table.
#4 Captive Pricing & Complementary Pricing
This pricing method is where a product has a core product in addition to services, accessories or addons that "complement" or are related to the main product, and in some cases can't function without it. Not to be confused with "complimentary" products which are products given free when the core product or service is bought.
The core product is priced at a very low margin in order to attract interest, and the complementary product becomes the profit driver. It's a powerful pricing method that also helps increase the overall perceived value in the mind of the buyer. The method is also commonly used with the tactic of cross-selling where a related product is offered in addition to the main product/pair.
Some captive pricing examples:
- Razors and shave cartridges
- Printers and print cartridges
- Movie tickets and their snacks
- Mobile phone contract which may also include a phone with accessories, data plan, entertainment plan (ie Whatsapp, Netflix or HBO) and in some cases a laptop, tablet or other electronic - ie both the device and the data come from the same provider.
- Low-cost Air travel and additional services like extra baggage allowanc, extra seat space, airport lounge access and in-flight snacks.
- Woocommerce plugin (free) and complementary services (paid)
#5 Everyday Low Pricing
An everyday low pricing strategy is one where you charge the absolute minimum price possible in the hopes of attracting more customers. It can be wildly effective, but it's a volume game and not recommended as a sustainable strategy.
The main problem here is generally you'll be attracting customers whose primary criteria for buying is the price. Not to mention you'll be up against the likes of Amazon whose key objective is to be perceived as having the lowest price on the internet. They've created a global marketplace where other sellers compete with each other on price to the win the coveted "buy box". This drives prices down to the absolute minimum.
However, if this pricing method is used with effective cross-selling and complementary offers it can be a powerful sales tool. Converting the traffic that's brought in from such pricing focused campaigns is key to making this method not only successful but profitable too. But bear in mind that those same customers might not always display loyalty toward your business when a cheaper price is found somewhere else.
#6 Head-Tail pricing
The head-tail pricing approach is closely linked to the Pareto Principle or 80/20 rule and looks at the majority, or head, of products sold (80%) being priced competitively and the tail (20%) being priced at a higher margin. This works especially well when you are selling your own private label, unique, unusual or hard to find products alongside more readily available products.
#7 Product Life Cycle Pricing
An important aspect of product pricing is to consider the life cycle of the product being sold. However, this is not always practical for businesses selling 100s or even 1000s of products to look at each one or a range of products to assess where it is in the life cycle -so just being aware of the forces at play is recommended when setting prices.
There are four stages in the product life cycle:
The product life cycle helps business owners manage sales, determine prices, predict profitability, and compete with other businesses.
During the growth phase (and early on the maturity phase) is where the highest amount of sales will be seen.
- Penetration Pricing: Is the practice of offering a new product at lower than normal rate in the hopes of attracting interest and sales. Best used during the Introduction and Growth phase to ride the wave and buzz that may be surrounding a new product launch.
- High-Low Pricing (incl Skimming): The idea is to price at the upper end of the scale when the going is good and then normalise the pricing when your competition catches on or the "early adopters" are tapering off and the product just isn't as new as it once was. Best used during the Growth and early Maturity phase.
- Competitive Pricing: As the name suggests this product pricing method is relative to your competitors' price for the same or similar products. It's great to use as a benchmark for your pricing strategy. However, knowing your costs is vitally important to know the lowest viable (and profitable) price before starting to creep into loss-making territory. Blindly pricing 5% lower than your competitors is a recipe for failure. Best used during the Maturity and Decline phase.
- Sales & Discounts: When the product leaves the maturity phases and enters into the decline phase some items may struggle to sell on their own and will need to be discounted via sales and clearance promotions. This should be used as a final tactic to sell the stock once all other options are exhausted. Best used during the Decline phase.
Bundling slower selling products with faster moving ones has the benefit of increasing the perceived value, creating an entirely unique product/SKU and also ensures your slower sellers keep selling.
#8 Premium Pricing
Premium pricing strategies can be used when you're looking to attract a more affluent customer base, but is dependent on the products you're selling and the perceived value. It'll be challenging finding anyone who is going to pay top dollar for a product that is readily available (and cheaper) elsewhere; however that same person might be happy paying a bit more if they know your product is presented beautifully, solves an ongoing problem for them, is completely unique, or they know the service received will be world-class and different from anywhere else. Especially when they connect with your brand on an emotional level and are a fan.
A Walker study found that at the end of 2020, customer experience will overtake price and product as the key brand differentiator. "..86% of buyers will pay more for a better customer experience"
#9 Bundle & Kit Pricing
Creating a unique collection of products in a bundle or kit is a great way to ramp up the perceived total value of the bundled products - and whilst boosting the overall profit margin far more than if those same products were sold individually.
