Every time when the Competera team participates in conferences or events, we’re getting the same question during coffee breaks: «We just started. How should we set prices in a small (young) online store?» And it is close to impossible – to answer this question in a few words (you know, those coffee breaks are really short and pretty crowded), so we decided to write this post to help you set up basic pricing «rules» for your online store.
We consciously used quotation marks for «rules», because the list below - it is just a recommendations. Even if you use it, you'll still need to write and implement the full pricing strategy based on your company's business goals.
Rule #1: profitability
If a small shop starts to sell goods with a negative profit, at some point it will lose all current assets. Therefore, during price settings, you should be guided (at least) by your business’s costs. In this case, your pricing will be based on well-defined indicators – the company's costs for the purchase/production of products, marketing, salaries, etc. This approach is called cost-based pricing.
Rule #2: flexibility
At the same time, if you exclusively focus on cost-based pricing, you can fall into a gap when all of your business decisions will be based on the desire to cover the actual costs and to get at least some profit. This is not the best option: only flexible pricing (it combines cost- and value-based pricing) can regulate the sales and average costs that could eventually take the company to a new profitability level. And in order to set this flexible pricing, it is necessary for a retailer to not only to continuously reduce the company's costs, but also to choose products and market segments that will bring the biggest profit for the lowest cost.
Rule #3: the value
A situation when small shops set minimum prices for some products is quite common in our practice.These retailers are focusing on the prices that the user is «ready» to pay (they use it based on «some» research), rather than focusing on the real value of a product for the customer (which should be based on real data). In this case, there is often a situation when decreased prices are perceived by potential buyers as a bad sign (product quality, retailer reputation, etc.). And this pricing step can easily decrease sales being used incorrectly.
Rule #4: competitiveness
You should not forget the fact that you are not alone. There are many other retailers in the market. So if you constantly monitor competitors' prices, you can:
- quickly respond to changes,
- make a profit with no discounts (or worse – dumping),
- win customer's loyalty
For example, if your competitor is working at a loss and distributes low-margin goods much cheaper than your shop (or the market in general) can, you could offer a set of the same products plus a few related (but not similar) goods to the customer with one condition: the total price should be less than the sum of the elements of this set.
Rule #5: Analysis
No matter how small (or new) your online store is now, you need to constantly analyze all its activities, effectiveness and to consciously manage the costs, marketing, and, of course, pricing. Otherwise, you will have no marketing, costs or store quite soon.
Remember: the rules in this case are just a recommendation. The only correct way of pricing that would suit everyone, simply does not exist. But there are science-based strategies, methods and practices that can greatly simplify the task of pricing in your store (if you use them) or mistakes that can obscure it. So keep reading our blog!
Author: Alexander Galkin, Competera.