Pricing has a massive impact on sales. Obviously!
I mean, just think back to the last time you bought something online.
Did you consider pricing when trying to choose one product over another? I’m sure you did.
After all, why pay more for no reason? We all want that value for money product.
And you’d be among the vast majority of online shoppers.
In a recent survey of retailers by SPS Commerce, 68% agreed that pricing was the biggest factor that influenced online shoppers.
Even though it’s super important, pricing is something that many new dropshippers and eCommerce store owners overlook.
In the excitement of launching a store, it’s easy just to adopt a simple cost-based approach. But this isn’t always the best way to go about it.
Your pricing strategy should encompass your goals and branding - not just your bottom line.
So how do you go about creating a winning eCommerce pricing strategy?
That’s what we’re going to reveal in this guide.
We’ll explore the 11 most used eCommerce pricing strategies so you can explore your options. You’ll learn the pros and cons of each and how to choose the right one for your eCommerce store.
And we’ll also look at five examples so you can get some inspiration from successful brands.
Ready to find the right price for your dropshipping product?
Let’s get into it.
There are a bunch of ways you can use pricing strategies for your ecommerce store.
Do you want to:
The right pricing strategy can help you achieve all of these goals and more.
In this section, we’ll review 11 tried and tested pricing strategies. You’ll learn how they work, the benefits, and the potential drawbacks.
Some are great for beginner dropshippers. But there are a few you should avoid until you’ve built up a loyal customer base.
Let’s kick things off with the simplest and most used strategy.
Cost-based pricing, also known as cost-plus pricing, is a strategy that applies a fixed percentage profit margin to the total cost of the product.
It’s super simple.
Just calculate your costs and add your profit margin markup to reach the price for your product.
As a dropshipper, you don’t have to cover as many costs as a brick-and-mortar store. That’s one of the biggest benefits of the dropshipping business model!
There’s no store rent or high staffing costs. But, you’ll still need to consider the cost of running your eCommerce business and marketing fees.
Think about your store hosting costs, Facebook Ads, and the other ways you invest in your store. It’s also important to think about your time investment. You’ll need to write the production description, ad creative, and upload the product to your store.
Once you know these costs, add them to the cost of buying the product from the merchant. Then apply your profit margin.
That’s the basics of a cost-based pricing approach.
It’s easy to get started with cost-based pricing. You can see exactly what you can expect to make per sale. And when you add new products to your store, you can quickly work out pricing and start selling. That’s why cost-based pricing is so popular.
Cost-based pricing is a low-risk strategy. But it can leave you open to competitors undercutting you. Whatever niche you have chosen for your store, there will always be competitors targeting the same buyers.
If your margins are too high and shoppers can find your products cheaper elsewhere, you’ll lose out on sales.
Competition-based pricing is about looking at how much your competitors charge for similar products. By taking a deep dive into your competitors’ pricing strategies, you can establish the average price.
This will enable you to make an informed decision about how to price your product.
For example, you can offer the lowest price to try and attract new customers or differentiate your brand with a higher price if your product is unique or has an additional feature or benefit.
You can also price your product in the middle as the “goldilocks” option. Not too expensive, but not too cheap.
By pricing your products based on what your competitors charge, you can attract new customers to your store. It’s also pretty easy to research competitor pricing. You don’t need to spend all day trawling the web!
A quick Google search can show you how much your competitors charge for similar products.
It’s always beneficial to know what your competitors are doing, but competition-based pricing can be difficult if you’re new to the niche or unable to find products cheaper than your competitors.
That’s where tools like SaleHoo Labs and Directory can really save you time by helping you find the best suppliers.
Market-based pricing is similar to a competition-based strategy but with one key difference. It focuses on competitors AND demand.
This strategy is about evaluating the broader market situation to determine pricing. For example, if there is a significant demand for a product and a limited supply, you may be able to increase your margin and make more per sale.
The way Toyota and Honda price similar cars is a good example of market-based pricing. Both car manufacturers know how much customers are willing to spend on a new vehicle, and they adjust their pricing accordingly.
A market-based pricing strategy allows you to sell above, below, or at the average market price based on customer demand.
Another great example of market-based pricing is the rush to buy trending toys in the runup to Christmas.
