Fans of the series Arrested Development probably remember Lucille Bluth’s famously out-of-touch quote about pricing: “I mean, it’s one banana, Michael. What could it cost? 10 dollars?” While humorous, this is a downright dangerous attitude for an e-commerce entrepreneur to have in reality. After all, the effectiveness of your product pricing strategy has a huge impact on your bottom line.
Value and price: What’s the difference?
There’s a huge difference between value and price. Price is simply the number on the digital price tag informing customers how much something costs. Value, however, is a bit more complex. While many people think of value as synonymous with low price, it’s really the tradeoff between the benefits a customer receives from a product and the price he or she pays for it. Let’s say a customer is considering a subscription box on your online store. Whether they know it or not, they’re evaluating the customer value of the product, which is their perception of its benefits weighed against their perception of its price.
How you position value versus price depends heavily upon your brand’s unique selling proposition (USP). Some brands choose to emphasize their affordability. Others —especially upscale and luxury brands— focus immensely on value, making price an afterthought compared to what their goods and services can offer customers. This is precisely why some sellers choose to pursue a value-based approach over a price-based one.
But merchants be warned; you need accurate insight into customer value to avoid setting prices too high or low. Running A/B testing and adjusting as you go can help. Employing one of the best ecommerce website builders will give you the flexibility to adjust pricing and inventory over time to keep up with the ebbs and flows in consumer demand.
A simple matter of cost and markup
Some sellers favor a more straightforward, mathematical approach to price setting Cost-plus pricing
is a model in which sellers simply take the cost of the product and add their desired profit margin to derive the selling price. You can add the margin in dollars or as a percentage, but either way, the end result is a simple matter of how much your store needs to earn to make it worthwhile to continue stocking a given product. The major benefit here is this model protects against financial loss because you’ve set your own margins. The downside is you may actually be underselling your products. Sure, you’re getting your desired margin, but what if consumers would be willing to pay more than you’re asking?
Consider your competitors
E-commerce stores don’t exist in a vacuum. Keeping an eye on your competitors’ pricing is the only way to gauge your store’s pricing in a given market. This is known as market-oriented pricing because it requires a comparison between your operations and those of the market at large. You may decide to increase or slim down your margins to remain competitive, based on the market at large. After all, if you’re charging significantly more than competitors, your store will stick out like a price-gouging sore thumb. But if you’re asking quite a bit less, your margins may be unsustainably thin.
Your e-commerce strategies for setting prices really depend on your USP and the niche in which you’re operating. Whether you opt for a straightforward cost-based model or a more dynamic value-based one, running tests and adjusting your price as needed is the best way to achieve balance.