Pricing strategies for retailers and manufacturers – find the one for you and increase profits
What’s the core of every business? Maybe a product or marketing campaigns that will boost your sales and attract a new audience? Well, of course, they have a great impact on your results, yet one of the crucial business elements is pricing.
As commerce along with the e-commerce industry has become an extremely competitive landscape, effective pricing can help you to win the market and outstand from your competitors. Therefore, in this article, we’d like to fully explain the whole mystery of pricing, from price modeling to price strategies for both, retailers and manufacturers. And why you should always track your prices. Ready? Let’s start!
The importance of price modeling
Perhaps you’ve heard a lot about pricing strategies and how significant they are for the profitability of your business. And that’s all true. Nevertheless, before you decide to implement efficient pricing strategies, you should consider proper price modeling first.
Simply put, price modeling regards considering all of the factors that determine your business such as:
- type of a product
- production cost
- customers’ perception of your items’ value.
You can juggle between strategies over time, but when it comes to price modeling – you should stick to one that will bring you the highest revenue. There are three main areas you need to focus on when choosing the best pricing model for you:
- Your current position on the market.
- Your customers
- Your costs.
Are your product are considered low-price, luxury, or somewhere in the middle?
The choice of a specific price position has an impact on the availability of the products of a specific brand in e-commerce and expectations towards the company’s distributors. Online shops should know what is the price positioning of each manufacturer.
In the case of products with luxury price positioning, finding information about their prices in e-commerce is really difficult, and the distributors are chosen very carefully. For example, Rolls-Royce cars could only be bought in four cities in Germany. When you sell luxury products, customer experience in physical stores is extremely important, and that is why up till now, online sales of luxury goods were very limited. Although the situation is slowly changing, it is still difficult to find luxury products in online shops as manufacturers cannot risk price erosion.
If you can find a lot of product offers in e-commerce, this usually means that it has medium, low, or ultra-low price positioning. Usually, their distribution is much broader, and online shops compete with each other by price. It is especially the distributors of such products who should think about competitor price monitoring, as these markets are usually more dynamic. This means that the systematization of this process is necessary to always be up to date.
Consumer value & pricing modeling
Do you know your buyer persona? What is their demographic, age, and interest? What are their values? These inconspicuous questions may have a huge impact on your sales results.
Thanks to determining your potential customers you will be also able to anticipate what price changes they are going to tolerate, what kind of buying experience they expect, and which client service approach to take.
Costs-focused pricing modeling
This seems to be a very basic approach, yet it doesn’t mean unimportant. Though your market positioning and customer values are still significant, you cannot think about running a business without profitability. Therefore, it’s essential to know your costs. Nevertheless, when talking about prices, you should be ready to cover not only current expenses but also prepare yourself for possible cost changes in the future.
5 Types of Price Modeling
There are various price modeling you can employ in your business. However, the list of the most popular ones includes:
- Cost-plus pricing – as simple as it says, cost-plus pricing means that to get the final price, you need to add all the costs + also your preferred margin. This modeling works best with beginning businesses.
- Value-based pricing – if you are commonly recognized in the market, or your goal is to create a luxury brand, this price modeling is for you. The real cost of the product doesn’t matter but what matters is how much your customers are willing to pay. Value-based pricing also strongly relies on non-market experience.
- Hourly pricing – for those who offer services, the hourly pricing model is worth considering. You simply set an hourly rate that you charge your clients.
- Fixed pricing – another, yet more advanced solution for service companies is fixed pricing. In this case, you charge customers a fixed price for the entire service, regardless of time and expenses spent. Fixed pricing works best with clients who need to precisely plan their budgets.
- Performance-based pricing – here the results you deliver matter the most. In other words, the client pays you for the value your service or product adds to their business. It may be sales, conversion, or website traffic increase.
As you can see, there are a few most popular models you can come across when running a business. Therefore, before employing your pricing strategy, ponder where you want your company to be in a couple of years, and think through your entire business idea.
Now, there is a time to choose the best strategy. Are you ready? Let’s go!
10 Best Pricing Strategies – ideas for retailers
As we mentioned before, the main difference between pricing modeling and pricing strategies is that whereas the first one refers to your business model in general and shouldn’t be changed with time, the second one can be swapped freely.
Check the diagram below to see what pricing strategies look like in a nutshell.
If you look for details, check some elaborated descriptions below.
Penetration Strategy – popular when entering a new market
A penetration strategy is when you intensify sales thanks to setting lower prices. The aim of this strategy is to gain the biggest possible share of the market. It is particularly popular when launching a new product. This is when manufacturers sometimes decide to set low prices. One of the biggest advantages of this pricing strategy is the rapid increase in market share after setting affordable prices in comparison to the competition.
A perfect example of the penetration strategy was the entry of Huawei products into the European market. The company gained a big market share by offering relatively low prices and good quality at the same time.
