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Retail Pricing Strategy for Ecommerce Stores

One of the keys to a successful business is selling at the right price. If your products are inexpensive, you may rake in more sales but have a hard time turning a profit. And if your products are too pricey, consumers will turn to other retailers, and you’ll lose your market share

But if you’re a small business owner, don’t fall prey to the misconception that price alone drives sales

When it comes to a retailer’s pricing strategy, there isn’t one surefire approach that fits all. You need to perform a product pricing balancing act that considers business and production costs, consumer trends, revenue goals, competitor pricing, and even a little psychology.

In this article, you’ll learn about:

  • What retail pricing is.
  • What kinds of retailer pricing strategies you can use.
  • How to choose the right retail pricing strategy.

What Is Retail Pricing?

The retail price is the final amount consumers pay to purchase an item. 

To make a profit, the retail price you set for a product must include the cost of goods for you, plus an additional markup to make a profit. 

As an online retailer, you can take numerous approaches to pricing products or services. The right strategy for you will depend on your short and long-term business goals.

Here’s the good news.

We’re about to explore 10 approaches, so you can pick the retail pricing strategy that will work best for you. 

Pricing Strategy Examples

  1. Manufacturer Suggested Retail Price (MSRP)
  2. Keystone Pricing
  3. Markup Pricing
  4. Discount Pricing
  5. Bundle Pricing
  6. Penetration Pricing
  7. Psychological Pricing
  8. Premium Pricing
  9. Competitive Pricing
  10. Dynamic Pricing

1. Manufacturer Suggested Retail Price (MSRP)

If you sell mass-produced items such as consumer electronics and household appliances, the Manufacturer Suggested Retail Price (MSRP) is a good pricing strategy to adopt.

MSRP is a standard price for an item, regardless of who is selling it. It takes the guesswork out of setting prices, but it can dull your competitive edge when your product sells at the same price as other retailers.

2. Keystone Pricing

Keystone pricing is a type of markup pricing. With this strategy, you double each product’s wholesale price to create a healthy profit margin. 

With a fixed percentage, your calculations will be simple. Maybe too simple — it’s easy to end up pricing products too low and too high.

Keystone pricing isn’t a good option if you offer highly unique products or custom items that take a long time to create because you won’t make enough profit. 

It’s just as poor a pricing strategy if you sell standardized, common products. Depending on the availability and demand for an item, it might be unreasonable for a retailer to mark up items at such a high rate.

3. Markup Pricing

Markup pricing (also called cost-plus pricing) is the most common and intuitive pricing strategy for retailers. You add a percentage of the base cost of individual items to create a profit — but you apply a different markup depending on the product. 

When selling a high volume of products or seasonal and perishable items that need to be sold quickly, it’s best to set the markup below 100%.

When selling custom products or privately labeled items like cosmetics, jewelry, alcohol, or electronics, you can set the markup above 100%.

It is straightforward in theory, but markup pricing requires you to spend extra time evaluating factors such as perceived customer value and competitor pricing.

4. Discount Pricing

When retailers mark down their products’ prices to encourage sales, it’s called discount pricing.

One form of discount pricing is the high-low pricing strategy: Products are introduced at a high price point and marked down when demand decreases. 

Electronics retailers use this strategy most often. Computers, game consoles, and smartphones are the most expensive when they’re first released. But when the next model comes out, the previous versions are sold at low prices.

Discount pricing is an effective strategy if you want to clear unsold inventory and increase sales. But if you become known for discounting your products, customers may perceive them as low quality or grow accustomed to waiting for the lower price. 

5. Penetration Pricing

Penetration pricing is another form of discount pricing. A business offers its new product or service at a lower price to attract customers. The idea is to get consumers hooked with a sale price, so they are willing to pay full price after the promotional period expires.

The penetration pricing strategy works best for subscription products, especially in a competitive market.

Businesses that use this pricing model include:

Similar to penetration pricing is the loss-leader pricing strategy, in which products are sold at a loss just to get customers in the door. 

