How To Create The Best Pricing Strategy For Online Business 📳
What’s an effective pricing strategy for an online business? How do you set your prices? Are your prices too high or low? Is your product portfolio generating the profit value you are expecting?
Setting prices for online products and services can be a difficult task. The price you set directly affects the demand for your products and also the margin per unit. Meaning, modifying your prices is a quick fast way to sell more goods or to earn more profit for every item sold.
However, very few online businesses pay close enough attention to how they set and manage their prices. Many companies establish their price arbitrarily. For example, pricing without any rules is a very common pricing practice. So is picking a number out of thin air or merely imitating the competition’s pricing. All of these bad pricing practices, in short, lead to cash flow and/or P&L issues.
The right pricing strategy for online business, conversely, can quickly help you scale and increase your business while generating accelerated revenue and margin growth.
But what does a good pricing strategy for online businesses look like?
When developing a pricing strategy for online business it’s very important to keep your customers at the heart of your strategy. What do they value about your products? What and how do they consume your products? Do you know what keeps them up at night? Does your business come close to fixing some or all of these problems?
In essence, a good pricing strategy for online business can support your omnichannel sales strategy. While a bad pricing strategy for online business can drive customers away.
So, in this article, we’ll continue to discuss pricing strategies for online businesses. We’ll do this by, first providing you with some of the best-known pricing strategies for online businesses. And, then, offering some tips and techniques on how to use price to get a positive response from customers.
At Taylor Wells advisory, we understand that product pricing can be a complex process; however, we believe that there are better ways to determine the right pricing strategy for online business than simply guessing.
We argue that companies should understand the differences of each pricing strategy and learn what works best for their business and customer base.
By the end of the article, you will learn the best pricing strategy for online business to help you scale and drive profitability without experiencing lags in revenue or dips in volume.
What is a pricing strategy for online business?
A pricing strategy for online business is a published document with a clearly stated plan of action including defined objectives, goals and outcomes. This strategy document is distributed to everyone involved in pricing (e.g. price setting, policy, negotiations, operations). The document can take many forms depending on the approach taken and dynamics in the market i.e., supply and demand, customer preferences, industry, product strategy, positioning and competition.
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9 Pricing Strategies For Online Business
Coming up with the right price for online products and services can be both exciting and nerve-wracking. Where do you start? What is the right price?
Set the price too high, and you don’t sell anything. Set the price too low, and you lose money.
Here are 9 of the best pricing strategies to set online products and services:
Value-based pricing sets invoice prices for customers by understanding how different customers value the business’ products, services, operations and business model.
It is a strategy that enables business owners to maximise margins by focusing on how much they can make from their products and services rather than how much it costs to make products and services.
Cost-plus pricing strategy is purely a cost-based strategy. A business owner would set prices using cost-plus by allocating costs across all their products and then adding a simplistic percentage mark up on top to reach a target margin.
Cost-plus focuses on product costs and distribution costs as the basis of price setting. It does not consider competitor pricing, customer’s willingness to pay or the relationship between costs and volume and volume on price.
Competitive pricing sets price points by comparing product or services pricing in relation to competitors’ prices for the same or like products. A business owner would take time to capture, monitor and line up competitor prices in an intelligence register to then decide where they will position and price their products.
Price skimming is a sales and marketing strategy designed for new or novel products and services in the market. Prices are set relatively high in the market with the expectation they’ll decrease and stabilise over time.
Business owners would use a price skimming strategy to recoup sunken costs quickly in anticipation that their competitors are likely to create a similar product or reduce prices to gain market share.
Loss-leader pricing sets specific keystone products competitively in the market to lock customers into high-priced complementary products or services.
Think Nespresso: The coffee machine is priced very competitively while the complementary coffee pods are priced relatively high because without them the coffee machine is of no use.
Dynamic pricing sets prices predominantly on changes in supply and demand. This means prices change frequently and are not fixed. Prices are calculated using algorithms or formula that seek to utilise capacity and drive demand.
More sophisticated algorithms also consider changes in competitor pricing, cost fluctuations, margin and revenue targets, certain business conditions/rules, and economic and market conditions.
Premium pricing is a strategy used by business owners to set prices for luxury or high-ticket products. Prices are intentionally set very high (way higher than the market average) to communicate brand positioning for the principal purpose of anchoring buyers to very high price points. The popular examples are luxury bags, designer clothing and accessories.
Anchor pricing sets a product’s price point in relation to their customers’ reference price. A customer’s reference price is a heuristic (rule of thumb estimation) that customers use to quickly help them decide whether to buy a product or not.
Charm pricing sets prices using odd numbers – especially 9 – to entice customers to buy or buy more. It is a psychological pricing strategy that finds that odd price points have more of a psychological impact on customers than even price points
Pricing doesn’t have to be a game of chance anymore. Apply some basic principles listed above and enjoy steady and profitable sales as your online business grows and changes.
Now you already know everything that you need in nailing your pricing and creating a pricing strategy for your online business. Bear in mind though that pricing is variable. Prices always change, and you should keep on top of your prices while running your business. Customers are smart, therefore, make smart decisions also with your pricing strategies.
A key element of a successful pricing strategy for online business, then, is your understanding of your customer base. In particular, tracking customer metrics such as customer frequency, willingness to pay, reference pricing, forecasting demand, customer spend and market growth etc. However, the most important aspect of a successful pricing strategy is defining your customers’ value drivers by product and segment. However, to do this, you first want to:
Identify your customer
To help you better understand your prospective customers, know the demographics, disposable income, traits, and buying behaviours of your target market. By doing so, you can create a pricing strategy that suits well for your business.
For example, some customers are price-sensitive while others are willing to pay for high-priced products. Therefore, it’s significant to do research and not just use a pricing strategy for online business based on a guess.
Let your business stand out
Your business should stand out among the competitors to truly differentiate from many e-commerce brands, and the correct pricing strategy for an online business can help.
For instance, H&M offers stylish, high-quality, and fashionable clothing at an affordable price. Their pricing strategy helped them become a popular brand because it filled a gap in the clothing market.
- Price can play a big role in a consumer’s buying decisions. But shoppers nowadays are smart. If they think your price isn’t aligned to their needs, then they look elsewhere (go to the competitors).
- Creating an online business requires a lot of price experiments to better understand which pricing strategy works best for your business. The smart approach is to set a target for every campaign; start small and then measure the results. Also, understand your target market.
- A lot of companies use a “set and forget” method for pricing. These businesses are leaving money on the table. So, make sure that you don’t fall into this trap. Continue to test different pricing strategies, using the nine techniques discussed in this blog to get you started.
If you want a successful online business, stop reducing prices, instead use intelligent pricing strategies (discussed above) to make sure sales continue to grow.
Ensure your prices are truly reflective of the value you offer to customers. You can use psychological techniques to persuade customers that your prices aren’t so expensive. But this is only a short term move. Or you can genuinely try to understand your customers and take the time to identify the unique customer value drivers that unlock more margin for your business and your customers.
For a comprehensive view on maximising growth in your company,
Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?
If so, please call (+61) 2 9000 1115.
You can also email us at email@example.com if you have any further questions.
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