Importance of Pricing Methods in the Online Marketplace

To stay competitive in markets with rising volumes and price pressure, the right pricing strategy is critical. It covers the expense of the services and goods you offer, as well as the earnings you need to invest in the business’s future growth and development.

Pricing for earnings: An easy formulation

Pricing optimization is crucial to achieving profitable growth. A 5% rise in pricing without sacrificing volume or average margins will easily raise profits by 30% to 50%. You might already have a cost-cutting plan in place to increase profits. However, no matter how heavily you invest in increasing volumes and reducing prices, you can only go so far, and intensive efforts often exhaust all capacity. So, where do you go from here? Let us begin by breaking profit down into a simple formula with three drivers:

Pricing is also the easiest and least-appreciated way to increase earnings.

Customers regularly perceive an optimal value price point, and the only way to discover it is through a scientific and quantified process. It all comes down to the difference between what a customer is willing to pay and what you actually get.

Price can be the most powerful profit lever, but it can also be the most dangerous profit destroyer. Where does pricing go wrong in everyday practise, and what should you do to fix it? Here are our top five solutions for avoiding the most common pricing pitfalls.

Know your value

Instead of considering value-to-customer, ineffective businesses often use a traditionally grown or cost-plus pricing model, communicating and selling too heavily on price. These businesses waste significant sums of money because they are unaware of the price they deserve for their goods and services. What is the solution? Adhere to a value pricing strategy! Understand and measure the value you provide, and where possible, charge for the “extras” you provide or unbundle them from the product.

Separate your costs and offering

Another big stumbling block is one-size-fits-all pricing. Offering a product at a single price point removes a competitive advantage and can turn away some of your interested consumers by putting these items out of their reach. Instead, businesses can segment consumers based on their behaviour and desires, and then have a differentiated product and pricing. Which customer should be charged what amount? Who should pay more? For what? And why? Remove unimportant elements to produce a low-cost commodity, and then enrich it with useful elements for demanding customers. Use psychological pricing aspects to create a well-differentiated offering and set the appropriate price levels in your product portfolio.

Keep away from and diffuse value wars

The price transparency makes the market more appealing to price-aggressive sellers, and everyone blames the “others” for targeting them and starting a price war. Price wars are extremely powerful profit killers in which no one really succeeds. They can gain you some market share in the short term, but they will cost you a lot of money in the long run.

Sometimes, what is needed is a more peaceful approach toward your rivals and a more aggressive approach toward your customers! Take back control of the market rebates and discounts. Rather than closing the deal at any expense, guide the sales team toward healthy price levels. Wherever possible, avoid price cuts, and be mindful of your market positioning. Every market has a high and low end, and there is always someone who can do it for less.

Check your virtual status

Your company’s digital transformation programs can finally result in improved sales and profits. Checking the digital readiness of your service delivery and pricing is critical here. In most sectors, there will be major changes. Lower development times, lower marginal costs, more segment/customer-specific solutions, and higher economies of scale are all advantages.

On the pricing side, you’ll face increased transparency, competitive pricing, low price competition, and completely new pricing metrics, among other things. Don’t make it an infrastructure or IT exercise; instead, see whether and how the digital transformation activities result in improved offerings or pricing. Prepare to monetize the digital solutions in a way that varies from what you’ve done in the past!

Make pricing an initiative task

Pricing is a continuous operation, not a one-time project. It all begins with deciding the best pricing strategy, then setting the correct price, and eventually putting it into action. Also the strongest pricing tactics, however, would fail in the absence of good leadership and enforcement: Make pricing a frequent subject of discussion in the boardroom! Yes, you can determine the value of your commodity, but it is much more difficult to ensure that your salespeople defend that value, particularly if they have always set prices based on gut instinct for decades. Internal incentives must be updated, goals must be tracked and regulated, and roles and responsibilities must be redefined. Pricing can be a very emotional topic, and it needs strong leadership and coordination from the top.