6. Bundle Pricing

Bundle pricing is another discount pricing strategy. It’s useful if you sell related items you can package together. Bundling items lets you curate the customer experience and empowers you to increase sales volumes through up-sells or cross-sells

Common examples of bundle pricing are Christmas baskets or deli bundles that include preselected wines, cheeses, and meats.

Similar to bundle pricing, multiple pricing sets products at a lower price when more than one is purchased. For example, “buy one, get one free,” or “buy two, get 20% off.”

This strategy works best when you bundle less popular items with your high-demand products. Sales are hard to resist, especially if the customer is buying something they already want. You can simultaneously attract customers and get slow-moving items out the door. 

7. Psychological Pricing

Psychological pricing is a value-based pricing strategy. Also known as charm pricing, it depends on the customer’s perceived value of the item.  

According to researchers at Carnegie Mellon, people experience pain when they spend money.  It’s up to merchants to minimize that pain.

You see psychological pricing almost every day when retailers give products a price that ends in an odd number. 

For instance, instead of charging $6, retailers price a product at $5.99. The brain sees $5 and the consumer is tricked into perceiving a lower price.

Psychological pricing is best applied to non-essentials, as it encourages customers to spend impulsively.

8. Premium Pricing

Premium pricing (also known as prestige pricing or luxury pricing) is another value-based pricing strategy. High-end retailers sell their products at an additional markup that gives their customers the sensation of status.

Premium pricing works best when your product quality and customer service can match the expensive price tag. It also depends heavily on successfully marketing your brand as high-end. 

It’s how Gucci sells their $1,200 Lady Lock bags. Other companies that use premium pricing include:

As an online retailer, it may be difficult to replicate the luxurious feeling these companies have spent decades cultivating. However, you can validate your premium pricing with a chic design aesthetic, high-quality products, and a stellar customer experience — which includes a fast-loading website.

9. Competitive Pricing

Competitive pricing entails consciously setting lower prices to gain a competitive advantage. It works best if you’re in an industry with similar products, where your competitors’ prices are the only differentiator. 

The competitive pricing strategy is most effective if you’re a larger retailer and can negotiate a lower wholesale price from suppliers so you can still earn a decent profit. However, small retailers can be driven out of business in a price war. 

10. Dynamic Pricing

Dynamic pricing is a retailers pricing strategy where you adjust your prices according to changes in supply and demand. 

Ecommerce businesses are in the best position to use dynamic pricing because it can be done in real-time. When you sell online, you can leverage technology and data to sell the same product at different prices depending on the purchaser. 

The dynamic pricing strategy requires software, data, and manpower. WooCommerce plugins can help you price products optimally on your WordPress website.

Final Thoughts: Retail Pricing Strategy for Ecommerce Stores

When deciding on a retailer’s pricing strategy, online sellers have several factors to consider, including their company’s niche, competition, market behavior, and most importantly, financial targets.

Of all the strategies we’ve shared, no single pricing tactic will be enough. Small business owners should experiment and combine tactics to develop the right pricing strategy to ensure their company’s profitability.

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Use an Entrepreneurial Mindset, Even When You’re Small

The 2020 pandemic has changed online shopping forever. The shift to ecommerce has been boosted by five years, and small businesses are scrambling to adapt.

While we hear about successful businesses that quickly pivoted to ecommerce, let’s not forget about those left in the dust. 

Studies show that 90% of ecommerce startups fail within the first 120 days. The main reason? Lack of an ecommerce strategy.

It’s not enough for aspiring entrepreneurs to be internet-savvy. After all, anyone can learn how to optimize their websites for speed. It takes an entrepreneurial mindset to run, grow, and build your ecommerce business to last.

In this guide, we’ll take a look at:

  • Successful ecommerce strategies.
  • The characteristics of a business mindset.
  • How to build an entrepreneurial mindset.

