STRATEGIC PRICING

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Roel P. Dolaypan Jr., CPA, MDM

Chapter 2
TYPES OF PRICING STRATEGY
Learning Objectives At the end of this unit, you are expected to:
1. define economy pricing;
2. discuss the product pricing strategy;
3. discuss the new product pricing strategy;
4. state the status quo pricing; and
5. differentiate start-up and e-commerce strategies.
Overview
This unit gives you an idea of different pricing strategies. Furthermore, wherein different
perspectives were developed.

Introduction
Setting the right prices for your products is a balancing act. A low price isn’t always ideal,
as the product might see a healthy stream of sales without turning any profit (and we all
like to eat and pay our bills, right?). Similarly, when a product has a high price, a retailer
may see fewer sales and ―price out‖ more budget-conscious customers, losing market
positioning.

Ultimately, every small business will have to do its homework. Retailers have to consider
factors like production and business costs, consumer trends, revenue goals, and
competitor pricing. Even then, setting a price for a new product, or even an existing
product line, isn’t just pure math. That may be the most straightforward step of the
process.

That’s because numbers behave logically. Humans, on the other hand—well, we can be
way more complex. Yes, you need to do the math. But you also need to take a second
step that goes beyond hard data and number crunching.

The art of pricing requires you to also calculate how much human behavior impacts the
way we perceive price.

To do so, you’ll need to examine different pricing strategy examples, their psychological
impact on your customers, and how to price your product.

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WHAT IS ECONOMY PRICING?
Economy pricing is a volume-based pricing strategy wherein you price goods low and
gain revenue based on the number of customers who purchase your product. It's typically
used for commodity goods, like generic-brand groceries or medications, that don't have
the marketing and advertising costs of their name-brand counterparts. Whether you know
it or not, you've encountered the economy pricing model. It’s a pricing strategy employed
by businesses to make generic and commodity goods appealing. In other words, it makes
customers feel like they’re getting a deal.

How do you execute economy pricing?

At its core, an economy pricing strategy is similar to a cost-plus pricing strategy. You take
a product with relatively low production costs and set a price for it that provides you with
a small profit.

With such a low price, economy pricing is very much a volume play. The only way you’ll
make a profit is if you bring in a large number of customers consistently. That makes
acquisition incredibly important because you won’t be able to rely on existing customers
to drive revenue over time.

Common products that use economy pricing

Economy pricing is used a lot in the commodity goods market. It’s a great strategy for
companies that have low overhead costs and the ability to sell a larger number of products
to new customers regularly. Here are a few examples of economy pricing in today’s
market:

a. Supermarket store brands

Every grocery store you go into has its version of popular brands. Companies like
Trader Joe’s and ALDI are two examples that capitalize on economic pricing to
drive their growth.

b. Generic drugs and medications

Much like supermarket store brands, there are lots of different types of generic
over-the-counter medications available through companies like CVS and Rite-Aid.

c. Big box stores

Companies like Costco and BJ’s take the economy pricing model to the next level
by selling primarily their brands. While name brands are still available, the major
draw of these types of stores is the quality-to-price ratio of their generic brands.

d. Budget airlines
Many airlines will provide economy pricing to fill seats in their planes, offering much
lower prices for the first seats that are purchased and scaling up the price as
availability decreases (which incorporates premium pricing as well).

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Pros and cons of economy pricing
Economy pricing can be a valuable acquisition strategy for SaaS and subscription
businesses. But as subscriptions are built on recurring customer relationships, the unit
economics of selling at such a low price makes it difficult to build a revenue base over
time.

a. Pros of economy pricing

Economy pricing presents some interesting benefits for larger, more established
companies. It’s easy to implement, keeps costs low, and makes your product or
service appealing to buyer personas who are particularly interested in ―getting a
deal.‖ There tend to be lower customer acquisition costs (CAC) than other pricing
strategies, coupled with the fact that you can acquire customers faster. Being able
to enter a market quicker and cheaper can help new entrants find their foothold as
well, but the tradeoff is a decrease in pricing power. Economy pricing is more of an
acquisition strategy than a pricing one.

b. Cons of economy pricing

When you’re considering economy pricing, it’s important to understand that it only
works in very specific market conditions. Companies that have no market share or
brand awareness won’t be able to keep their operational costs low enough to make
this pricing model work. And if you’re just starting, economy pricing can negatively
impact the customers’ perception of value for your brand.

