“Pricing is actually pretty simple…customers will not pay literally a penny more than the true value of the product.” This famous quote comes from Ron Johnson, the great mind behind Apple Retail Stores and the Genius Bar, but is your Shopify pricing strategy as simple as Ron suggests?
This week, we’re looking at Shopify pricing strategies and the different pricing calculations you can use to drive profits while attracting customers. Let’s get started.
The importance of a Shopify pricing strategy
A Shopify pricing strategy is the calculation you use to set the retail price of your products on your website. Shopify sellers are free from marketplace guidelines and buy box competition, but you’ll still need to make a profit while attracting and retaining customers: a significant balancing act.
If your prices aren’t comparable with your competition, potential customers simply won’t convert. If your prices don’t allow you to offer the same value as online marketplaces, such as free shipping, existing customers will head elsewhere. And, if your prices don’t allow you to make a profit, your business will fail. In other words, your Shopify store prices are a lot more important than you think.
Before you start
Before jumping straight into the pricing strategy that you might want to adopt, you first need to consider the pricing strategy that you can afford to adopt. Take time to calculate the following to work out the minimum price you need to charge to make a profit.
1. Your product costs
Your product costs include how much your products cost to acquire, including supplier fees, freight forwarding cost, and shipping charges.
2. Your Shopify costs
Your Shopify costs include your monthly store fee, payment rates, developer fees, and any Shopify plugins or integrations that you pay for.
3. Your fulfillment costs
Your fulfillment costs include packaging, warehouse rent, staffing, shipping, insurance, security, and third-party fulfillment partner costs.
Pro tip: use our handy fulfillment calculator to see if you can reduce this figure.
4. Your business costs
Your business costs include everything else involved in running your online store such as domain name, marketing, staff, rent, and software costs.
If a pricing strategy doesn’t reach your minimum profit threshold, then either your strategy or your costs need to change.
Examples of Shopify pricing strategies
So, how do you pick a Shopify pricing strategy? We’ve narrowed down hundreds of Shopify pricing strategies, along with the benefits and considerations, to our top 10 – starting with the most profit-generating strategy and ending with the least.
1. Premium pricing
A premium pricing strategy involves pricing your product above your competitors’ and is often used by brands marketing themselves as more prestigious, exclusive, or luxurious.
For example, coffee fans may pay more at independent coffee shops than at Walmart. It’s a risky strategy to adopt, but, when done right it can result in significant profits.
Advantages: Higher profit margins and premium branding that attracts bigger spenders.
Disadvantages: The potential to outprice your audience and drive customers to your competitors.
2. Keystone pricing
Keystone pricing is a common retail pricing strategy and is simply doubling the wholesale cost of your product. The use of a keystone pricing strategy is largely dictated by the type of product you sell and is best used with a dash of common sense and armed with your customer personas.
For example, doubling the price of a $0.25 notepad would be too little, but doubling the price of a $5,000 armchair may be too much.
Advantages: Quick and easy to implement across all of your product ranges.
Disadvantages: It can easily result in under or overpriced items.
3. Retail pricing
Retail pricing involves using a consistent markup percentage based on the product you are selling. This strategy is commonly used when keystone pricing generates a figure too high or low for your target audience. To calculate the retail price, complete the following equation with your product information:
[(Cost of item) ÷ (100-markup percentage)] x 100
For example, if you‘re selling $5,000 armchairs at a 20% markup, your calculation would look like this:
($5,000 ÷ 80) x 100 = $6,250
Compare that to the $10,000 generated by keystone pricing and you have a completely different target audience and sales volume.
Advantages: More control over the final product price.
Disadvantages: Difficulty knowing the correct markup to apply.
4. Manufacturer recommended pricing
Manufacturer recommended retail pricing (MRRP) is the suggested price provided by your manufacturer. This is a common pricing strategy used for highly standardized items, such as electronics and appliances, and smaller branded items, such as confectionery. You may have seen it printed directly onto the can of your favorite soda for example.
Manufacturers set an MRRP to ensure level competition, protect their customers from overpricing, and protect their brand image from underpricing.
Advantages: Easy to adopt, transparent and customer-pleasing.
Disadvantages: You must look for other ways to stand out from your competition.
5. Price matching
A price matching strategy aims to match the pricing of your competitors, allowing you to compete without affecting your profits more than necessary. Some brands go one step further by offering customers a price matching guarantee should their customers find the product cheaper, you’ll refund the difference.
Advantages: Staying competitive without entering a price war, and using risk aversion to convert customers.
Disadvantages: Depending on your competitors’ pricing, this may result in negative profit margins.
6. Dynamic pricing
Dynamic pricing, also known as competitive pricing or price wars, involves pricing your products below that of your competitors’. By doing this, you attract price-conscious shoppers and those doing price comparisons on your Shopify store and at checkout.
Advantages: High conversion and customer acquisition rates.
Disadvantages: Price wars can damage your long term profits and negatively affect your brand’s reputation.
Pro tip: want to avoid a price war? Check out this blog over at JivoChat.
7. Loss leading
A loss-leading pricing strategy is when you intentionally underprice a product, generating a negative profit margin. Loss leaders are commonly used to attract new customers to a store, introduce a new product, or to cross or upsell other products. They can also be used to create PR-buzz around your brand and your products.
Advantages: Increasing the average basket size, attracting new customers, and generating PR opportunities.
Disadvantages: Unsustainable long term and can negatively affect your reputation as a “cheap” store, making it difficult to increase prices later on.
8. Bundling or subscriptions
Product bundling involves selling multiples of the same or different products at a reduced rate. This pricing strategy is often used to sell slow-moving stock, introduce new products, or increase average order size. A subset of product bundling is subscriptions: bundles of different items sent monthly – for example, craft beers, beauty products, or even cake sprinkles.
Advantages: Selling slow-moving stock, cross-selling items, introducing new products, and encouraging repeat customers.
Disadvantages: Can affect the perceived quality of high-value items, resulting in fewer sales.
9. Free shipping
While you might think free shipping belongs in a blog on shipping strategies, it’s also a powerful pricing strategy. A free shipping pricing strategy involves reducing the perceived cost of a product by offering free shipping (and top purchase driver).
Advantages: Customers feel like they are getting a deal, encouraging them to increase their basket size.
Disadvantages: If your offer of free shipping isn’t prominent on your product pages, it may go unnoticed by customers.
We’ve cheated a little by listing psychological pricing as one pricing strategy, since there are many eCommerce psychological strategies (too many for this blog). But, some of the most common subconscious pricing tactics used include:
- Price anchoring – placing premium products next to your target product to create a sense of value;
- Odd number pricing – pricing products at .99 rather than .00; and
- Perceived value – increasing the value of a product by adding value in terms of guarantees, fast shipping, or free gifts.
Advantages: Driving impulse purchases and overcoming choice paralysis.
Disadvantages: Unethical use of psychological tactics can result in a negative brand reputation.
And those are our top ten pricing strategies for your Shopify store. Pricing your products might sound simple – price them high enough to make a profit but low enough to attract customers – but achieving this outcome is a significant balancing act that many Shopify stores fail to perfect.
We hope this analysis of the top retail strategies has given you some food for thought and enough information to start seeing which product prices work best for your business.