Ecommerce Strategy

  1. Be customer-centric.
  2. Optimize the shopping experience. 
  3. Leverage data to increase sales. 

Ecommerce Strategy #1: Be Customer-Centric

The most successful entrepreneurs often talk about bringing value to the customer

Instead of being revenue or product-focused, customer-centric companies consider their customers’ needs above all else. This is evident in their excellent customer service and cohesive consumer experience at every step of the buyer’s journey.

Millennial favorite Glossier found success by creating products that its customers wanted. The company built a loyal following and customer base purely through its ecommerce website and social media accounts.

Adopting a customer-centric strategy gives you a competitive advantage over other ecommerce businesses. It increases customer loyalty, eventually benefitting your downline.

Ecommerce Strategy #2: Optimize the Shopping Experience

If you want to sell more products, you have to make the shopping experience as seamless as possible. Some ways to improve the shopping experience:

  • Ensure your website is fast, accessible, and mobile-responsive.
  • Make the checkout process easy by not requiring buyers to create an account, saving shipping and payment information, and using form fields and auto-fill.
  • Offer various payment methods and expedited shipping.

Ecommerce Strategy #3: Leverage Data To Increase Sales

Today, data available to ecommerce platforms can be used to drive upsells and cross-sells through retargeting and personalized recommendations.

Ecommerce personalization and retargeting drive more conversions, sales, and revenue while enriching customer interactions with your online store.

Amazon is notorious for offering many recommendations. The company uses data to analyze customer behavior (for example, previous purchases and frequency of purchase) to segment similar customers and effectively recommend products.

Thinking Big: Characteristics of a Business Mindset

The ecommerce strategies detailed above won’t mean anything without an entrepreneurial mindset.

Having a business mindset empowers successful entrepreneurs to see the long-term big picture and adapt to the quickly-changing nature of ecommerce.

Every business owner’s journey is unique, but the best entrepreneurs often share a specific skill set that includes the following characteristics:

  • Innovative. Aspiring entrepreneurs with a business mindset think of the simplest ways to solve problems, resulting in process improvements or creating new products. Most people never thought we’d have self-driving cars or have the chance to be space tourists, but Elon Musk is making it happen with Tesla and SpaceX
  • Resilient. Mistakes are inevitable when launching startups, but the best entrepreneurs bounce back from failure and learn from their mistakes. Alibaba founder Jack Ma was rejected ten times from Harvard and rejected 30 times from jobs before he found success with Alibaba, China’s largest ecommerce website.
  • Lifelong learner. Many of today’s successful entrepreneurs have one thing in common: no college degree. Steve Jobs didn’t finish his degree but had taken calligraphy in college, which he later said was the inspiration for Apple’s typography. 

How To Develop an Entrepreneurial Mindset

It can be daunting or discouraging to develop an entrepreneurial mindset when you don’t have prior experience. 

The good news?

You can hone these entrepreneurial skill sets required to start your own business:

  • Provide value to others. Anyone can sell things online, but entrepreneurial success can be found when improving other people’s lives. When you focus on others, you see their needs more clearly.
  • Practice being decisive. Entrepreneurs constantly have to make quick decisions with the available data at the time. Practice critical thinking by looking through problems from different angles.
  • Remain curious. Continue seeking out new experiences and study what you don’t know. Take entrepreneurship courses and attend webinars. Learn from mentors and educators.

Final Thoughts: Using a Business Mindset for a Winning Ecommmerce Strategy

Anyone can create a startup, but without a clear ecommerce strategy, success isn’t guaranteed.

Business owners with an entrepreneurial mindset recognize opportunities and bounce back from failures. They differentiate themselves from their competitors by focusing on creating value and leveraging available technology.

If you’re an innovator looking to start a new venture,  let Hostdedi handle your business website. Set up a website in minutes with our ecommerce hosting plans, or try it for yourself with a free two-week trial of fully managed WooCommerce hosting by Hostdedi.

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