The model relies on thin profit margins to keep prices low and requires a consistent
volume of new customers to maintain revenue. Pricing your product or service so
low makes it hard for potential customers to connect the value of the product with
its price and makes it difficult to raise prices or capture expansion revenue in the
future.

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Roel P. Dolaypan Jr., CPA, MDM

WHAT ARE PRODUCT PRICING METHODS
Product Pricing is a pricing strategy in which the by-products of a process are also sold
separately at a specific price to earn additional revenue from the same infrastructure and
setup. By product is something that is produced as a result of producing something else
( the main product).

There are many different pricing strategies, but Competitive Pricing, Cost-plus Pricing,
Markup Pricing, and Demand Pricing are four common methods for small business
owners to use. An important point to remember no matter which pricing method you
choose: Recent research shows that Millennial and Gen Z consumers are willing to pay
more for a product from a local small business if the customer experience is above
average.

1. Competitive Pricing
If you are in the business of selling readily-available products, then pricing that is
similar to your competitors can be an option. It is always a good idea to distinguish
your business on something other than a competitive price, in case you cannot
maintain the volume a vendor requires, or if costs spike suddenly.

2. Cost-Plus Pricing
In terms of small businesses, Cost-plus Pricing is often used when the
manufacturer or creator of a product also sells at retail. Cost-plus is adding the
materials, labor, and overhead to a set profit margin to determine the final or total
cost of the product.

3. Markup Pricing
Markup Pricing can be considered a variation on Competitive Pricing. This method
is when a set percentage, the markup, is added to the wholesale product cost. It
may vary by product or category.

4. Demand Pricing
Demand pricing is a more risky and complicated method sometimes known as
customer-based pricing. In this method, a retailer is using his or her knowledge of
consumer demand and perceived value to create the maximum price that someone
might be willing to pay.

These product pricing methods should help you determine which one will work best
for your business. Keystone Pricing ranks as one of the easiest and fastest
methods. Just remember that giving attention to providing the best customer
service can make any pricing strategy more effective.

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Roel P. Dolaypan Jr., CPA, MDM

NEW PRODUCT PRICING STRATEGIES

What is New Product Pricing Pricing

may seem simple and easy. But it’s a very important and challenging part of any business
especially when the product is new in the market because you don’t know how the market
would react to the product price. Therefore, businesses and companies may test various
pricing strategies before setting the final price of a new product.

Some companies may follow the cost-plus pricing strategy, which means adding up all
the fixed and variable costs and then adding a percentage of profit to it. Other businesses
may follow the return on investment strategy; it means that you decide how much return
you want on your investment. It doesn’t matter what the case is, companies should also
keep in mind the demand and market competition factors before pricing the new product.

Market demand vs. Pricing

It’s important to know the demand for your company’s product in the market before setting
the price. You should know whether people are sensitive to the price of your product. It
means that the demand for the product would be lower if the price is higher. If people
aren’t sensitive about the pricing of the product, it means that the high prices won’t affect
the product demand in the market. It usually happens with technical products. For
instance, the high prices of the latest model of the mobile phone won’t affect the product’s
demand in the market, because people are focused on the product and they care less
about the price.

Pricing Strategy for New Products

As we know that a product passes through different stages in its life cycle and its demand
changes at every stage. Therefore, the pricing strategy of the product changes at different
stages of the product’s life cycle with varying demands. The introductory stage is when
the product is new in the market.

Therefore, when companies launch a new product in the market, they face the challenge
that what type of pricing strategy they should follow, price skimming, or price penetration.
Let's discuss them in detail;

Price Skimming Strategy

A price skimming strategy is when a company launches a new product in the market, and
then it follows price skimming. It means charging high prices for the new product. The
purpose is to skim the maximum profit from the market layer by layer because the market
is willing to pay high prices. It also goes by the name of the market skimming pricing
strategy.

Companies follow the price skimming strategy to earn a maximum profit for the new
product. They lower the prices at the later stages of the product’s lifecycle. The sale of
the new product may be lower in the beginning, but the company earns maximum profit
because of the price skimming strategy.