Back in 2016, hatchimals were the must-have Christmas toy. Parents went into a buying frenzy trying to find the interactive toy for sale, and the price skyrocketed on marketplaces like Amazon and eBay due to the increased demand.
This strategy can be an excellent way to maximize revenue while keeping your pricing competitive.
You can see what your competitors are charging for similar products and adapt your approach depending on your goals and the broader market conditions. It takes demand into consideration so you can maximize revenue by remaining flexible.
Market-based pricing can be lucrative, but measuring demand accurately is challenging. Consumer preferences can change quickly, and there’s no guarantee that demand will be consistent.
It’s also tricky for a dropshipper or eCommerce store owner to get the same insights as a global retail brand and judge the broader market conditions. You can embrace elements of this strategy, but you might struggle to adopt a full market-based approach like Honda or Toyota.
💡Pro Tip: One of the best ways to judge the demand for a product is to use a product research tool like SaleHoo Labs. You can use the trends graph to see the popularity of products and determine if it’s worth your time selling. It also shows you the sell rate so you can see how well other sellers are doing with the product on Amazon, eBay, and AliExpress.
Value-based pricing determines the maximum amount customers are willing to pay for a product.
Shoppers are willing to pay more for products based on the brand reputation, ethical considerations, and other factors.
For example, the latest Global Sustainability Study 2021 revealed that 34% of shoppers are willing to pay more for sustainable products or services.
Generally, consumers are also willing to pay more for products made from higher quality materials or a higher production standard. Sometimes the brand name alone is enough to increase the perceived value.
Value-based pricing can be an effective strategy to maximize profitability. You can increase your margins so that you make more per sale. This type of pricing can work well if your store has a strong brand identity or eco-friendly credentials.
It’s not easy to successfully roll out a value-based pricing strategy. Many major brands invest significant resources into consumer research to discover the best value-based pricing strategy for their products.
Even the most successful dropshippers don’t have anywhere near the same resources as Apple or Nike. You can experiment with pricing using A/B testing, but finding the right price point can take time.
Dynamic pricing is a flexible approach that allows you to adapt your pricing strategy based on customer demand. You can increase or reduce your pricing based on sales.
So if there is a surge in sales, you can increase your pricing to boost your profits. If you’re experiencing a slow period, you can reduce the price to increase sales.
The price is dynamic and increases or reduces based on demand.
Uber is an excellent example of a company that uses dynamic pricing. In areas where there is a sudden surge in customers, Uber implements “surge pricing.” For example, if thousands of people leave an event and turn to Uber for a ride, the app will automatically increase the pricing in the area.
This approach maximizes revenue for Uber without harming sales.
Dynamic pricing allows you to maximize profitability by adapting your pricing based on sales volume. It can be a good way to capitalize on spikes in demand. If sales volume drops, you can reduce your pricing.
Dynamic pricing can also be combined with other pricing strategies to keep your pricing competitive.
Dynamic pricing works well in some situations. But it can also tank your conversions.
If your customers know that pricing will likely drop soon, they may hold off on a purchase. It can also frustrate your existing customers if they see that pricing has significantly reduced shortly after purchasing.
It can also be challenging to continually adapt your pricing. You can use tools to automate some of these tasks, but it’s not a beginner-friendly strategy.
Price skimming is a strategy where the price is initially higher before gradually reducing over time as demand decreases.
You can capitalize on demand for a new product, and reduce the price to appeal to a broader audience later.
This strategy can work well for some types of products.
For example, technology products are typically priced higher on initial release. However, the product becomes less desirable over time as new models are made available, and the price reduces.
Price skimming can work for products that have an exceptionally high demand. It’s a popular pricing strategy for technology and seasonal products.
If you’re Apple selling the latest iPhone, price skimming can work.
You can maximize profit and then make your product more accessible to budget-conscious consumers when the demand has started to drop.
It’s difficult for a dropshipping store to implement a successful price skimming strategy.
Major technology brands can use price skimming as there is a massive demand for their new products. However, it’s hard to capitalize on price skimming if you don’t have an existing customer base or an exclusive product.
Unless you can get an exclusive deal with a manufacturer or distributor, price skimming might not be the best strategy for you.
Bundle pricing is a simple strategy for selling multiple products in a bundle for a discounted price.
