How to Price Your Products in 6 Steps
April 8, 2020
Pricing products is one of the trickiest aspects of running an ecommerce business — especially during a pandemic when consumer spending is down across many categories.
Set your prices too low and you won’t profit. Set them too high and you’ll miss out on new customers.
Accurately pricing your products can lead to more growth opportunities for your company and position you nicely against competitors. Yet, product pricing isn’t an exact science and the right price at the right time is subject to change.
Whether you’re launching a new product or revisiting your current selling price, now is the time to review your product pricing as it has a direct effect on your sales volume.
In this product pricing guide, we’ll cover the importance of reviewing your current product pricing strategy, how to price your products, and ways to reduce costs so your products remain affordable.
Why you need to rethink product pricing
Many businesses price their products based on group decisions or by using a simple cost-plus pricing strategy. While there is no one true pricing model that works for all ecommerce brands, your pricing strategy is likely in need of a review and potential updates.
Pricing shows value
Pricing is a way to show your product’s true value and also signals if your ecommerce brand sells luxury products or not.
For example, a $10 shirt shows your product is for everyday use and anyone can buy it. A $500 shirt shows your product is meant for high fashion and focuses on wealthy customers. Of course, quality and branding are other factors that determine luxury.
Luxury businesses can charge a premium because their products are associated with wealth, success, and aspirational lifestyles. Discount products signal you don’t have to have the highest income to purchase it.
Pricing entices customers
Customers will take your prices into consideration almost immediately when browsing your store. If the prices match what they’re willing to spend, then you drive more revenue.
If prices are on the high side, you need to make sure you are attracting the right clientele to your site in the first place. If your products are priced on the low side, you can focus more on cost-conscious customers. Either way, your product’s pricing should should match what your type of your customers are willing to spend.
Pricing helps with retention
The right pricing strategy can be an important factor in getting customers to come back. Repeat customers are a goldmine for any business. You’ve already paid the acquisition cost to get them and they already know your ecommerce brand, so remarketing results in a better ROI.
If your brand experience matched what they expected from the initial purchase, then most likey they are willing to buy from you again. Even offering discounts the second time can increase the lifetime value of your customers.
Common product pricing strategies
There is no one-size-fits all pricing model. You need to choose the pricing strategy that grows your customer base while keeping your business profitable.
This takes many things into account: the products you sell, their landed costs, your average cost per order, customer destinations, and more. Let’s look at some of the most popular product pricing strategies:
1. Cost-plus pricing
The cost-plus pricing strategy (also known as markup pricing), focuses on applying a fixed percentage margin to a product’s cost. This is a very popular pricing strategy for small and growing ecommerce businesses since the formulas are simple.
Let’s look at a pricing example for a t-shirt with the cost-plus pricing strategy:
- Materials: $5
- Labor: $10
- Fixed costs: $10
- Total cost: $25
If you want to make a profit on your t-shirts, you need to sell them for at least $25.01. However, charging $0.01 more than the product’s cost is obviously not a realistic way to make money, thus most businesses will aim for a profit margin of 50%-100%. If you want to achieve a 50% profit margin, you’d need to charge $50 per shirt. This nets a profit and accounts for the true cost per order.
Cost-plus pricing pros
The cost-plus pricing strategy is popular because it’s so simple to use. All you need to do is make sure you’re charging more than it costs to produce products at a margin that keeps your business profitable. For many businesses that are just starting out, a cost-plus strategy is a great way to monitor.
Cost-plus pricing cons
When not done strategically, the cost-plus strategy model can cause your business to take a financial hit. If you incorrectly calculate your costs and markup, you could lose money on each sale. If your costs suddenly increase, and you keep your product price the same, it will cut into your profits. If you increase your product pricing, you may reduce conversion rates.
Additionally, cost-plus may lead to stagnant production operations. If your product costs don’t go down over time with an increase in volume, you won’t be incentivized to improve your operations even if there are opportunities to lower your costs.
2. Premium pricing
Premium pricing focuses on charging high prices to signal that your products are highly valuable. This is a pricing strategy commonly used by luxury brands, especially jewelry and high fashion. With premium pricing, you’re more focused on selling to higher-income households, which narrows your audience and keeps your marketing costs more focused on a niche audience. These product prices tend to be highly marked up as the value is placed on status.
Premium pricing pros
With premium pricing, you can quickly make profit if you’re able to drive conversions. As your business grows with premium pricing, you’ll also have a higher marketing and advertising budget. For promotional campaigns, you also have the opportunity to start working with social influencers and celebrities to reach their audience.
Premium pricing cons
Premium pricing only works if your products hold real value. High fashion and other luxury brands can charge premium prices because their products have a luxurious feel to them and have the branding to match. If you’re selling simple cotton t-shirts, premium pricing may hurt your business. You’ll also want to dish out premium shipping for the ultimate premium customer experience.
