One of the most important parts of e-commerce that also generates a lot of fear among entrepreneurs is how to price the products you want to sell on the internet. Its importance resides in that the price will define if a product will generate income and the necessary margin for the business to subsist. This fear emerges from the false belief that the price must be perfect: “if the price isn’t perfect, my business has no future”. First of all, setting a price is an art as well as a science. It requires the creation of a mentality open to experimentation and quick learning.
Secondly, not many people know that the pricing must be hand-in-hand with your store’s branding strategy and the desired positioning in the minds of consumers. If you sell at a low cost you may have negative numbers by the end of the month, but you would have also positioned your store as a place for buying cheap products. Sell expensive products and maybe you can position your store as a high quality, exclusive site, but sales will be less. There’s a balance to achieve.
“Setting a price is an art as well as a science. It requires the creation of a mentality open to experimentation and learning” Third, beyond the relation between price and branding, the balance between price and volume must be very clear. Low prices and high volume or high prices and low sales volume? Both are viable ways to make a successful online store but the journey will be very different. There isn’t a unique model that works for everyone. In this article we’ll talk about different pricing models for any product. The challenge is in understanding each one of them and choosing the one that makes the most sense based on the type of product or service, market characteristics and the competition.
Before we start to talk about different pricing strategies, it’s essential to begin with the basics: learning how to calculate the final price for the product considering product’s costs and the margins or profits we wish to obtain. The formula goes like this: Selling price = 100 x (Cost ÷ (100 – margin markup)) This way, if we want to sell sunglasses costing $100 and we want a profit of 40%, the selling price would be calculated like this:
Selling price = 100 x (100 ÷ (100 - 40)) = 100 x (100 ÷ 60) Selling price = 166,6… rounded to $166 This way, we’ll have a profit of $66 per sold unit, equivalent to 40% of the product’s final price. Simple, right?
Base Price is a very common pricing strategy in e-commerce, as well as in traditional retail. More than a strategy for calculating price, it’s a rule followed by many sellers. It consists of doubling the product cost to calculate the selling price. Thus, for the same sunglasses costing $10, our selling price would be $200. If we apply the formula to this new number, our margin markup would be 50%! This technique is very common due to its simplicity but it doesn’t make a lot of sense for many online sellers. Doubling the cost might make the product too expensive. For others, doubling it is too little as they have an initial cost that’s too high. This means having to even triple the cost to obtain the selling price.
“The main objective when creating an online store is that the client adds the product to the shopping cart. Using the wrong price can be tragic in this regard.”
Manufacturer’s Suggested Retail Price (MSRP)
You’ll find this term being widely used in e-commerce. There are providers that indicate to retailers the selling price of their products as a way to make prices the same in every store. If this is your case, the provider will dictate what the suggested selling price is and you can decide whether to use it or not. Even when it’s a “suggested price”, some stores are obligated to sell their products using them, but this practice is becoming less and less common.
Prices below the competition
Many e-commerce sellers think of this strategy if they’re positioned in a market where competition is fierce and clients can change stores easily following better deals. If we decide to use it, we must check the prices being used by our competition and place ours just below them. It’s very important to constantly monitor market prices for this to work, while at the same time verify that our margins are within a range that will allow us to have an interesting business.
Prices above the competition
Why would anyone want to put their prices above the competition? Good question! Many times the challenge for an online store is to put itself apart from the rest of internet stores and traditional retail. A good strategy is to focus on customers with more purchasing power. If we focus on this segment, having higher prices than other stores in the market can help define our brand as “more luxurious” or “of better service” than the rest. Sounds simple, but for this to work we must have products that match the price we’re offering (good quality) while at the same time having a purchasing experience that surpasses the customer’s expectations. It’s a widely used strategy in e-commerce these days and there are many opportunities to implement it in Latin America.
Having a final price calculated with the formula we used earlier, we can see the numbers are a bit weird, right? Studies show that the last digit on a price is of great importance when the decision of buying it or not is being taken. In our previous case, the selling price for the sunglasses was $166. Between these 3 alternatives: $164, $169 and $170, which one do you think is the best? Multiple observations in customer behavior around the world, both in online and physical stores, show that if the last digit is uneven, there’s a perception of “better price”. This way, $169 is the best choice even if $164 is lower! In the next article we’ll continue to talk about other pricing methods. As we have observed, there isn’t a Holy Grail for the perfect price. The final decision has to take into account the product, market, competition and what we want our store to communicate: cheaper prices, luxury or something in between. The important thing is to know how we want to be recognized by our customers, only then we can think of what prices we will use.
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