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Example Price Skimming

When companies like Apple or Samsung plan to invent some new products or the latest
model of iPhone or Android, then they have to spend a lot of capital, manpower, and
resources on research and development. Therefore, such companies follow the price
skimming strategy because they have to cover the high expenses in the beginning.

That’s why the prices of the latest model of smartphones are higher in the beginning, and
only those people buy it who are interested in the latest model. A few months later, the
company drops the prices in the 2nd stage to attract more people. In the 3rd stage after
some time, the company drops the prices to target price-conscious customers.

You must have noticed these trends. That’s how smartphone companies skim profit layer
by layer at different stages of the product’s lifecycle.

The price skimming strategy may be suitable for some products, but it doesn’t work with
all the categories of products. Factors like the product’s quality, brand image, and
customers’ perception matter in some categories. When customers think that the price of
the product is matched with research and development cost, that’s they justify the price.

But in some other product categories where the cost of the product is lower, if you follow
the price skimming strategy, then it won’t be much advantageous. If competitors see your
product not working with the price skimming strategy, they would lower the prices to
damage your business.

Penetration Pricing Strategy

A price penetration strategy is when companies set prices lower for a new product. Price
penetration is the opposite of the price skimming strategy. Where you skim off the price,
the purpose is to make the new product penetrate the market.

Companies follow the price penetration strategy to win the market share of price-
conscious customers, but at the cost of low profitability. If the sale of the new product
increases because of the lower prices, it would make the company cut the prices more in
the future.

Example of Penetration Pricing Strategy

Many companies follow a price penetration strategy. Ikea, a Swedish Furniture Company
is one of them. It has lowered its product prices to penetrate the market. That’s how the
company has attracted the price-conscious market across the world.

Although Ikea is selling its furniture products at lower prices, that means lower profitability.
But the question is how the company is managing it. The answer to secrete is that less

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price increases the sale volume, and the company maintains its profitability with more
sales.

Price penetration strategy works in a certain market where you have to check factors like;
the customers in the target market must be price sensitive. It means when a
company/business lowers the prices, then it would attract a large number of customers
towards it. More customers would increase sales.

Price penetration is similar to the economies of scale concept. When you push the
competition out of the market by lowering the prices, it means more customers, more
sales, and fewer prices. Keep in mind that price penetration works only for a short time.

Price changes
Businesses and companies have to understand one thing they just can’t keep the price
changes (high or low) forever. The price-changing strategy can work only in the short
term. For instance, if a company follows the price skimming strategy in the long term, then
it would lose the majority of the customer market share. If a business adopts the price
penetration strategy for a long time, then the company would lose the profit and it would
lead to the company’s bankruptcy.

However, businesses should offer occasional price reductions and discounts to

customers to win customers' loyalty. Some businesses provide some offers to their
customers for the new product, where customers would have the opportunity to win cash
prizes in the future.

Conclusion
The product pricing strategy article tells us how different factors affect the pricing strategy
of the new product. Companies use a price skimming strategy to recover the research
and development cost, and they use a price penetration strategy to penetrate the market
and win market share.

Some companies ask the customers before finalizing the price of the new product. They
conduct a focus group and market research for this purpose, and they ask customers how
much they’re willing to pay for such a product. How much they value the product because
their perception is also important. When you have answers to such questions, then you
should follow the price strategy accordingly.

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Roel P. Dolaypan Jr., CPA, MDM

PRICING OBJECTIVES OF STATUS QUO
A firm has to decide how to price its goods to achieve its goal of making a profit. Pricing
depends on what sort of competition and market conditions the firm faces. In a market
that has several competitors producing a product that is not unique, such as the U.S.
cereal market, one common pricing strategy is status quo pricing.

a. Avoiding Price War

By setting a price that is in a similar range to that of its competitors, the firm that
goes in for status quo pricing aims to maintain the industry status quo. If the firm
prices its goods lower than its competitors, it faces the risk of starting a price war.
If other firms also decide to cut down their prices, a price war might ensue that will
likely not benefit anyone except the consumer.

b. Stable Profit
Another objective of status quo pricing is assuring steady profit from the sales of
the product. By not pricing above or below its competitors, the business gets a
steady stream of customers and is assured of a steady profit. This is likely, given
that competitors too opt for the same strategy and don’t upset the status quo by
lowering their prices.

c. Maintaining Pricing
Considering that the firm that engages in status quo pricing doesn’t have much
control in terms of setting its price, the way to achieve status quo pricing is to focus
on cost control. The firm focuses on controlling its costs of producing and
marketing the good to maintain its market price.

d. Changing Objective
A firm could change its pricing strategy as market conditions and its specific
situation change. Thus, if a firm opts for status quo pricing at a time when the
market is down, to survive a down market, it may decide to change its pricing
objectives later. As the market improves, the firm may decide to focus more on
maximizing its profits and change its pricing accordingly. Similarly, a new entrant
to an established market might opt for status quo pricing initially and change its
strategy later as it gets better established.

