How to Set Pricing Objectives for Growth in Online Retail
Price is not the key differentiator, it’s the strategy behind price that matters, said Robert J. Dolan, the Baker Foundation Professor at Harvard Business School whose major research interests are product policy and pricing. To differentiate your business via pricing strategy you must set your pricing objectives first, as objectives are the foundation for the strategic decisions.
Here is the correlation: Pricing objectives are the specific goals a business wants to achieve through pricing. These objectives guide the overall direction of pricing decisions and typically are aligned with broader business goals, while pricing strategy is the method or approach a business uses to achieve its pricing objectives.
Pricing objectives are the “why” behind your pricing decisions, while pricing strategy is the “how” you implement these decisions to meet your goals. Let’s dive into the “why”.
What Are Pricing Objectives?
Pricing objectives refer to the specific goals that businesses set for their pricing strategies. These goals are often aligned with broader business objectives such as profitability, market share, customer acquisition, or brand positioning. Whether an online retailer is trying to maximize profit margins, penetrate a new market, or compete on value, the pricing objectives act as a roadmap guiding these decisions.
Why Is Pricing Important in eCommerce?
Pricing is a fundamental aspect of the eCommerce business model because it directly influences customer behavior, sales volume, and ultimately, the company’s bottom line. Pricing decisions have become more complex because customers can easily compare prices online. According to a study by Deloitte, 82% of shoppers state that price comparison is an important factor in their online shopping decisions.
In addition to influencing customer purchasing decisions, pricing also affects brand perception. High prices may position a product as premium, while lower prices might communicate affordability but could also signal lower quality.
Common Pricing Objectives in Online Retail
When defining pricing objectives, online retailers typically focus on one or more of the following:
- Profit maximization
This objective seeks to maximize the profit per unit sold. It’s particularly important for retailers with niche products or those with high overhead costs. However, focusing exclusively on profit can deter price-sensitive customers. - Market penetration
For new entrants in a market, the goal is often to capture as much market share as possible, even at the expense of high-profit margins. This is achieved through lower prices or discounts that undercut competitors and attract a broad customer base. - Sales volume growth
Some online retailers focus on increasing the number of units sold, even if that means sacrificing per-unit profitability. Amazon, for example, frequently leverages pricing strategies aimed at increasing sales volumes to gain a competitive edge. - Customer retention and loyalty
Pricing can be structured to encourage repeat purchases through loyalty programs, subscription models, or bulk discounts. For example, businesses that implement subscription-based pricing offer convenience and savings, which help in customer retention. - Competitive pricing
Competitive pricing strategies involve setting prices based on what the competition is charging. Retailers like Walmart and Target often use this strategy to stay in the race for market share. Price-matching policies also fit within this objective, where retailers adjust their prices if competitors offer a lower price.
Pricing Objectives for Growth in Online Retail
Dynamic Pricing for Profit Maximization
Dynamic pricing involves adjusting prices based on demand, competition, and other external factors. Companies like Uber and Airbnb are famous for using dynamic pricing to maximize revenue.
Amazon’s dynamic pricing model is often cited as a prime example of a retailer leveraging technology for pricing objectives. By analyzing user behavior and competitor prices, Amazon adjusts prices multiple times a day across its catalog, helping it offer competitive pricing while maximizing sales volume and profits.
Bundling for Increased Sales Volume
Offering products in bundles or packages is an effective strategy to boost sales volume. Bundling can persuade customers to buy more items at a slightly discounted rate. Online electronics retailers offering discounts on purchasing multiple accessories alongside a phone or laptop is a great example of this approach.
McDonald’s has long used bundling as a pricing strategy to increase sales volume and improve customer convenience. By offering value meals that include a burger, fries, and drink at a discounted price compared to buying each item individually, McDonald’s encourages customers to buy more. This approach increases the average value of the transaction, but also simplifies the purchase decision for customers, contributing to the sustainable growth of McDonald’s sales in global markets.
Penetration Pricing for Market Entry
When new online retailers or brands enter a competitive market, penetration pricing can help them gain initial traction. Offering lower prices than established competitors encourages customers to switch. For instance, Spotify initially offered free trials and competitive subscription pricing to attract users, later upselling with premium services.
Warby Parker disrupted the eyewear industry by offering lower prices for premium products. Their business model included direct-to-consumer pricing, which bypassed traditional retail markups. By focusing on affordable luxury, Warby Parker quickly gained market share and loyalty among price-conscious yet style-driven customers.
How to Set Pricing Objectives for Your Online Business
Setting the right pricing objectives requires a blend of market analysis, competitor benchmarking, and understanding your business’s value proposition. Here’s how to begin:
- Analyze market conditions and customer preferences
Understanding your customer base and market dynamics is crucial. Use surveys, customer feedback, and market research to gather insights. Tools like Google Analytics and Price Monitoring solutions can help you assess consumer behavior and competitor pricing. - Evaluate costs
Make sure your pricing covers all your costs, including production, shipping, marketing, and operational expenses. Factor in long-term costs as well, such as customer acquisition and lifetime value. - Benchmark against competitors
Study the pricing strategies of your competitors. Is your market dominated by premium players, or is it more price-sensitive? Use pricing monitoring tools to gather data and ensure your prices are competitive without eroding margins. - Align with business goals
Your pricing objectives should align with broader business goals. Are you aiming for rapid market expansion, or do you prefer sustainable profit margins? For instance, if customer retention is a priority, loyalty-based discounts or tiered pricing can be useful. - Test and adapt
Pricing should never be static. Testing various pricing strategies and adjusting based on performance is key. Run A/B tests, use dynamic pricing algorithms, and track metrics like conversion rates and customer lifetime value.
An Extra Tip for Online Retailers
An extra tip for online retailers when setting pricing objectives is to leverage data analytics and customer insights. By using tools like price monitoring software, customer feedback, and competitor analysis, retailers can ensure their pricing objectives are not only aligned with business goals but also responsive to market trends, customer behavior, and evolving industry conditions. This data-driven approach enables dynamic adjustments and helps optimize both profitability and customer satisfaction.