3. Competition-based pricing
Competition-based pricing focuses on pricing your products to beat the competition. In ecommerce, this means comparing your products to similar products offered by your competitors on different channels. For example, if you sell face cream, you’d monitor different pricing from other companies over time and charge lower prices than them.
Ecommerce has made this pricing strategy more prevalent than ever before as shoppers can go from website to website in a matter of seconds, rather than driving miles from store to store in search of the lowest price.
Competition-based pricing pros
If done correctly, competition-based pricing can put you ahead of your competitors by chipping away at their market share. By charging less than them, cost-conscious customers will keep coming to you (assuming they can find you by continuing to market directly to them).
If you can’t lower your costs to match your competitors, then you must demonstrate why your product is worth the extra cost (e.g., it’s more eco-friendly, has unique features, etc.).
Competition-based pricing cons
Competitive pricing can cut into your profits since you are focused on charging the least amount of money. If you choose to lower your prices to match your competitors, your other costs need to be lowered or you better have incredible profit margins that allow you to reduce your average revenue per order in favor of more overall sales. It’s also time-consuming to keep track of different pricing.
4. Price skimming
Price skimming focuses on charging a high initial price for a product and lowering the product price over time. This is mainly used for hardware pricing like phones, laptops, cameras and other technologies that are hot when released but become less valuable over time. Over time, improved versions of the original products are released, and the older models have their costs lowered and become cheaper to purchase.
Price skimming can also be used by apparel brands to account for seasonal shopping. For example, winter clothing is usually more expensive in the fall but becomes heavily discounted when temperatures start to rise.
Note: Price skimming should not be confused with price gouging, which refers to a seller increasing product pricing of commodities to a level much higher than is considered reasonable or fair. With the COVID-19 pandemic, price gouging has been a problem with essential goods like hand sanitizers, face masks, and other high-demand products, and many sellers have been penalized for doing so.
Price skimming pros
Price skimming is useful for brands that have high-demand products. Apple and Samsung can price skim because customers want the newest versions of their phones when they’re released every year and will upgrade for the newest model.
With price skimming, you can charge high costs at launch to offset your production costs and increase your ROI. As your products become more affordable over time, even more consumers will be willing to purchase your products.
Price skimming cons
Price skimming isn’t a good option if you’re in a crowded industry or sell generally low-cost products. Companies like Apple can price skim because that have proprietary iPhone technology and arguably one of the greatest brands with the most allegiant advocates. This model assumes you have loyal fans and early adopters who feel called to your brand.
That’s why price skimming doesn’t work for businesses that sell commodities. If your business is selling vitamins and supplements, you wouldn’t want to price skim because there are many other competitors selling the same products. Price skimming is best suited for seasonal products.
5. Value-based pricing
Value-based pricing focuses on researching the maximum amount your customers are willing to pay for your products. Customers who shop based on value aren’t always loyal to specific ecommerce brands but they are price-conscious because they want to pay what they consider fair. For example, customers know and understand that diamonds are expensive, so they expect to pay more money than a typical purchase.
Value-based pricing pros
Value-based pricing can be used for all types of products, because it’s based on the value of the products. This pricing strategy also helps you understand just how valuable your products actually are. If you find customers are willing to pay more than you charge for your products, you can use this as an opportunity to introduce new higher-cost products that people are willing to spend more money on.
Value-based pricing cons
Value-based pricing is perhaps the most complicated pricing strategy to implement. You need to spend a lot of time and effort in finding out what the magic price point is for your products to optimize your pricing. You will need to spend time surveying your website visitors, doing market research, and A/B testing.
How to price your products in 6 steps
Now that you know more about common ecommerce pricing strategies, how do you actually begin pricing your products? Let’s look at how ecommerce businesses should price their products.
Step 1: Look at your industry
Depending on your industry or vertical, you could have thousands of competitors or only a handful. When comparing yourself to competitors, try to be as specific as possible. If you sell vegan makeup, compare your products to other vegan makeup products with similar ingredients. Once you find your competitors, make a list of their products, prices, shipping costs, and discounts they offer. You can even subscribe to their emails to see what deals they offer to their audience.
Step 2: Evaluate market share for your products
If your business is new, you won’t have market share. If your business is growing, do you know how much of the market you own? Take the time to understand your sales volume and which product prices are helping or hurting your margins.
Step 3: Choose product pricing with evergreen profits
You can’t keep running a business if you aren’t making money. Analyze how much you spend on labor, material, fixed costs, variable costs, and other running expenses. Look for supply chain optimizations you can make to further improve your costs.
Once you find opportunities to improve costs, and you still need to reduce your product pricing, you can pass those savings to your customers in the form of coupons, bundles, bulk or subscription discounts, and other special offers to keep your customers engaged and ready to make a purchase.
Ecommerce during COVID-19 has left many brands experimenting with discounts as things have changed practically over night. People are stockpiling essentials, so providing “hoarding” opportunities may help push skeptical customers into purchasing.
