How To Optimize Your E-Commerce Pricing Strategy in 2022

Austin Beh

Product management director @ fabric. Previously product management @ Emaar, THE OUT, Emoov, and Groupon.

April 28, 2022
ecommerce-pricing
Summary
  • Companies must cope with today’s inflationary pressures by employing a fully-tailored pricing strategy.

  • Purpose-built e-commerce pricing engines solve for human errors and inefficiencies by replacing manual spreadsheets with best-in-class pricing functions and capabilities.

  • Dynamic pricing software consumes and analyzes various inputs to deliver accurate, real-time prices to customers.

  • fabric Offers is a high-performance application that provides flexible, easy to use tools to help simplify pricing and promotions for enterprise merchants.

Now more than ever, online businesses require a strong e-commerce pricing strategy powered by an intelligent pricing engine to deliver instant, exact, and optimized prices prices to their customers. With inflation wreaking havoc on companies and running at its highest levels since 1982, businesses are radically shifting their pricing strategies to get ahead of rising labor, input, and logistics costs.

According to U.S. Bureau of Labor Statistics, the Consumer Price Index (CPI) for All Urban Consumers recently soared to over 8.5% while core CPI (which excludes volatile food and energy prices) has also soared to over 6.4%. The chart below by The Federal Reserve Bank of St. Louis shows that the U.S. is dealing with the highest levels of inflation in 40 years:

With inflationary pressures impacting the economy, merchants are faced with many challenges to remain competitive whilst protecting their margins.

For example, how will they manage higher costs without passing them on to their shoppers? If they pass on the costs by raising prices, how will this impact sales? Are competitors doing the same? How price elastic is their product?

To cope with these issues, companies are increasingly turning to pricing technologies to help mitigate the impacts of inflation. But with so many different tools, resources, and strategies to choose from, how do companies develop an e-commerce pricing strategy that drives revenue today?

Why Your Business Needs a Tailored Pricing Strategy

According to Hubspot, a pricing strategy is a model or method used to establish the best price for a product or service. It helps businesses select prices to maximize profits and shareholder value while considering consumer and market demand.

But to be clear, there is no one size fits all e-commerce pricing model that applies to all businesses. Each individual operation has different traits and characteristics, which means that companies must experiment with various strategies to find what works best for them.

An optimized approach takes into account a company’s revenue goals, marketing objectives, target audience, brand positioning, and product attributes. It will also be influenced by external factors like consumer demand, competitor pricing, and overall market and economic trends. However, there is a fine balance between pricing products high enough to maximize returns but also low enough to attract buyers and meet customer expectations.

Start with the Right Action Plan

When it comes to pricing products and services, there are many types of e-commerce pricing strategies that fit different use cases. Several of the more common ones adopted by companies today are listed below.

Pricing Strategy Description
Dynamic pricing This is calculated by taking a dynamic and flexible approach, based on market demands.
Cost-plus pricing This is calculated by taking the costs of products and marking up a fixed percentage.
Competition-based pricing This is set with prices based on what competitors charge.
Value-based pricing This is set with prices based on the perceived or estimated value of a product or service.
Price skimming This is set with a high price at launch that later drops as consumers become more familiar with the product.
Penetration pricing This is set with an initial low price to enter a competitive market. Prices rise thereafter.

Once a company identifies the right plan that suits its specific needs, the pricing strategy needs to be implemented across all products and services. Some companies choose to hire a team that specializes in this field while others opt for a software solution like a pricing engine.

Benefits of Using a Pricing Engine for E-Commerce

Traditionally, enterprise businesses would rely on old-fashioned manpower to set prices for their products and services, which is a practice that continues to this day. Pricing specialists consider the cost basis for each product as well as competitors’ prices and then utilize spreadsheets to manually create price lists that are used across the organization.

However, this process is not scalable for enterprise businesses. Human errors and inefficiencies multiply as businesses grow, which draws resources away from important operations to deal with increasingly complex issues.

But intelligent pricing engines simplify this key function by allowing brands and retailers to set optimal sales prices while also streamlining the pricing process. In turn, this frees merchandising teams from manually researching competitors, which allows them to focus on other value-driving tasks.

