Unlocking Scalable Growth: Ecommerce Pricing Strategies for Success

Published October 4, 2023

Pricing plays a crucial role in the success of a retailer selling online. It directly impacts every facet of the business from customer acquisition, to sales volume, and ultimately, the bottom line. To thrive in the competitive ecommerce landscape, it's essential to adopt effective pricing strategies and execute well-planned pricing campaigns.

Many retailers default to simple cost-plus pricing (a strategy in which total cost is calculated before a markup is added on top) or the manufacturer’s suggested retail price (MSRPs). While there is nothing inherently wrong with those pricing strategies, they pale in comparison to the sophisticated data-driven tooling enabled by modern retail technology. Specifically, generative pricing which enables a retailer to dynamically optimize prices based on their consumers’ behaviors. After all, the customer is not making purchase decisions on a cost-plus model, they’re making subjective decisions about how much a product is worth.

We will explore various pricing strategies and delve into the power of generative pricing as best-in-class retail technology, essential for pricing professionals. We'll also discuss how to choose the right strategy, best practices for pricing campaigns, and the advantages of executing multiple pricing campaigns simultaneously. Let's dive in!

What is an ecommerce pricing strategy?

Simply put, an ecommerce pricing strategy is a plan for setting prices for the products you’re selling on your website. A strong pricing strategy takes into account costs, average order value (AOV), business goals, such as margin targets and revenue, lifetime customer value (LCV), and your competition.

Pricing strategy influences customers’ purchasing decisions, thus determining effective pricing strategies is critical to the success of a business. Set product prices too high and risk abandoned carts and lost sales - set prices too low and lose out on profits and miss margin targets.

An effective pricing strategy helps you determine the optimal price point to reach your business goals, whether those goals are increasing sales, improving profitability, conversion rates, customer acquisition, retention, or sell-through.

While there are many different ecommerce pricing strategies, some of the most common include:

Competitor pricing: This strategy involves setting your prices based on what your competitors are charging, for similar products. Simple to execute, this can be a good way to stay competitive in the eyes of the consumer, but it can also lead to a race to the bottom if all of your competitors are constantly lowering their prices. Furthermore, it is not an effective strategy for DTC or private-label products, since competitors are not selling the same product.
Value-based pricing: This strategy centers around setting your prices based on how much customers believe your products are worth. While this can be a more profitable strategy, since it typically results in higher markups, it can be more difficult to implement as you need to accurately assess the value of your products in the eyes of your customers, which is challenging and costly.
Price skimming: In this strategy, you set prices high when you first launch a new product. This allows you to make a profit on early sales, even though your costs are still high. As the product becomes more popular, you can gradually lower your prices.
Penetration pricing: The opposite of price skimming, with penetration pricing you set prices low when you first launch a new product and gradually raise prices. This allows you to attract a lot of customers and gain market share quickly, but brand perception can sour if customers feel as if they’re not getting an increase in value corresponding to the price increase. In addition to damage to your brand’s reputation, another drawback of this strategy is the risk of customers undervaluing your product because of their perception that it is low-quality
Charm pricing: Also known as psychological pricing, this strategy involves setting prices that are slightly below round numbers. For example, you might price a product at $9.99 instead of $10. This can make your products seem more affordable and appealing to customers. Other examples of charm pricing include installments, or buy-now-pay-later, or anchor pricing in which the original price is slashed out next to the new price. While these pricing strategies are not going to damage your brand’s reputation they were not designed for an ecommerce experience and today’s savvy consumer.
Generative pricing: This strategy uses AI and ML to set a range of prices based on company goals, be it profitability, conversion or some combination of the two. Then in real-time allocating web traffic to the top-performing price point. This can be a very effective way to maximize profits and margins while maintaining conversion. Alternatively, generative pricing can be applied to a sell-through campaign in which the retailer optimizes for conversion and maintains profit/margin.

A well-defined pricing strategy enables a retailer to attract customers, increase sales and maximize profits.

How to choose a pricing strategy?

The best place to start is by defining your objectives. A pricing strategy designed to sell through excess warehouse products is going to differ from one designed to improve margins and profitability of specific categories and SKUs.

Broadly speaking the right pricing strategy is flexible enough to adapt to shifting business goals.

