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A Guide to Pricing Strategy: Boost Your Online Margins

From standard pricing to shipping costs, it all comes into play as to whether or not your customers feel comfortable buying from your online store. Not to mention the fact that if your pricing strategy is off you could even cut down your margins and shortchange yourself.

Keep reading to find out how to play around with your pricing strategy to boost your online margins and feel comfortable with the prices you offer to customers.

Start by Understanding Your Margins

The first crucial step in pricing your products is figuring out what your current margins are, or establishing a margin goal for the online store you plan on opening. Once you realize your margins you can set a minimum price drop zone so that you don’t get stuck in a low price battle with competitors.

The problem with apricing strategy that results in constantly lowering your prices based on competitors is that you will eventually start shriveling your margins and losing money in the long run. What is more, your customers will always expect your prices to remain low, leaving you little room to bump the prices back up.

Do You Have a Unique Selling Proposition?

An important part of your pricing strategy often has nothing to do with the price tag, since the Unique Selling Proposition, or what makes you different as a company, helps customers overlook your pricing and just go for a purchase because of that USP. For example, Zappos is known for their fast and free shipping (and returns) and quality customer service.

Offerings like free shipping at a certain price point or donating to a cause for every sale work well to help you stand out from the traditional pricing strategies and push people to buy from you for other reasons besides the price.

Implementing Incentives into Your Sales Pitch

Sustaining an ultra-low price is difficult, so what are some out-of-the-box ways to boost the effectiveness of your pricing strategy without cutting into your margins? Incentives play a huge role in increasing conversions and helping you maintain a sturdy margin without sacrificing anything towards the customer.

For example, it’s wise to stray away from downright discounting. Instead, prompt people to purchase more with incentives. A “buy one get one for 50% off” sale is an interesting way to put the idea in the customers’ minds that they are receiving 50% off a product. In reality, the customer is receiving a 25% discount on the entire purchase and you end up selling more items.

Benchmarks work well for incentives as well. Consider offering something like “buy four items and get 25% off.” This ensures that customers purchase a certain amount of products and it makes them feel good about receiving a discount in the process.

Effective Pricing Strategies to Try Out

The world is filled with companies who use varying pricing strategies, so which one is best for you? We’re going to cover some of the more popular pricing strategies to give you an idea of your options. Feel free to play around with them to find out which ones deliver the highest margins for your company.

The Simplest Formula

A popular way to configure your pricing strategy is to use the following formula:

The Retail Price = [(the cost of your item) / (100 – your markup percentage)] x 100.

This gives you some flexibility in terms of the markup price, since you can punch in a 45%, 35% or 60% markup and stray away from some of the more set-in-stone pricing strategies like the keystone strategy we will talk about below.

This formula is best is you want to further customize the Keystone process (discussed below). Most companies use the Keystone formula, but this gives you more control, increasing or decreasing your margins a little bit.

Working with the Manufacturer Suggested Retail Pricing

All manufacturers provide a suggested price (MSRP) for their retailers. This was implemented a while back to create a standardized pricing situation for customers. The benefit of going with the MSRP pricing strategy is that you no longer have to spend any time or money figuring out your product prices.

The downside is that you no longer have control over your pricing strategy. Your competitors might move around their prices to bring over some of your customers. MSRP is commonly used by automobile companies, as seen in the image above. A wise tactic is to reveal the MSRP on your website, then show your lower price right next to it, prompting customers to notice that you are cheaper than the market standard.

Pricing Based on Keystones

The keystone pricing strategy is one of the most popular and simple ways to price your products. It cuts down on time spent thinking about your pricing, and you can sleep easy knowing that some of the biggest retailers utilize this method.

How does it work? All you have to do is double the wholesale price you paid for the product. Sometimes this system works wonders for a company, but it all depends on what industry you’re in. This is considered a very high markup, so if you’re in an industry with lots of competition, you will have trouble trying to sell at those rates, since other companies will have lower prices.

This system usually works well for companies that have high additional costs such as shipping and handling, and inventory turnover costs. The jewelry and makeup industries are known for their high markups.

Multiple Pricing

Multiple pricing is a common option for apparel companies. It works where the company packages more than one product together to sell them for a single price.

The perceived value of the bundles is a strong advantage, and that’s why so many tech companies use it as well. The only problem is that you may encounter some troubles trying to sell the products individually, since customers now know that they can get a better deal with the multiple pricing.

Above and Below Your Competition

Above and below competition pricing works just like the names suggest. You look at your competitor’s pricing and price your items either a little below or above that benchmark. Pricing above your competition makes people think your products are of a higher quality, which is a good thing. However, if your customers are price sensitive it may not work well.

The “below your competition” strategy cuts your margins drastically, but you may sustain the strategy if you convince your suppliers to cut their own costs. Walmart is the obvious suggestion when talking about a company that focuses on “below the competition” pricing. Below the competition pricing works for huge companies with lots of pull with suppliers.

Above the competition pricing works for companies like Apple who are selling perceived value, in that it’s considered more of a luxury brand.

Test, Test and Test Again

The key to finding the perfect pricing strategy for your company is to test all of these and stick to the one that works best. Measure your margins after running each of these pricing strategies, and always remember that customer behavior can change, so a reevaluation of your pricing strategy, on a yearly basis, is a wise idea.

Are you comfortable with your current pricing strategy? Post a comment in the section below if you have any questions about where to start in terms of pricing, and explain how you approach putting a number on your products if you have an ecommerce shop.

Torsten Tromm

About the author

Torsten is CEO and founder of Userpeek. He is an old stager in the online business with 20 years of experience as an online marketer, conversion rate optimizer and UX strategist.

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