How to price products — 7 steps to make a profit

Knowing how to price products might seem simple, like just another task to accomplish for a business owner in the development phase. However, pricing a product is more than slapping on a price tag (or typing an amount into your ecommerce platform). It’s a complex process that affects the overall success and profitability of your ecommerce business.

Beyond creating and marketing a unique product, pricing will play a critical role in customer perception. Scientific studies show consumers equate price with product quality.

The ecommerce landscape is ever-expanding, with mobile sales expected to soar 62% by 2025. While this offers you more opportunities to grow your online business, with growth comes saturation. To become that glistening needle in a giant digital haystack, you need to stand out. 

Pricing is a way to do just that.

As an entrepreneur, you need to determine an appropriate price that your target customer is willing to pay, matches the competition, and still yields a healthy profit.

5 competitive pricing strategies

If you want to sell products, open your own online store or if you’re interested in selling on Etsy, Ebay, Walmart  (and similar third-party platforms), setting the right price is crucial.

Let’s review some of the most effective ways to set a pricing strategy for your business.

Dynamic pricing

When should you use it?: When selling or promoting a high-demand or popular product.

Pros:

• It can lead to more revenue and sales during high peak or seasonal periods.
• It allows you to offer pricing that suits different audience segments based on their budget and needs.

Cons:

• It can confuse or disgruntle consumers as pricing isn’t uniform.
• It can lead to unpredictable or constantly shifting pricing and strain customer trust.

This tried-and-tested pricing strategy is based on varying the price of your products or services in-line with changing marketing conditions. You can use dynamic pricing when considering trending products to sell within your range. 

But as valuable as it may be, you should use dynamic pricing sparingly to ensure customers who paid a higher price for your product or service don’t get frustrated.

Cost-plus pricing

When should you use it?: To set steady profit margins for your most common inventory, products or services.

Pros:

• It’s stable, predictable, and will ensure you maintain a healthy profit margin.
• You can build consumer trust as your product prices are more likely to be consistent and reliable.
• It’s easy to calculate.

Cons:

• It doesn’t account for market demand or competitor pricing.
• It’s more rigid than some pricing strategies and models.

Commonly known as market pricing, this is a popular strategy across industries. Cost-plus is easy to calculate and it guarantees a profit. Why? Well, because you take the cost or production price per unit and add your desired margin to arrive at your retail price. 

It’s a good idea to work with a profit margin of at least 15% if possible, so you can discount items for campaigns or seasonal promotions and still make money.

Value-added pricing

When should you use it?: When you’re looking to get a clear edge on the competition.

Pros:

• It can maximize your profit by setting your pricing based on perceived value, especially if you position your products or services as unique or exclusive.
• It focuses on your customers’ needs and preferences, building trust in the process.

Cons:

• It can be tricky to implement as you have to conduct market research and position your product or service for a ‘premium’ audience.
• You can run the risk of customers perceiving your products or services as overpriced.

When asking yourself how to price the product to maximize my profits, adopting a value-added strategy could be the answer. Using this strategy is all about determining how much your target customers would be willing to pay for your products. 

If your goods are high quality and you use digital marketing strategies to highlight their value or exclusivity, you can increase your retail price and increase your profits.

Competition-based pricing

When should you use it?: When the competition is fierce and you operate in a busy or saturated niche.

Pros:

• It’s simple to implement and requires less effort than some pricing strategies.
• It will keep you competitive in a saturated market and offer your customers value.

Cons:

• It can be time-consuming as you have to monitor your competitors’ pricing frequently.
• It can result in you overlooking product or service costs, driving down your profit margins.

Penetration pricing

When should you use it?: To build brand awareness and attract people to your new products.

Pros:

• It can attract customers rapidly and give you a foothold in your market.
• It can boost your brand awareness and reputation.

Cons:

• It could lead to initial losses due to low profit margins, making it unsustainable in the long run.
• It can be hard for consumers to adjust to your new pricing after the initial penetration period.

Penetration pricing is based on attracting people to new products or services by setting your initial prices low. Typically, penetration pricing affords little or no profit margin as the aim is to generate a buzz around your new products or services so they floor the market (before you raise the price tag).

How to price your products in 7 steps

Use the following steps to establish a competitive pricing strategy for your ecommerce business.

1. Know your local competition.
2. Understand the online market.
3. Assess all of your costs.
4. Determine your profit margin.
5. A/B test your pricing strategy.
6. Recognize the perils of underpricing.
7. Consistently review pricing strategies.

Are you ready to gain the insight you need for pricing products? Let’s dive in.

1. Know your local competition

Whether you’re a new business pricing products for the first time or an established business reassessing your pricing strategy, competitor research is invaluable.

It may seem counterintuitive, but understanding your local competition is also important.

While an online store has a global audience, consider that people in your local area can look elsewhere in the community, or might have personal ties to smaller, locally-owned brick-and-mortar businesses.