It is important to consider a myriad of other factors when determining a pricing strategy. These factors include but are not limited to:

Product: If you are selling a high-margin product, your consumer base might be more tolerant of a higher price. However, if you are selling a low-margin product, you likely will need to set your prices more competitively.
Target market: Aside from your business goals, the target market, or your customer base, is arguably the most important factor in determining a pricing strategy. Use personas, a research-based profile to describe your ideal customer, to inform your strategy. If you’re targeting a price-sensitive market you will likely need to set your prices lower, as opposed to a market with more discretionary income that is willing to pay more for a product they perceive to be high-quality and/or they share value alignment with the brand. When thinking about your target market it is important to root your strategy in data, talking to real customers if possible, to prevent confirmation bias - who you want customers to be not necessarily who they are.
Competition: Despite a competition-based pricing strategy being inadequate for DTC brands and private label, you’d be remiss to not explore how your competitors are pricing their products at an aggregate level. One might also compare competitors’ in-store pricing compared to ecommerce as 71% of shoppers think they’ll get a better deal online then in-store. (Prisync research)
Financial goals: If your goal is to maximize margin and profit, you will need to adopt a pricing strategy that allows you to set prices high. Comparatively, if your goal is to sell a large volume of products, perhaps to move from the warehouse at the end of the season, you want a strategy that optimizes for conversion.

The best pricing strategy takes into account all of these factors and optimizes prices based on your consumers and your business goals. Whatsmore, pricing strategies can work in conjunction with one another. For example, one could use a competitive pricing strategy to understand how their competitors are pricing their products, then test that range with generative pricing.

What is a pricing campaign?

A pricing campaign is a short-term initiative that you use to achieve a specific pricing goal. For example, you might run a pricing campaign to increase margin during a holiday season or to sell through seasonal inventory.

There are many different types of pricing campaigns that you can run. Some of the most common include:

Maximize profit: This type of campaign involves setting your prices to maximize your profits.
Sell-through/liquidation: This type of campaign involves setting your prices low to sell through your inventory quickly, often used to move seasonal merchandise or products with a shelf-life.
Flash sale: designed to move product quickly a flash sale campaign typically offers deep discounts over a very short period of time (often measured in hours!)
Maximize margin: Similar to maximizing profit, a margin campaign optimizes to get the most margin dollars for each SKU.
Conversion: Success for a conversion campaign is measured by the volume of sales, not profit or margin. This type of pricing campaign is useful if you are moving product quickly but don’t want to have to resort to deep discounts to do so.
New customer acquisition: Pricing campaigns can be used to attract new customers, particularly through promotional offers such as a first-time buyer discount.
Vendor promotion: Sometimes a vendor will provide a particular offer to promote and pricing campaigns can reflect this offer.

One of the greatest benefits of a generative pricing strategy is the ability to run simultaneous pricing campaigns with different goals for each. With a generative pricing strategy, your prices shift dynamically based on consumers’ behavior on your website, so you don’t have to compromise profit for conversion or resort to deep discounts.

How to execute effective pricing campaigns?

Executing effective pricing campaigns follows the same rules as all campaigns. Start with a clear, shared definition of success (what are you trying to accomplish). Next, research the target market or audience, then craft a compelling message - in this case price parameters such as price ranges, discounts, or promotions - hypothesized to resonate with your target audience. Lastly, monitor performance by tracking key metrics like sales volume, revenue, margin, and conversion rates to make data-driven optimization decisions.

The case for generative pricing as the best pricing strategy

Generative pricing is the best pricing strategy because it uses best-in-class technology to enable ecommerce retailers to achieve their business goals through simultaneous campaigns that are optimized in real-time using first-party data.

Generative pricing can help you boost your ecommerce sales in a number of ways:

Increase profits. Generative pricing can help you maximize your profits through campaigns geared towards profit. These campaigns can be configured to hold conversion steady so you don’t have to pick between the two.
Increase sales. AI-based generative pricing can provide insights that can help you increase your sales by driving up average order value (AOV) and increasing conversion.
Sell through inventory. Generative pricing can help you sell through inventory by optimizing prices for conversion over time, so you don’t have to resort to heavy discounting to move merchandise quickly.
Stay competitive. The best of both worlds since generative pricing optimizes prices according to your customers' behavior when shopping on your site. However, if a competitor takes an action that impacts customer behavior the algorithm picks up on this shift and dynamically shifts. For example, if a customer sells out of a particular item and customers are now willing to pay more the algorithm will shift to a higher price point.
Optimize your pricing strategy. Generative pricing and other insights from Price Optimization can help you improve your results, inform your in-store pricing, be shared in commercial negotiations with vendors, and more.

Generative pricing is a powerful tool that is an invaluable asset to your ecommerce business. It can help you boost sales, improve margin, surpass profitability targets, and stay competitive in today's ever-changing marketplace.

Pricing for Success

Pricing strategies and campaigns are vital tools for ecommerce retailers growth and success. Whether the businesses goals are to increase sales and acquire new customers or improve profitability and margin, selecting the right pricing strategy is imperative and the best pricing strategy is one that worst best for your business and your goals – we just so happen to think generative pricing is the way to do that.