Selecting the Right Pricing Strategy for Your Online Business

What is a pricing strategy?

A pricing strategy is used to determine the right price for a product or a service. It enables you to select prices that can attract more customers, build customer trust, maximize revenue and profits, and attain a competitive edge in the market. However, determining the right price for your online offerings can be a difficult task. If you set your prices too high, you might miss out on potential customers. But if you set them too low, you might risk losing valuable revenue. A good pricing strategy takes many business factors into consideration, such as product attributes, target audience, brand positioning, revenue goals, consumer demand, and competitor pricing.
Pricing strategy
A small-to-medium-sized business owner may need to take more care in selecting a pricing strategy. The pricing strategy should find a balance between attracting customers and generating profits. Read on to know more on how to select the right pricing strategy for your products and services.
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Need for an intelligent pricing strategy

pricing strategy
A study has shown that for many businesses, a price increase of 1% could translate into an 8% increase in their operating profits. But price changes can serve as a double-edged sword. The upward or downward change of prices can help to either grow profits or result in loss of customers and may cause damage to brand image.
An intelligent pricing strategy can create a strategic advantage for your online business. It can either motivate the customers to buy your products and services or make them move to another website. It can either drive or hurt the operating margins of your business.

You can read more about the importance of right product pricing here.

Types of online pricing strategies

According to a study, up to 30% of pricing decisions made by businesses are not successful in delivering a suitable price. Therefore, it is important to select a fail-proof pricing strategy. You can choose from a range of pricing strategies for your business based on your goals and needs. We shall discuss a few common pricing strategies below.
pricing strategy

Penetration pricing:

With this strategy, sellers provide products and services for either free or at an extremely low price as an introductory offer for a limited period. This pricing strategy can prove to be very useful. However, it may not be sustainable in the longer run.

This strategy has the potential to help your business penetrate the market and create a customer base.

With successful market penetration, your business might have more opportunities to expand your customer base and attain higher profitability in the future.

However, if your penetration pricing is too low, your profit margins may continue getting affected until you increase the price. Also, low initial prices may also result in consumers perceiving your offerings and business as low quality.

There are many examples of companies using the penetration pricing strategy. Let us consider the case of an over-the-top content platform. Many of them offer one month of free subscription to attract customers. After the free subscription ends, they charge customers based on the plan they select. Such companies are known for keeping their users hooked with a range of interesting content.

Market-based pricing:

This strategy involves pricing your offerings based on the prevailing market conditions, competition and demand. You can opt for the market-based pricing strategy if there are many competitors offering the same products and services at similar prices.

If you wish to implement this strategy, you would need to regularly monitor the pricing strategies adopted by others and use the competitive data to price your products and services accordingly. This might help to maintain your market share and reduce negative price competition. However, the implementation of the market-based pricing strategy can require many resources. You can conduct competitive research yourself or hire professionals to help you with the same.

Market-based pricing requires you to focus on the market trends and competitor’s pricing. Due to this, you might end up neglecting the needs of your customers and sell your product at a very low rate. Companies operating in highly saturated and competitive industries including automotive, technology, electronics and food, generally use the market-based pricing strategy to provide value to their customers and try to increase sales.

Cost-based pricing

Before choosing to implement this strategy, you may need to determine the total cost incurred for producing and selling your products and services. You may also need to set a target profit margin for each sale. One way you can start is by adding a fixed percentage of your total production cost into the pricing to decide the final selling price. For instance, if your production cost is INR 500 and you want to make a profit of INR 250 on every sale. Then, you can set a price of INR 750, which represents a markup of 50%.

Consumer-based pricing

This pricing strategy involves setting the prices for your offerings after understanding your customer needs. Before adopting a consumer-based pricing strategy, it is pertinent to identify and segment your target audience and figure out their willingness to pay for your offerings.

For example, you may choose to display a high price sticker for your product initially. Then based on the data collected about your customer’s recent purchases, or any information that can guide you about the spending capacity of your target customers you can increase or decrease the price accordingly.

Dynamic pricing

With this pricing strategy, you may set flexible prices for your goods and services based on factors such as market demand and your competitors’ pricing. For example, based on the increased demand for sanitizers, masks and similar protective products in the market during the COVID-19 pandemic, sellers dramatically increased their prices initially, before the Government had to intervene and declare price caps in public interest.

Also known as demand pricing, surge pricing and time-based pricing, the dynamic pricing strategy is most commonly used by event venues, hotels, utility companies and airlines. They use dynamic pricing and repricing algorithms (changing prices based on predictions made using logical rules) that predict to collect competitor-pricing data and make real-time changes to the price of their products/services.

You can use re-pricing algorithms and adjust your pricing based on different fluctuations in the market. For example, several rideshare apps use dynamic pricing to incentivize drivers to stay on the road during peak hours.

Bundle pricing:

With bundle pricing, it is possible to sell multiple complementary products or services at a single package price. This pricing strategy can serve as an effective way to improve customers’ value perception of your business and reduce inventory. Many online retailers pair some of their offerings together and sell them as a bundle. For example, it is cheaper to buy a combo meal at a fast-food restaurant than buying each item individually.

The use of bundle pricing strategy can help to increase the value of lower-cost products, improve customer traffic, and potentially increase the sales of old and out-of-season products.

Loss leader pricing:

The idea behind this pricing strategy is to sell one item at a loss to get a sale on another product. For example, selling certain products at discounted prices to entice customers to visit your online store. While they are there, the chances of them making additional purchases increases.

This pricing strategy can be used to drive traffic towards your online store. You can also use the opportunity to increase the overall value of the shopping basket. Although the profit gained might not be very significant, it stimulates the customer’s interest and creates more opportunities for future transactions.

However, you may need to be careful here. If you overuse this strategy, consumers may start expecting more bargains from you.

Price skimming:

You can consider using this strategy if you are launching a new product or a service in the market. Price skimming strategy involves setting the highest possible price for a new offering at the introductory level and subsequently lowering the price as the item becomes less popular. It is mostly used in markets where novelty and exclusivity are important.
This strategy works best for businesses that target consumers who are willing to pay more for the latest products. Global technology giants use such price skimming strategies for its new electronic products. The companies launch products at high prices and then slowly lower their prices over time to attract price-conscious buyers.

For online retail, this pricing strategy can be used to try to recover development costs and create an impression of exclusivity and high quality. However, you might need to be careful, if you lower the price of your products too soon after the launch, it might bother your early buyers and impact their loyalty.

Value-based pricing:

If external factors such as recession or increased competition are affecting your sales, you might want to consider the use of a value-based pricing strategy. This strategy involves pricing your products and services based on how they are perceived by the customers. The accurate use of the value-based pricing strategy can boost customer loyalty, trust and sentiment.

This is entirely focused on better understanding of your customers. Therefore, you may need to conduct thorough market research and find out how valuable your offering is in the eyes of your customers. Customer willingness to pay is one of the most common ways to determine the value of your offerings.

In many cases, many pricing strategies take competitive metrics such as competitor pricing information or internal factors such as production costs into account instead of focusing on the customers. It is advisable to understand that your production costs may not be as important to the customers as the value they are receiving at a given price.


Price plays an important role in influencing the consumer’s purchasing decisions. If you wish to run a successful online business, adopting a robust pricing strategy that attracts new buyers and turns them into loyal customers, increases sales, and boosts profits may help greatly. You can start by experimenting with different pricing strategies and figure out which one works best for you. However, you should not forget to continuously evaluate your pricing strategy. This can help in expanding your customer base, grow your business and increase profits.
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