Step 4: Put your business priorities first
If you decide to maximize your market share by pricing aggressively against your competitors, your product quality might not be as high. Consider if it’s important for you to maximize market share with your product or maintain top quality against your competitors.
Step 5: Know your customers
Consider what your customers are willing to pay for a product and if there are better options in the market. Conduct surveys and/or in-depth research on what your target customers are looking for. This is especially important if you decide to use a value-based pricing strategy. Be sure to account for the coronavirus pandemic affecting many consumers at this time, as their spending habits may have shifted for non-essentials.
Step 6: Keep optimizing
Pricing is dynamic and something to monitor now more than ever. As time goes on, your pricing can become stale as more competitors enter the space or shopping behaviors shift. Be sure you optimize your product pricing on a regular basis across all of your channels.
3 more factors to consider for product pricing
When pricing your products, you have to consider your ecommerce business’s goals and expenditures. Here are other factors you have to consider when looking at product pricing:
Fixed costs are the expenses you incur regardless if you have 10 orders a month or 10,000. These include salaries, utilities, rent, insurance, and more. There is often little opportunity to lower your fixed costs, so you are incentivized to become more efficient and increase sales. That way, you average cost per order is reduced as you spread the fixed costs across every sale.
Are you focused on growing fast at all costs, or do you want to run a sustainable business that grows over time? While this may change over time, growing responsibly can be a determining factor in the longevity of your business, and an intelligent pricing strategy can help you get there. Have a target of what you hope to achieve and work backward by adding in all of your costs to see what the ideal price per product should be.
Just because you decided on a price for a product, this does not mean that it’s final. Take advantage of testing different price points and see which work best with your customers. Tweak messaging in your ad copy, on your optimized landing pages, and more to see what resonates. If something is not working, pivot and test the next idea.
2 tools to help your price better
Manually setting your prices can work if you’re just starting out, are operating in a niche industry, or have a low SKU count. However, as your business grows and more competitors pop up, you’ll need ways to optimize your pricing. This is especially true if you sell a lot of products and you manually set your prices and are constantly checking competitor’s prices, which are time-consuming activities. Luckily, there is pricing software that can help you determine optimal pricing.
1. Price Intelligently
Price Intelligently is pricing software for subscription businesses. With Price Intelligently, you can compare your prices to competitors and get data-driven recommendations on what your pricing should be.
Prisync is pricing software for ecommerce businesses. All you have to do is plug in your products and it compares your product prices to competitors. With support for dynamic pricing, you can automatically change your prices to stay ahead of the competition.
Shipping rates keeping your prices sky-high?
High shipping rates can cause you to inflate your product prices. With most customers expecting fast shipping options, you need to deliver on their expectations without over-spending on shipping. That’s why many ecommerce brands turn to third-party logistics (3PL) providers like ShipBob.
“We want the customer experience of purchasing on our website to be similar to Amazon Prime. This is possible with ShipBob, without inflating the shipping cost to an insane level. To do this, we strategically place products around the country. We are storing inventory in three of ShipBob’s fulfillment centers.”
Tim Fink, Co-Founder of EnduroSport
If you can transform your logistics into a revenue-driver rather than a cost center, you can reduce shipping costs while driving more sales to ultimately increase your profit margin. Think about it: If you can quadruple your revenue, without quadrupling your shipping costs, you will bring home more profit.
“Customers get accustomed to a certain service level at a low price — often free — and want it faster over time. ShipBob has been able to deliver the customer service level we need at the right cost. Since switching to ShipBob from our previous 3PL, our fulfillment cost on comparable orders went down by 25%.”
Michael Peters, VP of E-Commerce Operations at TB12
How do 3PLs reduce shipping costs? 3PLs get bulk discounts and can pass those savings onto you. For example, ShipBob helps thousands of brands ship millions of packages and works closely with UPS, USPS, FedEx, and DHL.
ShipBob also has a large network of fulfillment centers, allowing brands to distribute their inventory to locations closest to their end customers. This reduces the time in transit and shipping cost since it eliminates the need to ship to the highest, most expensive shipping zones that are farthest away.
ShipBob also has a 2-Day Express Shipping Program, which enables you to offer 2-day shipping to all of your customers in the continental US across all of your platforms. It’s easy to set up and lets you decide how much to charge for it. Learn more about the program here.
Product pricing is often dynamic in today’s world. Due to competition, changing consumer expectations and spending, rising costs, and more, product pricing is ever-changing. Ecommerce brands that focus on optimizing product prices and costs will stay competitive and profitable.
If you’re interested in improving your operational costs by outsourcing fulfillment, check out ShipBob, the leading tech-enabled fulfillment company. Request a pricing quote by clicking the button below.
Product Pricing FAQs
Many ecommerce brands are challenged with pricing their products. Here are some of the common questions about product pricing.