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5 KEY CONCEPTS FOR A SMART STARTUP PRICING STRATEGY
Building a company is no easy task. From creating a product to hiring the first employee,
there is a multitude of things an entrepreneur must do to get the company off the ground.

One of the things that often gets lost in the shuffle (and really shouldn’t) is the startup’s
pricing strategy. Too often the task of pricing is left to the very end of a product launch,
but entrepreneurs should take the time to build a thought-out pricing plan to achieve larger
goals for the company.

The result? For many startups, it’s going to market with an unachievable revenue model,
diluted value in the product and the company, and limited pricing capabilities to address
current and future market pressures.

So what can entrepreneurs do today to ensure value is not lost? Here are five essential
concepts you need to understand to start building your pricing strategy.

1. Know your product’s (pricing) value

Today’s entrepreneurs have been doing their homework and now understand that
pricing is a function of a product’s value. Yet when asked what value means, they
find that the question is much harder to answer than it appears. For most
entrepreneurs, it is easier to create value through products than to extract value
through pricing.

In the simplest terms, value in a pricing context is the benefits customers receive
through your product or service. This is not a feature or a price point, but the reason
why customers want to use your product. Even if this seems obvious, it’s often one
of the hardest exercises for startups because it is overlooked during the product
development and customer discovery stages.

The heart of a high-impact pricing strategy is identifying two drivers: what brings
customers to your product and what gets them to pay. While subtle, the distinction
is material—just because a customer is willing to use your product doesn’t mean
they’re willing to pay for the product. Get to the heart of your product’s value and
you’re one important step closer to building your pricing strategy.

2. Leverage insight powers of pricing

Many startups actively research the market, customers, and competition. This
research can be anything from collecting answers to short one-question surveys
to longer and more involved studies. While conducting this research, many
entrepreneurs ignore pricing as a signal, because they fail to realize how pricing,
and specifically the development of a pricing strategy can provide invaluable
insight to the customer and market.

Unlike other forms of research, pricing research is focused on understanding the

one thing customers are less willing to part with—money. When startups start to

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dive into pricing questions, new insights on product-market fit are generated that
would otherwise be difficult to determine.

For example, it may turn out that a killer feature all customers loved during product
testing may not be one that those same customers are willing to pay for. This raises
questions not only for pricing, but also for the product, sales, and marketing teams.
Should the company continue developing the feature? Will change the price level
change customers’ willingness to pay? How will sales and marketing fill the gap
between the current perception of value and the desired pricing?

These are difficult questions, but they can provide vital insight, not only into how a
product should be taken to market but also into the startup’s objectives and its
capability to successfully execute them. Failure to capture this insight into a pricing
strategy can lead to a rude awakening.

3. Pricing is a strategic and tactical weapon

There is often a ―set it and forget it‖ mentality when it comes to pricing, but the
best companies understand that a strong pricing strategy is a source of competitive
advantage.

With clearly defined objectives and planning, startups can use strategic and tactical
pricing to achieve larger goals. For example, Apple rarely discounts their prices,
and instead often offers discounts via iTunes gift cards. This is an intentional, well-
designed strategy. Strategically, Apple’s prices are purposefully positioned to
signal to customers and competitors that its products are premium-tier. This also
makes the price a non-negotiable factor, causing customers to evaluate other
factors to determine their willingness to pay.

Pricing is also a tactical tool to achieve measured and often short-term goals. One
example is the use of promotions to increase basket size (i.e. the number of items
purchased in a single transaction) or move unwanted inventory. In other situations,
a company can use pricing to unbundle products or features to increase the
perception of affordability. This tactic is commonly used, for example, by airlines.
Features such as baggage and food are unpacked from the overall offer to bring
the presented airfare price down and increase the likelihood of a sale.