Walk down the cosmetics aisle in any Walmart, and you’ll find bundle pricing for lots of products. You’ll also see bundle pricing in most fast-food restaurants.
This could be multiple units of the same product, like a buy 1 get 1 free offer, or a selection of complementary products. For example, a laptop might be bundled with a case, wireless mouse, and keyboard.
One of the biggest advantages of bundle pricing is that it can help you sell some of your less popular products. Bundling products can be an effective way to boost the average order value of your store and increase sales revenue.
Many beauty brands use this tactic. Once a shopper has tried a new product as part of a bundle, there’s a good chance they will continue to use it and make a repeat purchase when they run out.
Getting shoppers to overcome the initial barrier to purchase is often the hardest part of running a successful ecommerce store.
Product bundles can be a great way to increase sales revenue. But it can make a dent in your profit margins. The product bundle needs to provide a significant discount to be appealing to shoppers.
💡Pro Tip: This pricing model sometimes doesn’t lend itself well to dropshipping. If you bundle products together, you’ll need to ensure they are sold by the same supplier. Bundling products together from two different suppliers is tricky as you will need to charge separate shipping fees. Shoppers will often abandon a purchase if they discover they need to pay double shipping costs.
Premium pricing is a strategy for luxury brands and those targeting the top end of the market. A premium pricing strategy aims to create a perception of quality and status by setting prices above competitors.
Technology and fashion brands often use premium pricing to protect their market share and increase the perceived value of their products. For example, think about how RayBan sunglasses or Tom Ford clothes cost so much more than similar products.
The people that buy premium products are often buying into the status or perception that comes with owning the expensive item. This can be a good way to market white label products and items that are exclusive to your brand.
If you sell luxury or high-end products, premium pricing can be a great way to differentiate your brand and increase margins. It can also help to protect your brand from new competitors looking to enter the market.
People are willing to pay a premium for certain types of products. According to a recent Statista survey, 45% of people are willing to buy premium clothing and shoes, but only 7% are willing to purchase premium toys and baby products.
You need to pick the right niche and build your brand for premium pricing to work. A penetration pricing strategy may be more effective if you’re a new dropshipper looking to enter a market.
Loss leader pricing is a strategy for selling a product at a loss to encourage shoppers to buy from your store. The product being sold at a loss is known as a loss leader.
Although the loss leader is sold below cost, this strategy can still be profitable if shoppers buy other products from your store.
For example, Gillette often sells its razors at a loss. But customers need to replace razor blades with refills regularly. These repeat purchases are where Gilette makes a profit.
Supermarkets also use loss leader pricing to bring shoppers into the store. By placing the loss leader at the back of the store, shoppers need to walk past other products before they can find the item. This can lead to impulse purchases on higher profit items.
A loss leader pricing strategy can be a great way to enter a market and quickly grow your customer base. It can also be effective if you have a wide range of products that will appeal to shoppers that come to your store for the loss leader.
If you want to use this strategy but minimize the loss, you could combine a loss leader with a more lucrative product in a bundle pricing strategy.
A loss leader strategy can only work if you manage to convert your new buyers into loyal customers or sell other products to cover the loss. It can be a risky strategy for a new eCommerce store and is generally used by larger brick-and-mortar retailers.
Anchor pricing is a simple strategy that shows shoppers how much they could save by purchasing a product at a discounted price. The new price is displayed next to the original price.
Amazon and other online retailers often use this pricing strategy.
You can also display the product’s price next to a more expensive alternative. This instant visual comparison can encourage conversions.
For example, cinema concession stands often use anchor pricing to encourage customers to purchase more.
How many times have you bought a medium or large bag of popcorn because the smaller-sized option looked like a worse deal?
That’s anchor pricing in action.
Anchor pricing can be an effective way to guide consumer purchasing decisions. It helps shoppers compare the value of each option. If you choose the right pricing comparisons, you can nudge customers towards purchasing the most lucrative option.
It’s important not to lose credibility and trust by overvaluing your products with an anchor eCommerce pricing strategy. If savvy customers become aware of the strategy, you risk losing trust and shoppers walking away from your store.
Nobody likes to feel like they are being manipulated by deliberate overpricing.
Penetration pricing uses a lower initial price to grow the customer base and increase market share quickly. The low price encourages shoppers to switch to your brand.
