Pricing Models for eCommerce: Choose the right pricing strategyUpdated on December 23, 2022 in Ecommerce by Nishant Shrimali
Looking for a one-fix pricing model for eCommerce that fits everyone? Now that can be a tricky and loss-making strategy.
Pricing of your products directly affects the demographic of your target audience. Most online customers are looking for “value for money” products. And that is a challenge in itself.
As an eCommerce, you have to create a pricing model that attracts customers and sales, as well as make sure that eCommerce is getting the value back that it is investing.
How to price your products?
We’ll be learning about it right here in this article. I am sharing three ultimate pricing models for eCommerce that will help you strategically choose your products’ price.
Why choosing the right pricing is important for eCommerce?
Before we start with the best pricing model for eCommerce, it is important to understand the importance.
For eCommerce, pricing can make a lot of difference in customers’ perspectives, hence reflected in sales.
Choosing the right pricing model for eCommerce allows you to:
- Reach and attract more target audiences.
- Help customers in making better buying decisions.
- Gives the brand a competitive advantage.
- Helps eCommerce with better revenue prediction.
- It makes sure that eCommerce is and stays sustainable.
Three Pricing models for eCommerce for the right pricing strategy
Cost Based Pricing
Cost based pricing model for eCommerce is a model where you first calculate the cost of selling the product and add a percentage or fix amount on top of it to get a final selling point.
For example, if the cost of selling a dress is about $100, and you add $50 as a profit for each piece of dress, your selling price will be $150.
Based on your selling price, you added a profit to your cost of selling.
There are three types of cost-based pricing:
1. Markup Pricing
Markup pricing is a cost-based pricing model where the profit is based on the percentage of selling the product.
That means, if you are selling a product for which the cost of selling is $100 and you are selling it at $150, your markup pricing will be 50%.
This is best for products that have fluctuations in pricing.
2. Margin Pricing
Margin pricing is a cost-based pricing model where you find the difference between the selling price and the cost of selling products. The difference is the profit.
For example, if you are selling a watch worth $750 and the cost of selling is $550, the profit here is $200.
It is one of the easiest ways to determine profit.
3. Planned Profit
Planned profit is cost-based pricing where the profit is pre-planned and not dependent on the cost of selling products.
For example, you decided to sell t-shirts and make a $10 profit on each T-shirt. Now you find that the cost of selling the T-shirt is $5. So the price of your t-shirt will be $15.
The dynamic pricing model for eCommerce is a model where the pricing of the product is highly based on the competitors, the market demand, and the cost of selling.
This style of pricing involves continuous testing and analyzing of the data.
That means to set a price for your product, you will analyze the pricing of your competitors and what they are selling. You’ll also analyze the demand for the product and the time when the analysis is happening.
All this will help you determine the best pricing of the product in the market against your competitors.
It is also one of the most time and resource-consuming pricing models, as it requires you to continue monitoring the market.
This type of eCommerce pricing model is the best fit for eCommerce with similar products in a competitive market.
Compared to other eCommerce pricing models we discussed above, value-based pricing is used by very few eCommerce and products.
It is the reason that this model is not the best fit for general products. The concept of this model is to understand the value of the product in the eyes of customers.
How much value does the customer perceive towards the product, and that is how the pricing is set for the customer.
You can learn about value through customer psychology (for example: will they mind paying the price or not), the use of the product (for example, wedding dresses are highly expensive due to emotional value), and your brand value (for example brands like Gucci can sell T-shirts at a much higher value than others).
There is no fixed formula here, as the pricing really depends on the perception which requires a lot of work on branding and building community.
Having a strategic pricing model for eCommerce is really important. It helps you determine the trajectory of how your eCommerce will be sustainable and what can you do to have the price that customers are happy to pay for your product.
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