Ecommerce is a tricky business where you’re continually balancing cost and profit, aiming to keep expenses low for your operations while maximizing revenue from repeat shoppers. Understanding these competing interests and controlling expectations for costs and products is how you safeguard operations while keeping customers happy.
There are multiple pricing strategies and elements to consider in offering the best price while making a healthy profit. This piece looks at five core components of the buyer-seller relationship and how you might be able to leverage products, prices, and offers to your advantage.
1. Keystone pricing is a smart starting point
Your best way to ensure profitability in an eCommerce store is to start with keystone pricing. It’s a standard option for retail where you double the wholesale cost of a product. We like it for businesses that are just getting started because it helps you set stable pricing while creating a clear path to pursue greater profitability.
Remember, this is a starting point before you get deeper into advanced pricing.
While much of this article will focus on balancing demand and pricing, keystone allows you to set a price that people are generally comfortable with because of how common it is. Then, instead of tweaking the price you sell it for, start working on ways to reduce the cost of acquiring these goods and getting them to customers.
See if you can:
- Buy in bulk from your wholesaler to reduce cost-per-unit as well as overall shipping costs
- Find additional suppliers that are closer to your distribution location so that you pass less on inbound shipping
- Adjust how you store products and pack orders to see if you can streamline labor
- Negotiate with your carriers or hire a 3PL to get access to their discounted carrier rates for last-mile fulfillment
Those are processes where you can often trim some costs, and reducing them early on in 2021 will lead to consistent cost reduction and price controls that benefit you all year long.
One tip on advanced keystone pricing is that you may still need loss-leaders to help you lure in shoppers. Work to control these by limiting the number of discounts you offer or relying on coupon codes where only one can be used per transaction. Prioritizing keystone pricing and then working in loss-leaders helps you bring in new customers without creating the expectation that your store always offers the deepest discounts.
Keystone pricing is also a smart way to set baseline pricing as you start gathering shopper data. Apply it broadly to see what works and doesn’t, and then you can quickly see what items might be useful to A/B test as loss-leaders and sale items to move them off shelves or increase your average order size.
2. Remember the MSRP
The eCommerce world has an interesting interaction point with the manufacturer’s suggested retail price (MSRP) of most goods. It can be difficult for the consumer to find this, especially for items sold via wholesale or techniques like dropshipping. Manufacturers want to standardize product pricing to ensure sales, but they’re less likely to provide MSRP data for eCommerce plays, and the same holds true for eCcommerce stores themselves.
However, this doesn’t mean you should ignore MSRP when it’s available. In many instances, MSRP will inform your competitors’ pricing schemes. Sticking around this price point can help you avoid sales losses as customers price shop, especially on goods like appliances and electronics.
Reliance on MSRP creates a balancing act for your goods. You can simplify pricing strategies by going strictly with MSRP and are less likely to list goods as too expensive. However, you aren’t competing much on price and will need to ensure sales through more company-focused marketing and providing high-quality service.
MSRP also won’t take any additional costs you face into consideration. Unless the manufacturer has updated it recently, MSRP will generally cover bulk shipping to retail and distribution locations. You could face higher costs due to having smaller shipments to end-consumers or if you can’t buy at bulk rates for inbound shipments. Don’t let it eat significantly into your margins.
Use it as a barometer for pricing and sales potential. If you work in any spaces where manufacturers are stricter about MSRP or leverage it in their supply negotiations — again, the home appliance space is a top area — speak with your partner directly to avoid any harm to that relationship.
3. Set your anchors
One core strategy is to set prices against the potential value of your goods to the customer. Here, you demonstrate what something could be worth to the shopper, while calling out how much of a discount you’re providing relative to that value. This is often stated along the lines of “a $50 value that can be yours for just $19.95.”
The trick is not to go overboard and make people feel like you’re lying about numbers or selling an inferior product.
Anchor pricing is the strategy of creating this comparison and putting your price in a favorable light by positioning your lower price against a higher one. The higher is called the “anchor.” You demonstrate what the consumer saves.
It’s a common tactic for subscription services and kits, where one month may cost $10, but a three-month option drives the per-month pricing down to $8. The customer sees themselves as saving 20% each month, and it can be a big draw.
If you offer a series of similar products, you can also use them to position your best seller. Show the products next to each other in a comparison chart and highlight one of the lower-cost options with colors and bolding to gain attention. Putting it next to a high-priced good makes the mid-tier option more compelling.