Additionally, when developing your pricing strategy, understand the relationship between online and in-store pricing and shopping.

Today’s savvy consumers know that ecommerce removes many of the hard costs of getting products to market, so they expect to see lower prices online. Take this into account when you research local brick-and-mortar competition.

2. Understand the online market

Just like knowing your local competition, being conscious of your digital competition is essential. Especially in this increasingly competitive ecommerce field.

Do some quick, informal competitor research of similar products.

• Start a list or spreadsheet with your competitors’ price points. Note product differentiators in relation to their pricing.
• What makes your competition stand out?
• What explanations do they give on their quality or unique characteristics that account for their prices?
• How do your competitors justify their pricing through their messaging and marketing?
• Alternatively, if you find bargain or discounted pricing amongst the competition, why might that be?
• Look at consumer reviews for real feedback, see if any mention the price vs. value of the product.

Once you’ve accumulated a range of price points and competitor data, think about your product and your unique selling points (USP), and apply that to your pricing strategy.

Do you want to be a value player, a low-cost leader? Can you command a higher price than competition because of brand quality or features?

Keep in mind that it’s challenging to convert shoppers into buyers. As of the third quarter of 2024, the average ecommerce conversion rate hovered at 1.58% (depending on the device), according to data from Oberlo.

In the saturated world of ecommerce, where competition is fierce, knowing how to price products in relation to the online market will increase sales and maximize profit.

Remember, your goal should be to model your competitors, not to copy them.

Use their pricing strategies as inspiration and then develop your own unique, product- and customer-based pricing models.

3. Assess all of your costs

When evaluating potential pricing structures for your ecommerce products, it’s essential to have a solid grasp on all costs associated with your business so that you can ensure healthy and sustainable profits.

In general, there are two types of costs:

Fixed costs

These represent your hard costs that are unchanging; for example, the cost of hosting your ecommerce site, meeting payroll for any employees, leasing space for on-premise storage or offices and marketing. These are costs that do not fluctuate based on an increase in sales or production.

Variable costs

These are costs that change based on production or sales volume. For example, your production costs might increase if you need more products, or perhaps the cost of materials lowers as you order more.

Gathering all of your cost data is an essential step in pricing your products.

Make sure to take your time. It’s easy to miss expenses (such as services you pay for annually or quarterly).

Once you understand your fixed and variable costs, you can perform a break-even analysis (detailed in the next step).

Bottom line: You need to understand what it’s costing you to produce products and run your business so you can accurately price products to sustain and maximize profits.

4. Determine your profit margin

Profit margin is the percent revenue you make on each unit after you deduct your fixed and variable costs per product.

For example, if you set the retail price of your product at $80, and it costs you $60 to make, then your profit is $20, which represents a 25% profit margin.

FYI: Average healthy profit margins tend to vary by industry.

According to data from Vena:

• The average gross profit margin across industries is 36.56%.
• Banks have the highest average profit margin which is 100%.
• The auto and trucking industry has the lowest gross profit margin at 12.45%.

To determine a realistic profit margin, first, do a quick break-even analysis. This is where you determine the number of sales you need to at least cover your costs. Consider your fixed costs for the business and the variable costs per product.

From there, you can adjust your pricing strategy accordingly to determine a competitive, yet optimized profit margin.

Your pricing directly determines your profit margin, and this is where you’ll have to factor in all of your research and knowledge. There’s no sense in undercutting competitor’s pricing if you can’t make a return on your investment, or even worse, turn any profit.

5. A/B test your pricing strategy

If you want to try out a few different pricing strategies, test them against one another in real time.

A/B testing, aka split testing, usually occurs in web design or digital marketing, but you can also use this tactic to help determine competitive pricing strategies for ecommerce.

Simply use different pricing structures at the same time on your website and see which yields the best results (or most sales).

You can A/B test your pricing strategies in two ways:

1. If you have any type of digital marketing campaigns that funnel traffic to your product landing pages (like PPC, social media ads, or email marketing), create two landing pages with different pricing and equally direct traffic to each. After a set amount of time, see which product has the best conversion rate.

2. If you have different products of a similar nature and price point, you can test pricing strategies on each. Then track sales and see if one outperforms the others.

Stuck on which type of pricing strategies to test (in addition to those we’ve already covered)? Quickbooks recommends these standard pricing models:

• Pricing at a premium: Price products higher than your competition, then, market the value perception and unique features that constitute the premium price.
• Economy pricing: Often difficult for smaller ecommerce businesses, this is basically setting prices low to attract the budget-conscious shopper.
• Price skimming: For new, unique products you set prices higher, initially. As other competitors enter the market or interest wanes, prices gradually decrease — the opposite of penetration method.
• Psychology pricing: Appealing to the emotion of a shopper by setting illusions of lower prices and better deals. For example pricing at $99 instead of $100, because customers might have a hard time spending past a certain threshold.
• Bundle pricing: The offer of lower pricing, or a deal when a customer purchases multiple products — a type of bulk discount. Bundling works well if you have complimentary products to pair together, you want to move a specific, low-selling product, or your variable costs decrease if you produce more items.