What reference points are your shoppers utilizing when they are interested in buying your products? How do these reference points influence their receptivity and willingness to pay for your offering? What was their experience like when they used your product?

After you’ve generated information about your target customers’ backgrounds and reference points, you’ll want to look at how you can apply these insights to other areas of your marketing strategy. In some cases, it will be clear how to capitalize on the observations, but in others, you will need to extend those little grey cells.

Supply and demand

The basic economic laws come into action at this highest stage of price control. Changes in supply (plant closures, new competitors), demand (demographic shifts, emerging alternative products), and costs (new technologies) all have a real impact on industry price levels.

Managers analyzing pricing in this context should consider the pricing “tone” of their markets, i.e. the overall direction of pricing pressures (up or down) and the essential marketplace variables fueling that pressure. This awareness enables managers to not only forecast and capitalize on broad price patterns, but also to anticipate the possible effect of their decisions on industry price levels.

Product marketplace approach

The key issue here is how consumers view the advantages of different goods and related services from various suppliers. If a product provides more profit (value) to consumers, the company may typically charge a higher price than rivals.

The key is to understand which aspects of the product and service package customers consider essential, how you and your rivals compare to those aspects, and how much customers are willing to pay for additional benefits. Market analysis tools can assist you in understanding consumers’ perceptions of benefits.

The critical problem at this stage of price control is how to handle the exact price charged with each purchase – that is, what base price to use and what conditions, discounts, exemptions, rebates, rewards, and bonuses to apply. Whereas other levels of price control are more concerned with the large, strategic positioning of goods in the marketplace, the focus at the transaction level is microscopic, customer by customer, transaction by transaction, deal by deal.

Review/update prices frequently

When did you last update your costs – a year or five years ago? This could be devastating for your online business. Maybe your line of reasoning is that if things are going along easily, then what is the reason to cause disruption with a price change?

However, have you considered rising costs and inflation? At the very least, you can review your rates once a year. There are many reasons for you to review/increase your rates on a more frequent basis, but perhaps the most compelling reason is that a 1% increase can have a significant effect on your bottom line. This will raise the company’s net income by 12% on average. You’ll probably be shocked by how little it bothers most customers/clients.

Check to see if your prices are always the lowest

If you are under the impression that if your products are priced lower than every one of your competition, you will get more customers, more volumes, and more business then you are sadly mistaken. If you are working on the assumption that extra volume implies you will get extra money, this may not always be the case. This pricing technique possibly works in case if you’re selling the very same product as your competitors.

However, today’s savvy shoppers have a tendency to be skeptical, and the more inexpensive something is, the more suspicious they may be. Obviously, affordability is important, but buyers also want value. Rather than comparing your substantially lower prices to those of your rivals, explain why your prices are lower. What does your brand do differently that helps you to deliver high-quality goods at a low cost?

Check to see if you are pricing too high?

Setting rates that are too high without taking into account target customers or what they value is a recipe for disaster.

When businesses overprice their goods, they will make sizable profits on each sale. Consumers, on the other hand, are acutely conscious of the value they get for their money, and if they believe that goods are overpriced, they may stop purchasing. Consumers have long memories and will be unwilling to re-trust your business.

Benchmark your business

Business owners often have a tendency to consider what a product has to be worth, not what it really is worth.

It’s critical to research the whole market, but it’s much more important to look at what prices products sell for in your local region. Examine your rivals’ models and see how they relate to yours.

What are your rivals’ sales volumes? Is there a reason why their product sells for what it does? This is known as benchmarking, and a surprising number of small companies struggle to use this technique.

To efficiently manage day-to-day pricing decisions, your company should define the necessary processes and policies. If you can revise your pricing plan by implementing the suggestions above, you’ll be well on your way to unlocking your company’s untapped profit potential. All else being equal, a good product and accurate pricing can result in a healthy profit. If you want to know more about pricing modules for your online marketplace platform, feel free to contact us.