This example from the Wall Street Journal’s subscription store (Dec. 2020) highlights the type of positioning and how to visually highlight these elements. It also gives us a chance for a quick thought experiment on how to A/B test the offer. Do you think you would be even more inclined to select its “Best Value” option if the price were slightly lower, say $22.25 per month, representing additional per-month savings off the middle option?
Like with many other things we’re discussing, remember to treat your audience as intelligent. They will likely price shop, so if you set the anchor price too out of normal bounds, you’ll erode trust and send them elsewhere.
4. Cost-plus price add-ons and extras
Upsell and cross-sell opportunities are important in eCommerce because they can help bump up your average order value. However, applying complex metrics to these units creates a lot of work and can pull some small shops away from focusing on their core sales drivers. Prioritize your effort by focusing on the products that have your best chance of generating a sale. For other items, stick with more established formulae, such as cost-plus pricing.
Cost-plus pricing is a standard mark-up strategy where you add a fixed percentage on top of your costs to set the purchase price for goods. The “total costs” here include things like your marketing and overhead, so the calculation is straightforward but still takes some effort to get your data together.
Generally speaking, cost-plus pricing is simple and avoids your customers seeing wide swings in what they expect something to cost. You’ll generate consistent returns and revenue, which is useful for budgeting. It also reduces the burden on your sales team because of its simplicity. An added operational bonus is that cost-plus pricing should rely on data you already collect. If some of the metrics are new to you, take it as a flashing neon sign that you need a better understanding of labor, production, or other costs.
A core reason to keep this for those extras and add-ons instead of core products is that cost-plus won’t adjust based on what your competitors are doing or any larger market trends. It’s relatively static, so it is slow to respond to changes in customer perceptions of value.
5. Test ways to offer free shipping
Shipping costs are hard to estimate on the whole because they depend on the size of the order plus where your customer lives and how fast you need to get an order to them. You’ve got labor for picking and packing each order plus carrier pickups and final delivery. However, you want to collect as much of this information as possible to determine how much it costs you to ship and fulfill your average order.
The reason for that data collection is because it’ll help you price out your ability to offer free shipping to your customers. Free shipping is the top incentive for about 90% of online shoppers, and it can boost your average order value by up to 30%, according to multiple studies. It’s a boon when you can make it work for your business.
Making it work for you means testing the two most common methods and seeing how your customers respond.
Here’s a quick overview:
- Free shipping on all orders. Every order a customer makes gets a standard free delivery. You cover the cost by adding a small amount to the price of each product. The price is generally determined by taking your average order shipping cost and dividing that among the number of products in the average order. So, a $10 shipping across five products would be a $2 cost. You can directly increase the customer’s cost or allow some of that to reduce your profit margin. If you sell expensive products, you might offer free two-day or faster shipping and include this price without creating an increase that drives customers away.
- Free shipping on orders over a specific price. This strategy allows you to generate enough revenue from an order that you’re above the average profit on an order even after paying for the full shipping cost. What’s great is that — per the studies above — free shipping is generally enough of a draw to get people to spend more than they usually would, making it easier to cover your costs and generate that profit.
Companies often blend these strategies, offering free standard and expedited options based on products, order values, and promotions.
From the eCommerce fulfillment side of things, you want to make it as easy as possible for everyone to understand. Customers should be able to skim your offer and determine when they get free shipping. Your warehouse team or fulfillment partner should also get a complete picture of which orders should be prioritized. Remember that order processing can take time, so you want to boost those expedited shipping orders to a place in your line where they’ll get out on time.
A straightforward process means less room for human error in your warehouse, plus fewer customer service requests to explain shipping. You also limit the likelihood that a customer will misunderstand and complain because of a delay or cost issue.
Competitive pricing requires a supplier focus
Much of the focus for eCommerce pricing is on the sale. Brands want to engage their audience and make a compelling offer while generating a healthy profit. That’s smart and reliable, but only half of the equation. As you create pricing strategies to see what will get people to spend a little more, keep working on the other side to see where you can manage supply costs.
Work with suppliers and wholesalers to see what volume you need to reach for a further discount. Have a similar volume conversation with carriers. Look for intermediaries who can manage some of these relationships or aspects like shipping to control costs. When you outgrow a certain process or location, weigh the expenses of expanding versus outsourcing.
Being your most competitive requires that you treat customers right. Just don’t forget that you’re a customer, too, which means it’s okay to ask your partners and suppliers to treat you right.