4. Mindset for leaders and teams

One of the most important success factors in an effective pricing strategy is the
mindset of the company’s leaders. Company leaders set the vision for the
company’s pricing strategy, but also the development, execution, and maintenance
of pricing. This is a classic example of success starting from the top.

Whole Foods co-founder John Mackey brought organic foods into the American
mainstream and reshape how people viewed healthy eating and food sourcing. He
also introduced prices to reflect the value he saw in foods that delivered this value.

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While earning the store the cheeky nickname ―Whole Paycheck,‖ Whole Foods’
prices were both intentionally and purposefully high: they shaped the perception
of premium value, created a sense of uniqueness and practically, and helped to
drive profitability and growth. This pricing strategy started from the top, with
leadership setting the goals.

A purposeful pricing mindset isn’t found only in large corporations, but in startups
as well. The Information, a digital media company founded by Jessica Lessin, went
against digital media trends and put up a paywall to monetize the quality content
they were creating.

How much value did Lessin see in their product? No less than the Wall Street
Journal. The Information’s annual subscription is priced at $399 or 18% more than
a comparable digital-only WSJ subscription.

When pricing starts at the top, it sets the tone for the rest of the company. Leaders
guide their teams on what value means and how pricing decisions are made. For
startups where leaders don’t take up the pricing mantle, their product’s value is
diluted through poorer pricing decisions and impact opportunities to drive revenue
and profit growth.

5. Way to keep your light on

This is perhaps one of the most obvious essential pricing concepts, but the pricing
strategy should be designed to help the company grow financially, starting with not
losing money (for too long). Many companies disassociate pricing and financial
objectives, often to the detriment of the startup.

Startups need to understand that they are building a business and this means that
their revenue model needs to be built on better and stronger pricing. When prices
are misaligned with value and willingness to pay, the financial results for the
company often reflect that truth.

Building a pricing strategy also means identifying financial tradeoffs. For startups,
this can mean speed of growth, market penetration, and profitability. It is critical for
startups to assess desired short-term gains, but also the implications those
decisions have for sustainability beyond. Many startups end up discounting and
competing on lower prices for short-term gain, only to find themselves either
unable to retain customers or stuck with a broken revenue model.

Final thoughts
Startups are challenged by many things inside and outside their companies – from limited
resources to competitive pressures. Pricing is one area where startups have some power
to shape their destinies, but it requires a thoughtful strategy built on actionable insight
and leadership.

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It’s easy and common for startups to push pricing to the back burner, but before too long,
they find out that it’s too late. Make the effort today to understand the components and
work required to build a strong pricing strategy. It can create a well-earned advantage
many of your competitors will overlook.

Remember the last time you visited your favorite shop? Let’s relive those moments
together and see how you can relate that to e-commerce pricing.

You go into your favorite store, gazing through the stalls briefly, touching a couple of the
items for the feel and texture. Suddenly, you find your perfect match, grab it, and put it
over your body to see if it looks great on you. You love the item and the only thing standing
between you and the t-shirt is the price tag. You find it, flip it, and check how much the
item is worth.

Yikes!

It costs a lot. It’s not a bargain, so you give up and leave the shop feeling blue.

Sounds like ancient history, right?

Today we follow our favorite brands on Instagram, set eyes on a product, and locate
where it’s sold in seconds.

And we have too many options. Options that sell identical products at different prices.

Google’s consumer barometer below shows how much time is spent on a product before
a purchasing decision is made.

As you can see only 21% start their research moments before a purchase. The rest starts
from hours to more than months!

So how many products and prices do you think a consumer sees before landing on your
website and buying something? Hundreds to thousands.

To emphasize that even further, let’s look at some stats:

• The most important store features driving the purchasing decision (80%) is
competitive pricing.
• Around %90 of e-commerce shoppers are masters of hunting deals. Thanks to
technology and comparison shopping engines consumers get alerts for multiple
items from multiple stores.
• Price comparison engines are a key part of the e-commerce marketing stack, as
they constitute around % 20 of e-commerce traffic for all sorts of product
categories.

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Don’t get scared by these numbers. Here lies a great opportunity for gaining an advantage
and changing the direction the wind blows.

You see, e-commerce pricing can act as a high-traffic marketing tool and can influence
both comparison engines and conversion rates.

