The increase in adoption of digital technologies has impacted the online retail sector in a big way. The convenience of online shopping is now attracting more people than ever before. Massive discounts and attractive prices offered by e-commerce companies have succeeded in pulling a large number of customers towards the online shopping platform. This has led to a rapid growth in the e-commerce market, creating tremendous new opportunities for retailers. Apart from pure-play online retailers, even the clicks-and-bricks companies are looking for ways to tap this growing market.  

According to Forrester, India has emerged as the fastest-growing online market in the world. Online retail sales in India will reach $64 billion by 2021, growing at a five-year compound annual growth rate (CAGR) of 31.2%. As the market reaches a certain maturity, e-commerce companies will have to build more effective pricing models that can help them sustain this growth in the long term.

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A study by Ystats shows that the adoption of mobile internet by millennials and in rural areas is one of the key drivers of India’s e-commerce growth. With e-shopping gaining popularity even in the remotest locations among all age groups, catering to the varied demands of such a vast population is posing a big challenge for e-commerce companies. Identifying their target customers, creating the right mix of products and most importantly, developing a successful pricing model would ultimately determine the future course of growth and sustainability of e-commerce companies.

Pricing Matters

Price is the most important factor that impacts online purchase decisions, say 60% online shoppers in a worldwide study. Most people who come online for shopping are looking for the best deals available for a particular product. Pricing also serves as an essential tool for marketing and can be leveraged for creating demand or promoting new products. Therefore e-commerce companies must invest time and effort to design an efficient pricing model that benefits everyone. Here are some options being currently used by online retailers:

Cost-Based Pricing:

Also known as Keystone Pricing or Cost-Plus Pricing, this is the most widely used pricing model in the retail industry. It is easy to calculate and does not require you to undertake major research on customer sentiment or market. You just need to add a markup to the cost of the product to earn some profit margin. The biggest advantage of this model is that it prevents losses and assures a minimum profit to the retailer. The profit margin can be calculated based on the demand or availability of a particular product. For example, if a product is scarce but has a good market demand you could add higher profit margin for it. But on the flip side, an unreasonably high price may even lower the demand, eventually resulting in less profit.

Competitive Pricing:

This model is usually applied in a situation where many vendors are offering a similar product and there aren’t any major differentiators. The price is fixed according to what the competitors are charging. So you just have to keep a close watch on their pricing strategies and fix yours in the same range. Generally such products will have a low profit margin due to higher competition. However, customers get the advantage of choosing from a wide range offered by multiple vendors.  

Value-Based Pricing:

In this strategy, the price is fixed according to the perceived value or worth of a product or service for the customer. This could get a little tricky as it requires a deep understanding of customer behaviour, their reasons for buying, preferred features etc. This strategy works well for products with a higher emotional quotient or those which appeal to customers at a particular time. For instance, the value of an umbrella would be higher in the rainy season. Apart from an understanding of customer perception, the price also factors in the cost of production of products, shipping and other charges. This strategy can give good returns if the product is well-timed in the market.

Customized Pricing:

A customized or differential model for pricing has been prevalent in the airline and hotel industries for many years, but it was not used by retailers due to the complexities involved. However, with digitization of businesses, it has become much easier for businesses to implement differential pricing. Based on online customer behavior and buying habits, you can define different categories and offer suitable prices for each. Targeted marketing strategies, personalization of services or special discounts can also be planned for these groups. For instance, loyalty points can be offered to regular customers, while new customers can be engaged through referral discounts or bulk deals. If properly implemented, customized pricing can significantly improve your sales and conversion rates. But at times, it can also create dissatisfaction among customers who end up paying higher price.

A Win-Win Strategy

Developing a successful pricing model requires a holistic approach based on an understanding of customer demand and market trends. An online store would usually have a wide range of products to cater to different types of customers. A strategy that works for one category may not always be appropriate for another set of products. Therefore the best approach is to use a mix of strategies for various product segments. For instance, you could follow cost-based pricing or competitive model for regular products, while unique products can be priced using a value-based model. If your online store has a well-developed artificial intelligence infrastructure with rich customer apps, you could even go for customized pricing.

With increasing use of analytical tools in the online world, retailers are increasingly deploying personalized pricing structures to attract and retain maximum customers. Browsing histories and buying patterns of customers are being extensively studied to design comprehensive marketing programs with a variety of incentives and discounts. The ultimate objective is to work out a win-win approach that not only maximizes profits but also creates value for your customers.