How to apply pricing strategies in e-commerce business based on price data

How to apply pricing strategies in e-commerce business based on price data

For obvious reasons, your pricing strategy has a fundamental influence on your store’s financial performance. On the one hand, a carefully-selected pricing strategy can win you customer loyalty and impressive revenue. On the other hand, each pricing strategy entails challenges that need to be addressed. And then, there’s the question of price data analysis and pricing automation. Let’s talk about prices in the modern e-commerce market.

If you run an online store, your ultimate goal is apparent. You want to maximize margins and revenue. In many instances, achieving both these objectives simultaneously can be tricky. Let’s use a simple example. If you want to attract many customers on a daily basis, you can decide to apply the EDLP (everyday low prices) strategy. In such a situation, your margins will be rather low, but you maximize revenue thanks to economies of scale. Of course, there are more questions to think about.

In this article, we are going to talk about two primary pricing strategies that you surely know from brick-and-mortar stores. These strategies are EDLP and HL. Both have pros and cons, and both are used by hundreds of both physical and online stores. Let’s take a closer look at them.

The EDLP strategy

The essence of this strategy is that your store offers low prices on a daily basis. Therefore, there are no special promotions and no discounts throughout the year (because the prices are already as attractive as possible). With the everyday low prices strategy, you won’t make much money on each product sold. We have to be honest here; the profit margin is quite low. If you want to thrive with this strategy, you have to make sure thousands of customers are in your store every month because your income comes from economies of scale.

One of the ways to implement this strategy in your store is to sell products in bulk. That’s the strategy used by the Canadian retail chain called Dollarama. In their brick-and-mortar stores, you can buy products by the piece, and they are very well-priced. In their online store, you can buy products only in cases. The per-unit price rarely exceeds 5 CAD.

The HL strategy

If you don’t want to attract customers with low prices, you should think about the HL pricing strategy. HL stands for high-low, and it’s a strategy in which the vast majority of your products are sold at relatively high prices. You keep just a few products that are sold below the average product price. These products are frequently referred to as traffic generators or loss leaders. You don’t make any money on them, and their only purpose is to lure customers into the store.

At this point, the vital question would be, what do you offer in return for these high prices? In general, some added value. Stores (both physical and online) using the HL strategy frequently offer:

  • Impeccable customer service
  • A wide range of products (including those that are difficult to get elsewhere)
  • Additional services (e.g., help in packing your purchases to the car)

The HL strategy is often used by delis that sell a selection of fine, exotic, or foreign-prepared foods. One of the examples of such stores is the German retail chain called Dallmayr.

Their products are usually more expensive, but if you’re looking for elderflower syrup or wild salmon caviar – that’s the place to go. In this strategy, you sell fewer products, but you make more money on each one of them, making this strategy a decent way to make money in retail.

The challenges of these strategies in e-commerce

As we’ve already mentioned, both these strategies come with some challenges that need to be considered. For starters, you have to remember that when it comes to the e-commerce world, prices are transparent. Customers have easy access to price comparison tools and marketplaces, so they can quickly assess the attractiveness of your prices. And bear in mind that even in the HL strategy, the prices can be too high.

Secondly, once you decide on a specific pricing strategy, it won’t be easy to change it. Shortly, your store will be labeled as the cheap one or the expensive one. So be sure to make an informed, well-thought-out decision.

And the third question you have to think of is that prices are far more relevant in e-commerce than in traditional retail. Delis usually opt for amazing store design and flawless customer service. As a result, they can get more regular customers, even if their prices are steep. In the e-commerce world, things are much more complicated, and winning customer loyalty is quite a challenge.

What should you do then?

Automation of pricing strategies in e-commerce

For starters, analyze market and price data to make sure your strategy is optimal. Analyze your competitors and their offer. Check all the leading marketplaces and price comparison websites to decide what prices will be attractive to your customers. Competitor price monitoring is essential in e-commerce since many customers choose where to buy based on prices. 

Secondly, think about pricing automation. It’s a service that allows you to monitor prices on the market automatically 24/7 and adjust the prices in your store accordingly, based on predefined rules (e.g., remain in top3 on Amazon). This way, you can maintain optimal prices and secure your profit while staying attractive to potential customers.

In e-commerce, the list of factors affecting your sales is very long. Every, even the tiniest element, can have a vital influence on your company’s success and performance. And prices are definitely very high on that list. Make sure your pricing strategy is as good as it can be.