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Pricing strategies for online retailers

Our latest article was about setting prices, refering specifically to the most popular price wars in ecommerce. Today, we want to elaborate on pricing strategies in general. Sounds boring? It is not! Learn which pricing strategies exist, how prices are set in the market and how the overall company alignment is implicated.

Setting product prices is a delicate issue to many online merchants. On the one hand, certain intern cost factors such as procurement prices, organisational expenses and other costs define the level of the price – on the other hand, extern market factors also have to be taken into account. Those are the competitors whose pricing needs to be well-observed and involved in the own pricing policy. Further, the customers, their demand and willingness to pay influence the pricing.

Pricing strategies – What is the goal?

Before the setting of a price strategy takes place there is the question of the enterprise’s aim. Certainly, merchants want realize profit and therefrom earn their living. However, this superior goal can be reached via two ways. As it is often in life, there is the key question: quality or quantity? Market shares or margin?

One way to set prices is selling as much products as possible with relatively low margins and thus reach a large part of the demand. Treading the other path it is necessary to sell products as expensive as possible to a certain target group. Both of those options (theoretically!) lead to the desired result: the profit maximization.

Basically, store operators can choose between expanding the profit margin and expanding market shares. The pricing strategy of the merchant results from that choice which is of course essentially dependent on the product that is being sold. The costs for the procurement of the product and the running of the trade provide the basis for the price. The profit margin that is added on top defines the price strategy. There are two extremities: the high-price and the low-price strategy.

Boost the prices!

The high-price strategy is especially suitable for products with strong brands. Unique selling propositions such as image, quality, innovation and high customer connectivity keep the price elasticity of the demand low. Thus, the price plays a minor part to the target group of those products- the customers rather search for personal reputation caused by innovation. Classic examples are designer-bags whose production costs only a bit more than no-name-bags but that provide the customers the maximal status boost. In all objectivity, cost and benefit are totally out of proportion but the more expensive the brand the more does the demand grow. Certainly, other marketing measures (such as limited amount and celebrity-placement) are to be mentioned. Examples for online retailers in the high price segment are Stylebob, Mytheresa and Net-a-Porter.

Facing innovations the price skimming is derived from the high-price strategy. Thereby, a new, innovative product is introduced to the market with a high price. The reputation affine early-adopters sense a new status symbol and buy the product earlier than all the others. As soon as the first hype subsides more and more target groups with different payment reserves are addressed by decreasing the price step by step. Consequently, the entire demand is skimmed of over time. If no example has crossed your mind yet: this strategy is often used for smartphones, flat screens and other entertainment electronics. Germany´s leading online retailers in this segment are Notebooksbilliger, Conrad and Cyberport.

Small prices – huge effect

The low-price strategy works very well for articles of daily use. The targeted group is very cost-orientated and the price elasticity is accordingly high. Products with low prices and sufficient quality mostly capture the market fast. Dealing with new products the low-price strategy can be a safe tool a big market share is reached fast with. Flops are unlikely and a good starting position is secured. Examples for this strategy are to be found at online discount stores such as Lesara and multichannel discount stores.

However, once someone has started to apply that strategy he should stick to it because posterior price hikes (like used at the so called penetration pricing) are often punished with flagging sales. Performing examples are magazine subscriptions and mobile phone contracts that switch from the reasonable special offer to the standard rate. Those who call a monopoly position their own will reach enough customers – even with increasing prices.

Certainly, there is an endless number of pricing strategies between high- and low-price strategy that are something in between. For different product types – e.g. for different manufacturer and trade brands – merchants can pursue different strategies. Depending on the branch and product the market observation is the essential thing to position oneself between the competitors as profitable as possible. In our article “Price Management in Online Trading”, we show up that the development of prices in the ecommerce does not necessarily go in one single direction.

Learn more about the cross-market observation of competitive prices by taking a look at our whitepaper “Price monitoring on the Internet”.

In order to get some wider knowledge we recommend the interesting book „Preisheiten“ from pricing expert Hermann Simon, the Gabler Wirtschaftslexikon and the knowledge portal of the institute for trade research in Cologne.

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