MAP Pricing & How To Price for E-commerce
Posted on 10th January '18 in Ecommerce - Comments
Everything has a price. It’s not as simple as choosing a number and sticking it onto your product. There’s much more thought and consideration that needs to be placed behind those numbers!
Your brand needs to know your overall business strategy, how that impacts your marketing goals and action plan, and how that trickles down to your pricing objectives and therefore, pricing method. A thorough and careful analysis needs to be done of your brand before you “throw out a price”.
Today’s post will look at the basics of pricing, the five key questions that you need to answer first, and then jump into the different methods of determining your product's’ price. This is incredibly important for getting e-commerce customers to love your brand.
WHAT DOES PRICING INCLUDE?
Along with Product, Promotion, and Place, Price makes up the four components of the marketing mix. It represents the value that a customer is willing to pay for your brand and / or product.
Pricing is one of the key factors in your customer’s purchase decision. Arguably, it’s the most important component of the marketing mix because it has a direct impact on your brand’s revenues and profits. We all know this drives your business’ survival or death.
If you price your products too high, demand will likely drop as people start looking elsewhere for similar products at a cheaper price. This would push yourself out of the market. If you price your products too low, this may increase your sales volume, but you may not generate enough revenue to cover your costs.
Price drives the overall demand and sales of your brand’s products. With increasing competition, the growth of online price checking, and the changing spending and purchase patterns by consumers, it’s critical that your pricing is regularly re-evaluated based on your goals and product lifecycle.
BEFORE YOU START PRICING YOUR PRODUCTS
Long before you start pinning a price tag to your product, there are a few things that your brand needs to think about first. Take a look at these five questions in chronological order. They’ll help you determine the right pricing objectives and pricing strategies that align with your business goals.
1. Think bigger picture: what’s your marketing objective and strategy?
What are the marketing goals for your overall brand and / or product? Are you looking to increase your market share? Do you want to increase product awareness in a new market or increase the average customer spend by a certain amount?
From there, you need to determine the strategy that you’ll need employ to reach your marketing goals. How will you reach new customers in your current market and / or ‘steal’ them from competitors? How do customers in this entirely new marketing like to be reached? How will you upsell or cross-promote products to your existing customers? The objective is the ‘what’, while the strategy is the ‘how’.
2. Break it down into smaller pieces: what’s your marketing mix look like?
Once you’ve figured out the higher level stuff, you’ll need to drill down on your ‘marketing mix’ decisions. They are the tools for driving your objectives and strategy. Since we’ll be going into more detail on how to choose pricing later on, let’s first focus on Product, Promotion, and Place.
Product is the item that your customer wants or needs. The types of decisions around product include how it looks, the variations available, and the packaging and labelling. Promotion refers to how customers will find and hear about your product. Factors to consider are the messaging, channel, and frequency. Place, or distribution, is how your products get into the hands of your customers. Brands have to think about channel relationships, warehousing and logistics, and inventory.
3. It’s about your customers: what’s the demand for your product?
Prior to creating your marketing objective and strategy, you should already know the different persona types of your customers. For instance, you should have an understanding of the customer profiles that interact with your brand and purchase your products. This includes their demographics and what they see, think, hear, and do.
Once you can put yourself in the shoes of your target audience, you’ll able to better determine the demand for your products. Is demand elastic; does it fluctuate with price? Or is it inelastic; is your product’s demand independent of price changes? Understanding the basic economics of your products will allow you to price accordingly.
4. Keep in mind the numbers: what are the costs?
Given your strategy and the decisions around your marketing mix, it’s time to sit down and crunch some numbers. What are the costs associated with everything? Over what time period will these costs be incurred? Once you start running the numbers and creating a budget, it’ll be normal to make adjustments so you don’t break the bank trying to meet your objectives!
5. There are things out of your control: do you understand the industry and competitive landscape?
Enough about your brand and everything in your control; time to turn your attention to the outside world! Research and analyze the different environmental factors that play a role in all of the above. Do a SWOT analysis (strengths, weaknesses, opportunities, and threats) on the overall industry. Consider how this might impact your marketing decisions. Get to know your competitors very well. Everything you do is relative to what your competitors do, so it should be a priority that you get to know them just as well as you know your brand.
