If you have an e-commerce store or are thinking about opening one, you will surely wonder how much you have to charge for each sale. Which is, in short, the best pricing strategy for your business.
Of course, it is something that you must seriously consider if you want to avoid selling to losses. However, before understanding the process of pricing your products, it is essential to understand what a “pricing strategy” actually means.
WHAT IS A PRICING STRATEGY?
With the right strategies, we will have a valid method to decide our prices. Just like any strategy involves a prior planning process before making a decision, a pricing strategy requires the same.
We must bear in mind that our pricing strategy must be related globally together with the rest of the business online.
In a way, the pricing strategy is part of the marketing strategy since it will allow us to give a long-term image of our company.
It will define our brand. Are we a “quality” trade only for privileged or a retail sector for all types of buyers? Are we Apple or Huawei?
However, the answer to this question we must do based on our business reality. If you insist on having the same pricing policy that Apple has, without thinking about your business reality, rest assured that you will close almost before opening.
PRICE SELECTION PROCESS
As we have said to choose an appropriate strategy, we must follow a process of price selection.
In the first place, we should and not only because of the prices, to be precise about the intentions of our company at a global level. What sales do we expect to have, desired margins, total profit or market penetration?
The pricing strategy is still a powerful marketing weapon. Alternatively, a handicap when business reality leaves little room for us. We must, therefore, put it in line with the rest of our marketing policy.
What is the volume of the market? What pricing policies do your competitors follow? Is it a growing or stagnant market? We must know how our pricing strategy will impact the market and sales.
This is fundamental. It will allow us to know the minimum price point, below which a company does not cover the total costs.
I can assure you that many businesses do not include expenses with their sales merely because they do not calculate the values correctly.
Now we have all the data to decide our policy and carry it out successfully.
KNOWING THE COST OF OUR PRODUCT
One of the most critical aspects while reforming our pricing strategy is how to define the cost of our product. Business is profitable if its income exceeds its total costs and here the word “TOTAL” is the key.
Often, e-commerce companies only focus on the unit purchase price they receive from their suppliers as the cost of a product. This tends to be a huge mistake since they forget all the other operating expenses of their online commerce.
First of all, we need to separate the ambiguity and be clear about the fixed costs of our business. So, we can talk about salaries, local cost, server cost, and other similar expenses.
Once we know our total costs, we should apportion them among the expected sales. If for example we have fixed payments of $3000 / month and we have planned 400 sales/month with an average amount of $75.
On the other hand, we will have variable expenses. So, for example, every time we make a sale we will have the shipping costs (as long as the customer does not pay them), the commissions of the means of payment, loyalty programs and, it is advisable that you also count, provisions for refunds and damages.
Rarely, all these expenses will be less than 5% with all this data we can now calculate our cost.
TYPES OF PRICING STRATEGY
1 PENETRATION PRICE STRATEGY
This is a pricing strategy applicable to both businesses and new products. It consists of establishing a lower initial price to achieve fast and efficient market penetration. In this way, a large number of consumers are quickly attracted.
Profit margins with this strategy can be quite scarce. In the long term, it is reasonable to either change strategies or reduces costs.
2 ALIGNMENT PRICE STRATEGY
Alignment strategies are based on the prices set by the competition. The standard amount of this strategy corresponds to the average sale value in the market. It is probably the most used price strategy for electronic stores.
Generally, for small companies, the margins are low and, therefore, adjusting the price too much can risk the successful execution of the e-commerce project.
3 SELECTION PRICE STRATEGY
In this strategy, the price is higher than the market average. In this way, the number of buyers is reduced, but the margins that each sale provides are much higher.
Of course, we must offer a differential value to customers if we want the strategy to work. So we could have competitive shipping methods, gift wraps, exclusive products or reward systems.
WHAT PRICES DO I PUT?
As you will see, there is no single answer to that question. You must plant the entire planning process. Think about your business objectives, your marketing policy, the knowledge of the market in which you move and your TOTAL costs.
With all this in mind, you will be able to decide on one of the pricing strategies that I propose above. However, do not skip the process. Choosing to sell very cheap can mean losing money on each sale and having to close.
Selling above your competition without justifying it or in a market in which the customer premiums the price, can suppose a low volume of business and have to close your online commerce.
However, if you choose your pricing strategy well, you will have a potent marketing.
Remember, pricing is not a static task and requires a continuous effort to optimize and refine its effects as the e-commerce company grows.
As in any other electronic commerce operation that you must develop, there will always be room for improvement.
To be precise, the way you fix prices fails when it is done through a department or a single person within an e-commerce company without discussions and exchange of ideas.
When it is taken seriously and handled intelligently, it becomes a very effective secret marketing tool.