Skimming is a pricing strategy sometimes also referred to as creaming. A product is launched at a high price and is dedicated to customers with low price sensitivity. The customers are usually well-off, and they want to get the new product as quickly as possible. After some time, the price of the product decreases, and it becomes available to customers who are more sensitive to prices.
The most popular example of such a manufacturer is Apple. We recommend reading our article: How does Apple use being a luxury brand? to see how the skimming strategy works in practice.
Low Pricing Strategy
This strategy is most often used in markets with highly competitive products or products that are easy to substitute. The low pricing strategy is characterized by setting low-profit margins in favor of increasing sales volumes.
The high pricing strategy is another interesting strategy that is often adopted when introducing a luxury product into the market. The product is launched as an exclusive good. It is presented as a top-quality item that is highly desired and adds prestige to the buyer. Only wealthy people can afford it. The launch of the product is preceded by extensive marketing activities.
The best examples are clothing and fashion products that belong to world-famous fashion designers. The premium pricing strategy is very often adopted in the automotive industry, by brands such as Mercedes, BMW, or Audi. This strategy is also popular in the segment of jewelry and accessories. It has also been used by the IT industry.
Cost-based Pricing Strategy
This strategy will work perfectly with beginners. Cost-based pricing focuses more on the sellers’ side than on the consumers’. You just take the product’s production cost, add your margin, and … done.
So let’s say you are selling an item that costs you $20. Then you add expenses on your side: hosting & platform fees, packaging, and shipping – $10 in total. However, you’d also like to make a $5 profit on every purchase. Therefore, the total amount your client needs to pay equals $35.
This strategy doesn’t require any advanced knowledge and is pretty easy to use. Nevertheless, as you don’t take your clients’ pricing preferences into consideration, the price you offer not always will be the one the buyers are willing to pay.
Companies examples: Ryanair and Walmart.
In this strategy scenario, the crucial reference is your competitor. Thus, before employing a competitor-based pricing strategy you need to do some research first. And that’s the tricky part. First of all, when it comes to the e-commerce industry, the competition is extremely fierce. So you need to prepare wisely. Instead of analyzing the market manually, use a competitor monitoring software, e.g. Dealavo.
Your next step is to identify your biggest competitors and review their prices.
However, remember that being the cheapest is not always the best choice. Many begging retailers set the cheapest prices to become competitive and attract customers, but at the same time, they forget about controlling the margin. Hence, as a result, your offer may be the cheapest, but it doesn’t mean you will gain any satisfying profit.
Are you interested in boosting your e-commerce sales? If yes, try a Bundle Pricing strategy. The goal is to create multiple sales by offering a bunch of related products at a lower price instead of one. Thanks to this approach you can also increase your average order value, also known as AOV.
Bundle Pricing is a win-win solution for both: retailers and buyers. Your e-store sells more and consequently makes a bigger profit. On the other hand – your client doesn’t need to cover multiple shipping costs and receive a few items at a reduced price.
Dynamic Pricing Strategy
For many e-sellers time is money, and by “time” we mean “seconds”. While buying online what matters the most is the price – customers usually use price comparison websites to choose the cheapest retailer. In that case, even a few cents may make a difference and bring a profit or a loss.
That’s where Dynamic Pricing may come in handy. The core of this strategy is to react immediately to market fluctuations and adjust the prices accordingly. Thus, retailers can keep their profit and stay competitive regardless of the changes. However, the Dynamic Pricing strategy works only when it’s fully automated. Otherwise, it may turn out to be not only time-consuming but also error-prone and unreliable.
Therefore, when looking for competitive pricing software, choose those with a Dynamic Pricing feature.
Value-based Pricing Strategy
Have you ever wondered why people can pay a fortune just for a scarf, a phone, or a car? It’s not because of its exceptional functionalities (well… maybe sometimes it is). What matters the most is the non-market value the product gives. This pricing strategy is extensively used in the fashion and luxury commodities industry. If your brand is strong, creates a sense of belonging to a particular community, or just fulfills your clients’ craving for an unexceptional experience, you don’t need to worry about the economics or even your competitors. The value of your product is much beyond its actual market price. Great examples are Louis Vuitton, Apple, and Starbucks.
Loss leader pricing is usually based on one particular product that’s referred to as a loss leader. This product has but one purpose – to attract as many potential customers as possible. Companies using loss leaders don’t make any money on selling them. Frequently these products even generate loss! How is that profitable? When the loss leader does its job correctly, customers order more products that are no longer so affordable. This way, the store can make up for this loss generated by the loss leader with other products in their offer.
Thanks to loss-leader pricing, of course, you can drive more traffic to your store but in practice, this strategy may appear a bit risky. It’s not a secret that buyers look for the cheapest offer on the product they want to purchase. Therefore, many platforms, e.g. Google Shopping, provide facilitations to bargain hunters, to make the searching easier and faster. As a consequence, it may turn out that the only item customers buy from you is nothing else but your loss leader.
Last but not least – in some countries, such practices are recognized as illegal.