Depending on your industry, select pricing structures for your products and test a few against each other on your ecommerce site. Then make a data-driven choice, based on sales, to determine the best pricing strategy for your business.

6. Recognize the perils of underpricing

Something that may seem so simple, like how to price a product, is a foundational ingredient to your overall business health and viability. It’s essential to exercise caution when trying strategies like penetration or economy pricing because in reality, you might be underpricing.

While it might be attractive to get the sales up front, underpricing can be dangerous to your ROI and bottom line.

Something else to consider: When you price products at the lowest possible point, not only are you diminishing your profit margin, but you also limit the possibility for adjustments.

What if you want to run a sale, or offer a discount? If you lowball your product, there’s no wiggle room.

What’s more, if you have a bargain basement perception, you won’t attract customers who value quality over cost. 

In fact, studies from Marketing Charts show that 46% of modern consumers are willing to pay a premium for trusted brands with high-quality products.

Online consumers are savvy digital natives that understand you get what you pay for. Underpricing affects more than just your profit.

Nellie Akalp, entrepreneur and founder of CorpNet.com, has cautioned that: 

“Even though you might land the sale, underpricing your products and services comes at a cost. … Entrepreneurship is challenging enough without feeling like you’re underpaid and overworked. Charging too little can not only put a damper on your revenue potential, but it can also douse your enthusiasm for your business.”

7. Consistently review pricing strategies

You can’t have a set-it-and-forget-it attitude when it comes to pricing products, especially in the constantly evolving world of ecommerce.

Business owners and entrepreneurs must consistently assess their data, metrics and pricing strategies to ensure optimal sales and profit. Moving forward, you need to consider cash flow, sales history and changes in the customer market.

Aim to review and update pricing strategies at scheduled times, like once per quarter. You won’t always need to adjust prices each quarter but rather when necessary. 

Alternatively, you may need to check prices more than that depending on industry trends. Refer to this checklist of events that should trigger reviews and/or changes in pricing structures:

• Your costs change (due to a minimum wage increase, changes in the cost of goods, or new tariffs introduced)
• The economy shifts (inflation or recession or a global pandemic)
• You notice that competitors change their prices
• You launch a new product
• You enter a new market or vertical
• You have a high-performing product (for example, you’re regularly sold out, or you receive a celebrity or influencer endorsement)

If any of the above occurs, use it as an alarm to stop and evaluate your pricing strategies to ensure their effectiveness.

Product pricing examples

Now that you’re up to speed with essential pricing strategies and what to consider when using them, we’re going to explore three real-world pricing examples for your inspiration.

Amazon

The ecommerce colossus Amazon leverages competitive pricing by frequently tracking and tweaking its product prices.

Amazon’s pricing strategy involves using automated repricing tools that monitor competitor prices in real time and adjust their own prices to maintain a competitive edge. This approach ensures that Amazon remains one of the best-priced options available across product categories.

The result? Amazon attracts a constant stream of price-sensitive customers, maximizing their sales and maintaining market dominance.

Netflix

Netflix continually expands its commercial reach with an effective penetration pricing strategy. The streaming giant sets initially lower subscription prices to attract a huge customer base rapidly.

When Netflix first launched, it offered subscriptions at a lower price point compared to its direct competitors like Amazon Prime. This approach built a buzz around the brand and earned the streaming service provider a large market share.

Netflix gradually increased its subscription prices in line with its commercial growth and platform expansion to boost profitability while retaining its loyal customer base.

Walmart

Walmart utilizes an Everyday Low Pricing (EDLP) strategy to make sure its customers always get products at low prices without relying on regular sales, deals or discounts.

This consistent and reliable approach to pricing builds consumer trust and inspires loyalty, making Walmart popular among budget-conscious shoppers looking for a wide range of useful consumer products.

How to price products to maximize sales and profit

Pricing products is not an exact science, and it’s not an art form — it’s a dynamic, business-dependent strategy that can be challenging for even seasoned entrepreneurs. A continual boom in ecommerce sales also comes an increase in competition, as well as even savvier digital shoppers.

Your decisions will depend on your particular niche, goals, products, industry and other factors.

Know that you’ll need to put in the time to research your market and competition. Crunch numbers on your costs to determine pricing that can maintain long-term product profitability. Analyze current business metrics and A/B test strategies to gather more data to bolster your decision-making. Be cautious of underpricing.

Finally, once you set your prices, know that it’s a living, breathing process that needs to be monitored and nurtured as your business and the market evolve.

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