As an example, let's say you have three products. One of them sells very well, the other moderately well and one is a very slow seller. Keeping the top seller available to buy individually but then also bundling it with the other two - and offering an attractive discount over buying them individually. The lost margin is then spread over the slower selling products proportionately.
This creates an entirely new and unique product that should ensure inventory is still turning over on the slower selling products, without losing much in the way of profit margin for the overall order.
#10 Past Sales Performance
If the products have already been selling for some time then this is an important report to look at. While historical sales volume does not guarantee future sales, if you have any sort of sales data to work from (and the products aren't brand spanking new to your store) this is going to be very valuable data for having an idea of the sales potential at the current price.
Try to always remember when making a decision about pricing that "the data doesn't lie!" While "gut feel" is good to go by, you should give the most weight in decision-making from the data you already have. Even if that means you need to run a Google Shopping or Facebook ad campaign to get that data.
Notes: In your favourite sales report have a look at the last 30 days, 3 months and 12 months sales performance. This will give you the best possible idea of the more recent sales performance (30-90 days) whilst taking into account a more longterm view (12 months) that factors in the effects of demand/seasonality, competitor's prices and the product life cycle price factors.
#11 The MSRP
When all else fails or you need to price something in a hurry there is always the Manufacturer's Suggested Retail Price. This price assumes the manufacturer has already done all the market research and proper costing to arrive at this price. So make sure this fits in with your customer base and overall pricing strategy. However, in some cases, the distributor will enforce the MSRP or MAP as the standard price for all its retailers to use - which doesn't leave much in the way of price tweaking below this amount.
But which pricing strategy should I use to price a product?
There is no one-size-fits-all strategy but the best way to start is to a) know your costs and b) know your customer. With these two fundamentals in place, you are in the best possible position to price your products for maximum sales without the need for discounting and lost margin.
Below is a graph that illustrates how pricing can affect sales. Even a small % drop in price can result in a large increase in sales. So it's important to test sales volumes at different price levels until that "sweet spot" is found.
The Power of Pricing: This also applies when pricing in the other direction. In one study of 1200 businesses, consulting firm McKinsey & Co. found that if companies raised their prices by just 1% while demand remained constant, profits would increase 11% on average".
Well done for making it this far! The next step is to calculate the cost of the products.
Calculating the Cost Price
By now you should have a good idea of the most popular pricing strategies and methods that can be used to price a product
The next and most important step now is knowing all of the costs associated with shipping that product to your warehouse or dropshipping it directly to your customer
Whether you're buying wholesale from distributors, importing from international suppliers or dropshipping from your supplier there are going to be a few unavoidable costs associated with getting those products to your business and ultimately to your customer.
- Cost of Goods: the primary cost of the products as found on the supplier's invoice or price list when buying from a supplier. If you produce your own products then this makes up all the input costs such as materials, overheads/fixed costs, labour costs, packaging etc.
- Freight or Shipping Costs (ie the "main shipping" costs). Airfreight, sea freight, road freight or courier delivery charges. The transport, loading or unloading, origin and destination charges of getting the goods from A to B.
- Fees: disbursements (clearing), document, communication and finance fees are a few examples of the most common fees you'll find on a shipper's bill.
- [Imports] Duties & Taxes, Entry Fees & Other Disbursements. When you source your products from outside the country where they are to be sold you, ie importing from another country, all shipments will need to pass through customs upon arrival. The tariff duties payable are linked to the type of product being sold and the duties vary from country to country (see below Tariff Guide links for your country). The taxes are normally VAT (Value Added Tax) and are linked to the declared value of the goods (in the local currency) as stated by the supplier in the "Commercial Invoice" which supplied along with every shipment.
The above duties and taxes also apply to orders being sent from the supplier direct to your customer - ie dropshipping - where orders over a certain declared value become liable for duties and taxes by your business or customer. Not all products have customs duties so it's best to check with your government website to ensure you're dealing with products that have low or no duties applicable - otherwise it might be better to try and source them locally. Otherwise you or your customers might received a nasty surprise.
Importing: How to Calculate The Landed Cost Price
Importing products might seem a bit daunting. But don't let that scare you. For all the extra work and cost, it can have the benefit of giving your business a unique mix of products not found anywhere else in your country or marketplace.
This then means you're able to be a bit more flexible with respect to your pricing and you won't always have to be ultra-competitive. Using the strategies above, test different pricing methods to find the sweet spot of sales volume vs. profit margin.