Traditional vs. modern pricing software

With traditional e-commerce platforms, pricing software is built into the backend. However, the efficiency with which you can change prices at scale is limited. You are also limited by how much flexibility you have for setting unique price points for different customer segments and sales channels.

In contrast, decoupling the pricing function from a traditional e-commerce platform can solve these issues while bringing additional benefits to a business. Some of today’s most powerful and versatile third-party pricing software is API-based engines that can be easily called by any integrating application. They are also packed with industry-leading features and capabilities that are built for a variety of enterprise use cases.

For example, some pricing engines use AI and machine learning to evaluate multiple factors including order history, price elasticity, and inventory levels. This data can come from spreadsheets or other software like an enterprise resource planning (ERP) system or product information manager (PIM).

These insights help businesses understand how different customer segments react to different price points. Leveraging this data, merchandisers can schedule prices in advance to align with marketing campaigns.

Manage omnichannel

Pricing engines also give you a solution to set and manage prices across all your sales channels. Whether it’s in-store, desktop, or mobile app, prices will remain consistent and accurate at all times, and changes are updated for each touchpoint in real-time. More importantly, if you want to offer different prices on a particular channel, modern pricing software allows you to do so without impacting the prices of other channels.

Custom pricing for B2B sellers

Pricing flexibility is a big part of B2B commerce. Companies rarely stick to a static price for all their customers. Each deal is unique and buyers and sellers often negotiate custom contract pricing. With a pricing engine, you can easily create customer segments to define the prices a B2B buyer sees on your e-commerce portal.

Relevant promotions

In addition to setting prices, pricing engines can assist you in optimizing your promotional offers. Modern intelligent software can leverage data it uses for prices to present the right promotion to the right customer segment at the right time. Merchants can not only increase conversions and boost sales, but they can also minimize losses that can arise from excessive discounting.

Dynamic Pricing: A Modern E-Commerce Strategy

As mentioned, dynamic pricing is a strategy that sets flexible prices for products or services based on current market demands. Dynamic pricing software allows companies to automatically harvest a large number of inputs to generate prices. These inputs can come from scraping competitors, demand prediction, or a collection of customer data.

Software allows dynamic pricing to be properly executed by consuming various inputs and adjusting prices in real-time. Let’s examine a few approaches you can take to price your products dynamically today.

Competitor-based dynamic pricing

Businesses can monitor competitor prices and immediately adjust prices based on any changes. You can set different repricing rules to position your products where you want.

For example, some companies that always want to have the lowest prices will set their dynamic pricing to undercut the competition. Others may retain a sizable margin when their product is in high demand and reduce it when consumer behavior changes remain competitive.

Dynamic pricing by customer segment

Another effective way to use dynamic pricing is to set unique prices for different customer segments. Companies can define customer segments using criteria such as location, demographics, device type, purchase history, and more.

With machine learning algorithms, you can easily test different prices for different groups to discover insights into consumers’ willingness to pay at different price levels.

Optimize Pricing with fabric Offers

Despite the benefits of strategies like dynamic pricing, many companies struggle to implement them effectively. Larger businesses with multiple pricing lists suffer from complex pricing operations. It is particularly prevalent in B2B commerce, where individuals negotiate price conditions. However, the right e-commerce tools allow businesses to automate much of this process, saving valuable time and reducing the amount of overhead required.

A dynamic, high-performance pricing and promotions engine like fabric Offers gives merchants the ability to optimize pricing across all products and services. For example, merchants can create and manage price lists, offer bundles and volume discounts, support attribute-based pricing, and manage contract pricing, to name a few. Businesses can also build and stack coupons and pre-schedule promotions to align with campaigns, giving companies the flexibility and versatility they require today.

fabric Offers integrates seamlessly with your CRM and other data sources, allowing you to create highly personalized offers for your customers. You can set a unified omnichannel pricing strategy or choose to leverage a different pricing strategy for each channel. No matter what pricing approach you follow, the ability to quickly apply your strategy across products will ensure you reach your business objectives.

Austin Beh author Product management director @ fabric. Previously product management @ Emaar, THE OUT, Emoov, and Groupon.

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