5 most popular manufacturing strategies that will save your money
But if you are not a retailer, but a manufacturer looking for some best pricing strategies for production. Well, there are some similarities, especially when it comes to price modeling. Let us also share some other pricing & manufacturing strategies you may find useful.
This strategy focuses on chasing market demands. Therefore, manufacturers produce specific items when needed only. During high market demand, the production level is exalted, whereas when customers’ interest drops – the production level decreases as well. Good examples are seasonal or perishable products, e.g. Christmas-related items or Chinese moon cakes.
Chase Strategy helps to save money by lowering inventory costs. Moreover, it enables reducing product waste to a minimum.
As the products are not easily available during the off-season, price differences may be significant.
If your industry is pretty stable and allows you to anticipate market demand, this strategy is for you. Make-to-stock approach assumes that produced items will be sold in a particular period of time due to high customer interest. Until then, products are kept in warehouses and wait their turn. This market strategy is popular among manufacturers offering mass-product items, such as food or clothes. The unquestionable advantage of using a make-to-stock strategy is short delivery time. However, the industry you work in must be predictable and reliable. Otherwise, you may put yourself at risk of financial loss.
If you manufacture items for niche industries, you should consider employing a make-to-stock strategy. According to this approach, a manufacturer produces the item after the order has been placed. It’s commonly used when selling highly customizable products, e.g. print-on-demand items or craft commodities. Make-to-stock strategy allows producers to cut unnecessary spending, though it also extends shipping time. Also, due to vast product variability, the prices of individual items may differ a lot.
This method is a combination of make-to-stock and make-to-order strategies. It assumes that manufacturers hold all of the components necessary to make a certain product in their inventory, but they make the item after the purchase. Assemble-to-order works best with computers & furniture industry.
The level production strategy resembles the make-to-stock method, but in this case scenario, the market demand is not only easy to anticipate but cyclic. Thus, manufacturers make even numbers of product weekly, monthly, or annually regardless of customer interest or other market factors. It also ensures a fixed product price with no rapid price fluctuations.
The value of MAP/MSRP tracking for brands and manufacturers
No matter which approach you use as a brand or producer, it’s extremely important to track retailers’ prices. Employing MAP/MSRP policy & tracking carries a range of benefits, including:
- Promoting fair competition across all distribution channels.
As the manufacturer, you can reach every potential customer through your small and large resellers. They are both valuable. So you should care to promote fair competition across all distribution channels and to allow smaller sellers to compete with larger retailers.
- Maintaining brand identity and value
Consistency is what consumer expects from the brands and MAP policy is the key to consistency in pricing. Establishing a minimum price for your products to be advertised, will help you maintain your brand identity and value across your entire channel. It is a great way to maintain price integrity, which is a perfect sign of being a trust-builder among customers.
- Preventing underpricing
To attract the consumer, resellers can choose to lower the prices rather than enhance their marketing, their shopping experience, or their customer service. It is easy to make advertising with a super low price on it. But, MAP helps you prevent underpricing among your resellers, and make them change their vision. By using an intelligent MAP monitoring platform, you’ll be able to detect violators easily and review relationships with retailers.
- Attracting new retailers to your products
A successful application of MAP means that you are serious about maintaining the integrity of your brand and supporting resellers while they are selling your products. As we have already mentioned, consistency makes them trust you and want to sell your products.
Proven tools for price strategy implementation in e-commerce
Developing an effective pricing strategy is possible only after gathering adequate data. If you want to adopt an appropriate pricing strategy for your products, you should first conduct market research, get to know your customers’ needs, and obtain useful information about the competition. Dealavo provides a modern online tool for monitoring the offering and pricing strategy of your competition.
Tools for price and promotion monitoring are useful for manufacturers who want to check if their prices on the market are consistent with their positioning. Thanks to the transparent panel, they can immediately notice any deviations from the suggested prices.
What is more, it is also a useful tool for online shops, which can use price monitoring to see if their offering is competitive in comparison to other players.
To test all the features of the Dealavo system, request a demo of the product.
Competent pricing may be hard to implement, First of all, you have to consider a proper business approach and price modeling. Defining your brand should be the very first step before thinking of implementing a possible price strategy.
Then, the pricing game begins! There is no one perfect strategy for your e-store or any other type of business. The real art of employing pricing strategies lies down in its freedom. However, some serious math should be done as well. When choosing pricing strategies what really matters are your results. Therefore, always keep track of your numbers.
But there is one more thing that comes next – what price to set? You can guess, you can do manual market research, but nothing works as well as price tracking tools. That’s why you certainly should consider having one.
Which one to choose? Well, there are plenty of them. However, we highly recommend you try Dealavo.
With our price monitoring tool you will be able to:
- identify and monitor your biggest competitors, both online & offline,
- use the Dynamic Pricing feature to adjust your price to market conditions according to the rules you set,
- track MAP/MSRP validation whenever you want to verify your distributors,
- monitor prices and promotions on every website or marketplace worldwide, including Amazon, Google Shopping or Idealo
- and much more.
Contact us to get a free demo and start tracking prices today!