HOW DO YOU DETERMINE YOUR PRODUCT’S PRICE?
Let’s turn our attention to figuring out price. As we previously mentioned, price is the only marketing mix factor that has a direct impact on revenue and profit, and therefore, the overall health of your business. Shall we dive in?
[1] Set the pricing objectives for your brand and / or specific product
Similar to how marketing objectives guide every marketing decision that follows, pricing objectives do the same thing for all decisions around price. When creating your pricing objective, you need to consider not only your marketing goals, but also financial and strategic objectives, as well as your marketing mix decisions.
Some common price objectives include maximizing current profit or revenue, maximizing quantity or profit margin, quality leadership, or status quo. These can be broken down into four different types of objectives: sales, profit, competition, or customer (source).
[2] Determine the best pricing strategy that aligns with your objective(s)
Once you decide your pricing goals, the next step is to determine how you’re going to turn that into a reality. We’ll go through some common strategies, as well as the objectives they would aim to achieve.
Skimming is a pricing method where brands initially sell their products at a high price, and decrease the amount over time. This helps brands position their products as high-quality, exclusive items for customers who are early adopters. As they drop their prices and more competitors enter the market, they’re able to capture price sensitive consumers as well.
Another strategy is penetration which is used to primarily draw customers away from competitors. Brands offer their products at lower than market value, in order to attract more people to their business. Gradually over time as product awareness increases, as well as the number of customers, brands raise prices to market value. With this strategy, brands are hit with an initial income loss, but usually make up for it once they increase prices.
Skimming and penetration are great strategies when your brand is new to the market, launching new products, or in the growth stage.
Another approach to pricing is taking cost-oriented strategies. Some examples include the cost-plus method where you add up all the input costs and add a certain percentage as markup; this is one of the most traditional and common forms of pricing.
You can take a competition-oriented approach with the loss-leader method. This means pricing a product below the market value so customers choose your brand over competitors. However, the ultimate goal is to encourage them to buy your other products that are more profitable. Another method is competitive-based pricing, where you price your products based on your competition. These types of strategies are recommended for when your products are in the maturity phase of its lifecycle and you’re looking to gain more market share.
During the decline stage in your product’s lifecycle, consider a discounting strategy. This may be a temporary discount for promotional reasons or a long-term / permanent decrease in price. When using this type of strategy, pay careful attention to the impact it may have on your brand image. Deep and / or frequent discounts may signal to your customers that your products are lower quality, which may do the opposite to your market share and / or revenue goals (ie. decrease rather than increase them), as well as your overall brand image.
Other kinds of pricing strategies include taking a value-based approach. An example is differential pricing: charging different prices for different customers for the exact same product. This allows brands to maximize their profits based on the different values that each customer places on their products.
Another approach is psychological pricing, where you set prices due to the psychological impact that it will have. That’s why you see so many product prices ending in 9. This is part of the charm pricing method where brands reduce the left-most digit of the price by one, giving the illusion that it costs much less. Another strategy is prestige pricing where you round all prices up (ie. $99 to $100), making the price “feel right” and encouraging customers to buy based on this ‘gut’ feeling. Using greed is another driver to get customers to purchase with Buy-One-Get-One Free offers.
Along with choosing your strategy, you’ll also want to determine your minimum advertised price. This is to ensure your retailers do not advertise your products below a certain price, and you can maintain control over your prices across your entire seller network. Utilizing a map monitoring company can help streamline the process.
[3] Determine the pricing discounts for your brand / products
Aside from determining your product price, you’ll want to create a list of scenarios that will warrant different discounts for your products. For instance, if a customer buys a large quantity of your product, usually the cost per item goes down. You may offer discounts depending on the season (and your industry) and during special calendar or retail holidays. How about rebates for your customers? Or special promotional offers?
Keep in mind, this step is different from choosing a discount pricing strategy that is typically implemented at the decline stage of a product’s lifecycle. The discounts determined at this point are independent of your product’s lifecycle.
CONCLUSION
Pricing is a critical piece in your marketing mix: it’s the only component that directly affects if your business grows or dies. Your brand needs to review your overall business strategy and marketing objectives and plans, before you can determine your pricing goals and the best pricing method to use. The price that you choose can make or break your business.