Remember that your average eCommerce seller will choose the quickest and easiest route and may simply list all products from a dropship supplier for their shop. So that new dropshipping supplier you have just discovered with a massive range probably has their products listed on 1,000+ other online stores.
How will I know what import duties to pay?
This will vary from one country to the next - and is based on the type of goods and their declared value - so your best bet is to ask your supplier for these in advance (as they'll appear on the commercial invoice) and then view your government's website. Search by the general description of the goods being imported and you'll be given a list of tariff headings/codes and their duty amount (as a %). Below are a few popular ones.
Government Tariff Guides
- UK HMRC Trade & Tariffs Guide
- European Tariff Lookup or TARIC
- US Import & Tariff Fees Overview
- SA Customs Tariff Book
Where will I see the import fees and costs?
The list or breakdown of duties and taxes will be provided via the "Customs Worksheet" by your shipping or courier company once the goods have landed at the port of entry (ie the airport) and before the clearing agent officially submits it to customs for the duties and taxes to be paid. Which they will also pay on your behalf to the government, and invoice you before delivery of the goods.
Notes: Some suppliers may not always include detailed Commercial Invoices for easy customs clearance - and the tariff headings become unknown to the clearing agent in the customs department of your shipping company. The customs agent will then try to decipher what the product is and attach a tariff code (know as a "tariff heading") for each one. This can sometimes be incorrect, so you shouldn't always rely on the customs person to declare your products correctly. Double-check to ensure they are using the correct tariff headings and ask them to change it if they are not. This could mean that you're paying import duties when you're not supposed to.
How to Calculate the Selling Price
You now should have all of your product costs calculated. The markup to use will be based on your pricing strategy from the Price Strategies section earlier in the article. The formula looks like below.
How to Calculate Profit Margin
This may be obvious to some but knowing the difference between how much you markup something and the profit margin is crucial. Marking up an item is adding on a percentage, above the cost price, to get to the final selling price. Margin is the %/$ value of what is realized when and item sold, and is the difference of the selling price minus the cost price. This is represented as a percentage or $ value.
Markup and margin are closely linked but are NOT the same. For example: a 30% markup on your cost price does not equal a 30% profit margin, it gives a 23% profit margin. See the table further below which illustrates this.
However, a 50% discount is the same as removing 50% of the margin. So bear this in mind when pricing your products and when running discounted offers and promotions.
Below is a quick and simple profit margin formula for calculating profits. But if you're looking for and interactive version then check out the dynamic profit calculators or if you're looking for a powerful yet versatile profit calculator, then be sure to download our 100% free All-in-one Price Calculator which will help you price your products in a matter of seconds. Simply input the cost price and desired markup or desired margin and it will do the rest. Available for USD/$ and GBP/£ profit formula calculations.
How to Calculate Selling price from the Desired Margin %
If you’d like to do things the other way round and know the profit margin needed, then work from the following to price a product.
In this example the cost for an item is $50 and you want a 30% margin:
$50 / (100%-30%)
$50 / (70%)
$50 / 0.70 = $71.42
You then will price the item at $71.53 (before vat/sales taxes)
What is the Difference between Markup vs Margin?
- Product markup is defined as the amount added to the cost price of goods to cover overheads and profit.
- Profit margin is defined as the amount by which revenue from sales exceeds costs in a business.
Below is a table with some common margin vs. markup pairs. You'll see this illustrates the difference in the profit margin as the markup increases or decreases. From this you can see how margin and markup differ from each other.
|Markup %||Profit Margin %||Multiplier|
#4 Price Plugins & Tools
This section below is home to all the best pricing related tools and downloads.
- 5 Best Woocommerce Dynamic Pricing Plugins
- Wiser Retail Strategies | The Official Wiser Blog
- The Ultimate Guide to Pricing Strategies
- How to set the right price for your products or services
- Dynamic Pricing: Benefits, Strategies and Examples
Pricing Apps & Plugins
Below you find a list of popular plugins for optimally pricing your products as well as keeping an eye on competitor's prices.
|Prisync - Pricing software for ecommerce||View|
|Price2Spy - Price comparison and alerting app||View|
|Price Edge - The dream pricing software||View|
|Minderest - Experts in pricing||View|
|Zonos - #1 in cross-border duty and tax calculation||View|
|Dynamic Pricing by SpurIT - Change prices automatically according to sales volume||View|
- Omni Calculators
- Reorder Point Formula | Safety Stock Calculator | Zoho Inventory
- Break-Even Point | Break-Even Analysis | Calculator | Zoho Inventory