We’re taking a holistic approach to pricing strategies, so get ready to learn each pricing
strategy that might be the game-changer you’ve been looking for.

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E-COMMERCE PRICING

Cost-based pricing
This method requires the company to write down its unit product costs for each of its
products in its portfolio, and then set a target profit margin for each of those products. The
formula is below:

Direct Material + Direct Labor + Manufacturing Overhead x (1+Markup) = Price

Some common costs most e-commerce businesses have are:

• Your domain
• Your website hosting
• Your rent (if you have an office space)
• Sourcing products
• Storing your products in a warehouse
• Platform fees
• Shipping
• Returns and refunds
• Bank and processing fees
• Software
• Salaries
• Marketing budget

It may be too obvious but it’s shocking to see how so many e-commerce companies lose
track of their unit costs and fail to even apply this strategy.

Let’s take a look at the second part of the equation, where most of us get greedy, the
target profit margin.
The crucial task is coming up with the right profit margin that will maximize the profits
without scaring off the customers.

2 risks come with this approach.

1. Pricing is too cheap which will undervalue your products
2. Pricing too expensive and losing competitiveness

The reason why it carries such gruesome risks is that it ignores two major factors that
play an important role in the price/demand relationship:
• Competitor prices
• Consumers’ willingness to pay

For example, when you’re selling a diamond neckless, you know that the buyers don’t
care about low prices. So, a fatter profit margin could still hold valid.

However, the same approach would yield zero sales in the consumer electronics industry,
where the competition is harsh and the products are identical. There, the profit margins

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are slim, and the players with relatively expensive prices do not have much of a chance
in the market.

Rather than pursuing a cost-based approach to pricing, you must make sure that your
costs are calculated in every pricing strategy you pursue.

Market-based pricing
If you’re not a single player in the market you need to be aware of your competitors. There
are tons of active e-commerce companies in the industry, around 860,000 to be exact. As
part of this huge jungle, each company directly competes with at least 15-20 businesses.

That’s why online retailers can’t ignore the market competition. As we mentioned above,
consumers care heavily about the price and they compare prices all the time.

Pursuing a competitive pricing strategy doesn’t mean undercutting your competitors and
lowering your prices until your margins are paper-thin. It carries the risk of racing to the
bottom which is beneficial to no one.

The major and often neglected benefit of market-oriented pricing with solid competitive
pricing intelligence is that it sometimes grants companies exceptional price increase
opportunities, where you can increase profits while still holding a competitive edge.

Let’s take a look at this example. Below, three retailers are selling the same LE CREUSET
27cm Signature Oval Casserole, Marseille Blue.

The first one is the most competitive, selling at £171.08.

The second and the third ones sell the same item at £210.00.

In this scenario, the first retailer could detect that opportunity through a competitor's price
monitoring software and raise the price just below its competitors. They would increase
profit margins and still be the most competitive in the market.

Dynamic pricing
Dynamic pricing is a very profitable e-commerce pricing strategy in which marketers set
flexible prices by taking into account costs, targeted profit margins, the demand of the
market, and your competitors’ prices.

In other words, it allows you to set the optimal prices at the right time in response to real-
time demand and competition status while taking into account your business goals.

Market-oriented pricing can be put on auto-pilot with a dynamic pricing engine.

Having tons of data is great. But, the crucial thing is to convert data into actionable
insights.

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Fortunately, the dynamic pricing and repricing software collects competitor prices and
adjusts your prices immediately against any changes. Then, the technology lets you test
different price points through repricing rules that help you position your business wherever
you want.

If your business strategy is focused on selling in high volumes at cheap prices, then the
software does it. You can set rules like:
• My price should be the cheapest in the market
• My price should be 5% higher than the market average
• My price should be $50 lower than my cheapest competitor

The repricing engine works all day and your prices will be changed according to the
fluctuations in the market and, of course, based on the rules that you’ve set. As you’re
able to react to every single move in the market, your prices will always stay competitive
or optimized.

With the mix of competitive intelligence and repricing ability, your business can gain a
competitive edge in the market.

Consumer-based pricing
In every aspect of e-commerce, customer-centricity should come before anything else.
When pricing your products, you must be able to answer two questions:
• Who are my customers?
• What value do I bring to my customers?

The answer to both of these questions will bring a solid self-awareness to the e-commerce
company.