Once you have increased market share, you can raise pricing to boost your margins. Netflix is a great example of how to use penetration pricing.
This type of strategy is often used by new market entrants looking to scale quickly. You can use penetration pricing to differentiate your brand and build your customer base.
One of the biggest challenges for many consumer brands is getting shoppers to overcome the initial barrier to purchase. Once customers have bought from you, they are more likely to buy from you again.
That’s why this strategy can be super effective.
Penetration pricing can also create goodwill among customers and boost positive word of mouth to increase brand awareness.
Penetration pricing is usually a temporary strategy to quickly increase market share. The challenge is to increase pricing without losing customers - not an easy thing to do!
Many shoppers attracted by penetration pricing are searching for bargains. Unfortunately, these shoppers often show little brand loyalty if your product is similar to a cheaper alternative.
Setting a pricing strategy isn’t as exciting as creating a new brand or building a new store. But it can be a powerful tool when implemented smartly and for the right products.
So how do you know which pricing strategy is right for your business?
Well, it depends on your unique circumstances.
The pricing strategy for a luxury watch brand will be very different from a budget cleaning products brand.
In this section, we’ll discuss the three most important factors you should consider when deciding on a pricing strategy.
First, you need to define where you want to take your eCommerce store.
What does success look like for you?
Before you adopt any new pricing strategy, define your objectives. Then, you can start to pinpoint the strategies that will be most beneficial.
If you’re starting out and looking to scale, you’ll want to focus on pricing strategies that can help you grow your customer base quickly.
For a more established store that generates a good chunk of revenue per month, you may want to increase your margins or boost the average order value with bundles and other promotions.
The next step is to define your ideal customers by creating buyer personas. A buyer persona is a semi-fictional representation of your ideal customer.
This will help you identify the key characteristics that can guide your pricing strategy.
You can look at their financial situation and how much they are willing to spend on your product.
If you’re in a crowded niche, you may discover that your competitors have already worked out the maximum a customer is willing to pay and adjusted their strategy accordingly.
You can also look at how your customers perceive your product. What problem does it solve, and how much are people willing to pay to achieve that benefit?
If you sell a best-in-class product that fills a specific need, you don’t want to confuse shoppers and dilute your brand image with bundled or discounted pricing.
Almost all successful brands have something unique that makes them different from the rest of the market. This could be a unique feature, exceptional customer service, or something else your customers value.
This attribute is a ‘unique selling point’ (USP).
The best way to understand what a USP is and why it matters to your pricing strategy is to look at an example.
Domino’s Pizza has one of the most well-known USPs in history. The company built entire advertising campaigns around the USP for decades.
“Fresh, hot pizza delivered in 30 minutes or less, guaranteed.”
They didn’t promise the best-tasting pizza or the lowest price. But they did tap into a key attribute that people look for in takeaway pizza: speed.
For your dropshipping store, you can’t own the fulfillment process like a typical retailer.
But you could base your USP on your product selection, ethical manufacturing, unique custom branding, or another aspect that your competitors will struggle to replicate easily.
If you can offer something your competitors can't, you can charge a premium for your products.
The best way to get to grips with pricing strategies is to learn from real-world examples.
We’ve covered the theory above. Now let’s see how these strategies play out for real.
In this section, we’ll look at five top brands and how they implemented pricing strategies to win new customers, increase profits, and achieve their business goals.
Dollar Shave Club is one of the most well-known disruptors. The company has gone from strength to strength through its powerful marketing campaigns and aggressive penetration pricing strategy.
The online shaving brand priced its products cheaper than more established in-store competitors. It then used massive advertising campaigns across social media and TV to get in front of potential customers and show the price difference.
Because of the subscription model, Dollar Shave Club maintained a high average customer lifetime value which offset the cost of the penetration pricing model.
By 2016, Dollar Shave Club had successfully increased its market share and was eventually purchased by global cosmetics giant Unilever.
Gucci is one of the most recognizable luxury brands in the world. And it uses premium pricing to make its range of handbags, clothing, and accessories stand out from competitors.
The brand commands a high price for its products, targeting wealthy consumers willing to pay the premium cost for a Gucci product. Buyers are looking for the status of owning a Gucci product, not just the product itself.
