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E-commerce accounting: How to choose the right pricing strategy for your business

Laura Tien November 03, 2023
Article E-Commerce

A major part of making sure your financial statements come back positive after the quarter ends is making sure your pricing strategy is right for your e-commerce business. Of course, there’s no one size fits all for every product or store. Hence, it’s important that you take the time to understand your unique business.

Your pricing decisions can take into account a range of factors such as COGS, competitors, market forces and more. We’ll take you through exactly what you need to know before deciding on a pricing strategy. That way, you can better decide on what strategy works for you. At the end, we’ll share five of the most common pricing strategies for e-commerce businesses.

Why e-commerce businesses can’t ignore pricing strategy

A lot of the resources that exist for e-commerce businesses focus solely on customer acquisition, marketing, cart abandonment, etc. In reality, what will make or break a sale for lots of customers comes down to pricing. You can have everything else going for your business but if the price doesn’t satisfy your potential customers, your success is in jeopardy.

The price you set for your products will impact all other metrics, whether that be revenue, conversion rates, return on ads spend or customers acquired. Not only can pricing too high be an issue, many e-commerce businesses fall into the trap of pricing too low. Finding that balance is vital to boosting sales, appealing to the right people and maintaining profitable margins.

Pricing for profitability vs. market share vs. branding

Before we get started, it’s important to understand the nuances of pricing for profitability compared to pricing for market share or branding. It’s likely that all three factors will be important for you. This means that you have to be able to prioritise and figure out how much of an impact each factor makes.

Looking at profitability alone isn’t enough. You need to consider what your competitors are doing and where you want to sit compared to them. If you’re looking to dramatically increase market share, that may mean you’ll have to sacrifice profit margins.

However, increasing your market share could actually increase profit margins depending on how you want your brand to be perceived. Potentially, making your prices higher and creating a more luxury or high-quality brand could be the thing that increases your market share. Take the time to consider how these different factors affect your business.

Know who your target market is and what their traits are

A huge part of knowing how profitability, market share and branding will affect your pricing is knowing exactly who your target market is. A lot of e-commerce businesses fail to spend enough time figuring out the traits of their ideal customer. Most of the time, an extremely broad target market just doesn’t work.

Consider what type of person would want your product and how much they’d want to spend. If you don’t already have a lot of customer data to help you create this profile, you’ll have to do external research and even conduct your own market research. Though a more specific target market might limit your reach, it allows you to better adjust your strategies.

Know what makes your e-commerce products unique

In order to set the right price for your products, you need to know what unique selling propositions (USPs) will justify a higher or lower price. Your USPs can be relevant to the individual product as well as to your brand overall. These make your business stand out from competitors.

For example, your product could be made from high-quality materials or customised to each user. In terms of your brand, you might be carbon neutral or endorsed by influential people. In fact, your pricing itself could be a USP. See how your USPs stack up against competitors and see where you stand.

Five e-commerce pricing strategies to consider

Now that we’ve gone through everything that should impact your prices, let’s start deciding on some numbers. These pricing strategies all take into account a different mix of the factors we’ve mentioned so far. Just like in marketing, you don’t have to stick with just one strategy. In fact, it’s probably better for you to mix and match.

  • Cost-based pricing: Basic strategy involving taking all the costs involved and multiplying it by a certain markup. Though it ensures profit, it doesn’t take into consideration competitors and perceived value.
  • Market-based pricing: Takes into account how your competitor pricing. You might end up pricing your products lower, matched or higher depending on your goals. Unfortunately, considering competitors without considering customers might not make for a strong benchmark.
  • Value-based pricing: Involves deciding how much a customer would be willing to pay. Focuses on fairness and perceived value rather than on competitors or cost. However, it can be difficult to calculate this value.
  • Loss leader pricing: Involves selling a certain number of products at or below their cost. Often, the goal is to encourage customers to purchase other items that are more profitable or to initially acquire more customers.
  • Premium pricing: Setting prices higher to create a sense of luxury or quality. Your branding has to match the pricing when using this pricing strategy. It could lead to low conversion rates if done incorrectly.

    • Key takeaways on pricing strategies for e-commerce

    What you decide for each product should factor in margins, competitors, target market and USPs. Pricing might take some trial and error but the earlier you have your strategies sorted, the better. Plus, don’t forget, your business and the market will evolve over time and it’s important that your pricing strategies evolve alongside these.

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