How to Choose an Effective Ecommerce Pricing Strategy

Pricing your products can make or break your business. Let NuORDER help you understand and create your eCommerce pricing strategies in order to see success.

For buyers of all types, the first question before a purchase is simple: how much does it cost? According to one study, pricing was the highest priority in over 50% of consumer research studies. In B2B marketing, in which you’re dealing with budget-conscious purchasers, a good price can make your company. And a bad price can break it.

The studies show that pricing is one of the areas you can least afford to get wrong. According to McKinsey, a one percent price increase can represent as much as 8.7% in increased revenue. It’s a slim margin, but it’s worth figuring out.

According to the same report, about 30% of businesses “fail to deliver” the optimal price for revenue generation.

That means if you generate a high-quality eCommerce pricing strategy, you’ll have an immediate advantage over your competition. Through a combination of logistical and psychological factors, your price will be more appealing than the next price. Sometimes, your price may look better even if the price doesn’t compare favorably. It sounds counter-intuitive, but in some cases, it’s true. Here’s how.

What is eCommerce Pricing?

eCommerce pricing is the strategic approach you take to determining a specific cost to your goods. Your goal is to optimize the sales you make, ultimately driving as much revenue as possible. Through the combination of increased sales and increased margin—but without throwing off the balance to either side of that axis—you can optimize how many sales your eCommerce company makes.

More than SEO, effective landing page design, and even offering custom features for your products, pricing is important. And the way you approach it could help you land more sales.

What is the Psychology Behind Pricing?

First, a question. What’s cheaper: $24 or 24 dollars? 

The two numbers are obviously equal. Yet a Cornell University study once tested restaurant menus and found that the number “24”—without the dollar sign attached—created perceptions of being less expensive. 

The conclusion can only be that while pricing may sound like a rock-solid mathematical equation, it’s also a question of psychology. Your pricing strategy needs to account for that.

In fact, the correlation between numbers and psychology is tighter than you might imagine. Consider the different elements that play a role in our perception of price. Some of these effects are so powerful that higher prices can sound less expensive to us.

  • For large prices, specificity affected price perception. In real estate transactions, the price of $325,425 often sounds less than a round number like $325,000, according to research. It’s a prime example of psychology counting more than math.
  • Price anchoring matters. Studies have long shown that by “anchoring” a higher price before a perceived discount, it’s possible to change a customer’s perception of your pricing. This is a common tactic in restaurants, which often create high-value dishes whose sole purpose is to change the price perception of the standard dishes.
  • The longer the price takes to say, the higher we perceive it. One study found that customers believe in an association between “a positive relationship between syllabic length and numerical magnitude.” The result? In some cases, “eighty-four” can sound cheaper than “seventy-seven.”

If price psychology has effects as profound as that, you can expect it to affect every facet of your store. That’s why it’s important that you don’t pull arbitrary numbers from thin air. And rather than simply running your own equations to calculate how many widgets you would need to sell to generate $1 million in revenue, you should change the questions you’re asking about your price.

Don’t ask how many you have to sell. Ask what the ideal price is to make more buyers want to purchase.

The Strategic Approach to eCommerce Pricing

One thing is clear: pricing your products with an arbitrary number is a strategy that should go out the window. But which strategies should replace your approach to pricing? Here are some of the common ways eCommerce businesses determine theirs:

  • Bundling. If you want to encourage sales, bundling and strategies such as wholesale pricing can make a major difference. By bundling products together, you can still create the perception of a “deal” while encouraging customers to engage in what is essentially an upsell.
  • Promote your relative value. Everything you advertise as it relates to your products will have an effect on perceived value. Style numbers, sizing, price, delivery dates, inventory—it all matters. It’s particularly important to consider the relationship between two numbers when you have multiple versions of a product: for example, medium shirts and large shirts. The way these prices compare to each other will affect what your buyers see.
  • Simplicity strategies. If you want to keep things easy on a buyer, you can also experiment with predictable, simple, consistent pricing. Consider the average dollar store. A customer might enter a dollar store without a particular plan on what to buy—they just know they have a handful of cash and can come out of the store with a few items. If you sell products with similar appeal, the simplicity strategy may be the way to go.

Discovering New Approaches to Pricing Strategy

Let’s zoom out. The three strategies above might also be considered tactics—ways to approach pricing in the immediate term, but not necessarily long-term solutions for true pricing optimization. How can you take a longer view? What are the strategic approaches to pricing most commonly used in eCommerce?

One such strategy is cost-based pricing. In cost-based pricing, you start out with a predetermined required profit per item. You might calculate this based on your current expenses: overhead, the price of labor, taxes, etc. Then, factoring in your goals for eCommerce selling, you might work out how many “widgets” you have to sell to turn out your profit goals for the year.

This is an example of a seller-side strategy. You’re thinking about your bottom line, your metrics, and your price’s impact on your company.

With competition-based pricing, you start to look outward. What is the competition doing, and what is your product’s relative value compared to the other products on the market? With competition-based pricing, you’re looking for an edge. You’re assuming that the demand is there, but that if you can efficiently turn a profit in relation to what your competition is doing, you can slowly build revenue by capturing greater market share.

There’s a third option: value-based pricing. This is where psychological pricing can really come into play. With value-based pricing, you’re considering the perception of value in your product. This is a customer-facing strategy in which you ask yourself what the best price is in relation to your customer’s perception of the value of your product.

The key to value-based pricing is to emphasize a differentiator of some sort. For some popular brands, it’s not hard to identify: a secret recipe, a 100-year history of brand development. If that’s not the case for you, however, you can also focus on value-based pricing by looking at the psychological impact of the numbers. Is $19.99 better than $20.00? In consumer products, it’s often the case. Is $19.84 better than $19? For more emotional purchases, using a “consumer-style” specific price may adversely affect your perceived value.

Pricing strategy ultimately comes down to this: context. It’s a delicate balance. You don’t want to be too expensive, nor do you want to be so inexpensive that your brand has no perceived value and you find it difficult to turn a profit. 

To find your ideal price, let’s consider some potential routes you can pursue.

Finding the Best Price for Your eCommerce Products

It’s not a paint-by-numbers exercise. But there are some essential questions that will help you close in on an ideal price for your products.

For starters, you can calculate your eCommerce costs: 

  • Transaction fees
  • Marketing/SEO services
  • Shop hosting fees
  • Design costs
  • Production costs
  • Shipping costs

Strive for full transparency in production and pricing structure. Ideally, you’ll settle on a specific number: how much does it cost you to produce one widget? Now you have a bare minimum, the number at which you would have to price a product at “cost.”

You should also enter a phase of competitor research. What are your competitors pricing for the most equivalent products in your field? It’s true that not every product you create will have a 1:1 comparison with your competition. But try to create apples-to-apples comparisons. During this stage, you may discover some important facts. For example, would you have to sell products at cost simply to keep up with the competition? Then you may have to switch to a value-based pricing strategy to increase the perception of your eCommerce product’s value.

Making Pricing Work in eCommerce

Pricing is ultimately a number, so it’s tempting to believe that you can find the “right answer.” But this isn’t high school algebra. There are countless ways you can optimize pricing to make more eCommerce sales. And it starts with having the tools to test prices and discover your perceived value in the marketplace.

Need some help? Request a demo to see how NuORDER can help you with your eCommerce pricing.

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NuORDER Team

NuORDER is dedicated to providing thoughtful, informative B2B eCommerce industry insights. Brands use NuORDER's platform to deliver a seamless, more collaborative wholesale process, where buyers can browse products, plan assortments and make smarter buys in real-time.