The Italian fashion house also restricts third-party retailers from discounting its goods to protect the premium pricing model.
Sony is one of the most noticeable examples of a price skimming strategy. When the consumer electronics company launched the Sony Playstation 2, it opted for a more conservative market-based approach.
The PS2 launched with a price tag of $299, which was similar to competing games systems and most DVD players. This proved a big success as the PS2 was a massive hit around the globe.
When it came to the launch of the PS3, Sony used a price skimming approach as it had already built up a loyal customer base. The initial launch price was $599 before it was eventually reduced in price each year until it could be purchased for $299 the year it was discontinued.
Apple has made value-based pricing integral to its strategy. It has a huge loyal customer base willing to pay a high price for its range of products. Its brand reputation means Apple can charge more than its competitors for similar products.
The technical specs and capabilities of the latest iPhone are similar to more affordable products. But Apple customers are part of a wider community around the brand. Customers can also access Apple Genius Bar customer support to help with any issues with their purchases.
There is an element of premium pricing at the top of its range, but Apple uses value-based pricing for most of its products.
The Chinese technology company has adopted a competition-based pricing model for its range of consumer products. This has enabled Huawei to capture a large share of the global smartphone market.
Huawei brings high-quality products to the market and sets pricing below most of its competitors. It targets all market segments with affordable products and some high-end products to compete with flagship products from competitors Apple and Samsung.
As of 2022, Huawei is the 4th most popular smartphone manufacturer globally.
We’ve covered the main pricing strategies for eCommerce, the factors you should consider, and examined some real-life examples.
Hopefully, you now have a good idea of which methods you want to implement on your site.
So, what’s next?
Here are some bonus steps to make your pricing strategy even more effective.
A price with fewer syllables is perceived as lower. It might seem strange, but humans are psychologically wired to think of a price like $25.00 with fewer syllables as lower than a more extended syllable price like $24.85.
You might not believe it, but there’s plenty of academic research to back it up. Check out the study by Clark University to see for yourself.
When customers can quickly process the numbers, they can make a faster purchasing decision.
You can use this tactic to experiment with round pricing for your eCommerce business.
Okay, this goes against what we just discussed, with fewer syllables being a good thing. But sometimes, a specific price can work better in certain product categories.
A super specific price like $124.76 can outperform a rounded price like $125.
This usually works best for technology products.
Shoppers can perceive the rounded price as higher than the product’s actual value. They think it’s a number you have made up rather than a fair price.
The University of Florida looked into this with a 2008 study.
People perceive the specific price as being calculated on the production cost and materials that go into the product. They think it’s a fair price based on the true value.
If you sell gadgets or technology products, try specific pricing and see how it impacts conversions.
Setting your pricing strategy isn’t a ‘once and done’ process. Instead, it’s something you’ll need to revisit regularly to maximize sales and profitability.
One of the best ways to keep on top of your pricing strategy is through A/B testing.
A/B testing is something you should be doing with your checkout process, sales copy, and other aspects of your eCommerce store.
But it’s also something you can use to determine the best pricing strategy.
There are many paid and free tools to help you get started with A/B testing, including Google Optimize.
Here’s how the process works.
You create two versions of your product page with two different prices. Then, you split the traffic you generate with half of the visitors going to the new price and half to the original price.
By comparing the conversion rates of the original and new prices, you can see whether to make the change permanent.
You may discover that your conversion rate drops slightly.
But this isn’t always a bad thing.
For example, if your new higher price generates more revenue, it could be the more lucrative option. Sometimes, a lift in the retail price can significantly impact your revenue while only causing a slight drop in total sales.
So now you know everything you need to create a winning pricing strategy for your eCommerce store.
The next step is to choose the right strategy for your dropshipping business and start making sales.
You can experiment with different strategies across your range. But always think about your overall brand image and how you want to be perceived by your customers.
It’s also vital to remain agile. Like everything else, pricing can change over time, and your strategy should evolve too.
If you want to learn more about what it takes to run a successful eCommerce store, check out SaleHoo Educate. It breaks down everything you need to do to create a winning store in easy-to-understand and straightforward steps.
Have questions on how you can fast-track your store’s growth? Our 24/7 first-class customer support will always be on hand to help as you work your way through the training and launch your store.