You must segment your audience. Define who’s likely to buy your products, and divide
them into groups to target each of them with the right products and prices. Use real-time
data and purchasing history to accurately identify customer segments.

After you finish segmenting, learn their willingness to pay (WTP) for your products. You
can conduct WTP research yourself, or get help from professionals.

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Bundle pricing
Product bundling is fairly simple. You sell a range of products together for a discounted
price.

For example, many products require accessories. Some are mandatory (like a lens cap
on a camera that usually comes with the camera), but some are highly desired, but
optional, like a tripod for a camera.

Bundling products of a similar nature is a great way to increase your average order value
because customers are likely to be looking for similar things. Someone buying a DSLR
camera is likely to be interested in a different lens or a tripod.

Penetration pricing
Penetration pricing is a marketing strategy where a business enters a new product market
with below-average prices.

Businesses also use this strategy when they’re highlighting a new product or service.

It works in a simple way, where they set their prices lower than competitors to lure
customers from competitors into their stores.

Price discrimination
Price discrimination is a tailored approach to e-commerce pricing where an identical item
is sold at different prices to different buyers. It works on three levels:
1. First degree: Consumers are charged the maximum they’d be willing to pay for any
given product. For example, auction or bidding sites, where one customer might
pay lots more for a similar item, based on what they’re willing to pay.
2. Second degree: Consumers can choose their price discrimination. For example,
they might be offered a lower price if they buy a product in a higher quantity.
3. Third degree: Products are priced differently based on customer segments.

In essence, it involves taking past and real-time customer data, segmenting customers
based on that data, and then generating prices specific to each segment.

Loss leader pricing

Loss leader pricing strategy involves setting a few products to be sold at a lower price –
a price that puts you at a loss –to get your customers through the door (or on your
website).

Loss leaders hope that once customers are on the website, they’re more likely to buy your
other (normally priced items).

An electric toothbrush is a great example of a loss-leader product. This electric toothbrush

costs £99.

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Roel P. Dolaypan Jr., CPA, MDM

Although we do not know the manufacturing costs, we can assume that they make most
of their profits on the replaceable toothbrush heads.

When you think about electric toothbrushes, you don’t tend to buy them often. And so
brands can afford to sell them at a loss because they know they’ll easily recoup their lost
profit costs from the accessories which need to be changed much more regularly for oral
hygiene.

So if you want to implement a loss leader strategy but you are worried, consider whether
you have any add-on products where people would need to come back to your store to
make a supplementary purchase.

Price skimming
In its simplest terms, e-commerce price skimming is the art of setting high prices for your
products during an introductory phase. What this means is that businesses can leverage
the ―newness‖ of their product and maximize their profits from the get-go.

What you need to remember about price skimming is there are consumers out there who
want to be the first ones to get hold of a product. They like the feeling of exclusivity.

If you want to implement price skimming, use phrases such as ―exclusive offer‖ or
―limited availability‖, ―to be the first to get your hands on‖ on your marketing copy to
make sure you highlight the urgency of the call.

Apple is one of the best examples of price skimming. During the run-up to a new iPhone
release, there are rumors before the announcement even happens.

Once it’s time for the actual announcement there has already been enough excitement
drummed up that increases the buyer’s appetite for a purchase.

You have seen the news, where wannabe iPhone owners would camp outside the store
to be one the first to get their hands on the newest model. Others would pre-pay for their
model weeks before they even get the phone.

Build your strategy

Pricing fails when it’s taken as a dull task within an e-commerce company. When taken
seriously and handled in smart ways, it turns into a secret and very effective marketing
tool.

The approaches that we shared here are not necessarily mutually exclusive. In other
words, you don’t have to choose one and forget the others. Contrarily, like most marketing
and growth strategies, they work best when integrated into a mixed strategy.

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Roel P. Dolaypan Jr., CPA, MDM

Define your business objectives, needs, and interests. Then, decide which of the
strategies above would work well with your objectives. Combine them into a unique
pricing strategy that’ll correspond to your needs.

Finally, pricing is not a static task, and it requires an ongoing effort to optimize and fine-
tune it as your e-commerce company grows. Like any other e-commerce operation that
you need to run, there will always be room for improvement and it’s not going to be an
easy task. But, fortunately, you have quite enthusiastic folks like us that look forward to
helping you out!

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