E-commerce pricing glossary
There are many terms for many strategies that differentiate between lots of different sorts of prices! Pricing in itself can be tricky. To decide a price for a product, you’ll need to consider the costs, the break-even, the expected sales, market-factors, price-fluctuations due to offer and demand, competition, price-elasticity, market velocity etc.
Try to say that last sentence out loud and really fast. Exactly, there are so many terms in there it’s a real tongue breaker. If you scroll down really fast and than scroll up again, you’ll notice that there are many more terms.
We specialize in pricing. We understand if you don’t, and you may have some questions about a lot of terms regarding pricing strategies. That’s why we’ve created this longlist of price-related terms and their definitions. Is there a strategy that fits you?
With anchored pricing, you label your products. You distinguish between a ‘basic’ label and a ‘premium’ label, with a more expensive price for a slightly different product. People are more inclined to buy the basic option because it’s cheaper. Sometimes, the only difference is the packaging. The idea is that the expensive version makes the cheap version seem like a really good deal.
Automated Pricing Strategy
With automated pricing, you use a tool to update your prices a few times a day. This way, you can keep track of all current price-fluctuations in the market. You can implement any strategy you want. If you have a pricing strategy to be the cheapest, this is the way to insure that.
Best Price Guarantee
You sometimes come across this sign. Usually, if this sign is used, you can get a refund if you bought something, but it was cheaper elsewhere. You just come back with your receipt and you’ll receive the price-difference.
By bundling products and asking a lower price, you can entice customers to buy it. For example: create a package with all necessary ingredients to make an apple pie, and ask a combined price that’s lower than all individual prices cumulated.
Budget pricing is more an identity than a strategy. Budget pricing basically means that you’ll only ask really low prices. People usually understand that they won’t receive a great service when they pay a budget price. It is called budget pricing, because you conform you prices to the low budget people have, or to what people want to pay. Walmart, SoLow or the DollarStore are good examples of this.
Captive product pricing
You offer a core product for a low price, but sell captive products with high margins. These captive products are additional products you need to be able to use the core product. Think about a keyboard as a core product, and the music-standard, microphone, headphones en keynote-stickers as captive products.
Charm pricing is basically the same as the well-known psychological prices. You make the prices look cheap by not asking a full number. Instead of €35,00, you ask €34,99.
Competitive price intelligence
The extensive use of data and detailed analytics to charter your competitors and anticipate on them is what’s called the competitive price intelligence. Basically, you spy on the market to spot opportunities. There are many tools that can help you with this.
Competitive price tracking tools
These are the tools that will help you gain detailed analytics as competitive price intelligence. Our tool, for example, tracks all prices in the market for a specific product. All competitors are shown together with their prices, so you can see where you stand with yours.
Cost plus pricing
The cost plus pricing strategy is often used. You basically calculate the costs of every individual product and add a certain margin, usually a percentage. For example, you add a 23% margin to every product. If product A costs €2,00 to make, you multiply it by 1,23 and the selling price is €2,46.
This pricing strategy heavily relies on the costs of a product, usually when you want to be the cheapest. You’ll calculate the costs of a product and at what margin you’ll need to sell to make a profit. It’s usually the same as the cost plus pricing. However, cost-oriented pricing can be adopted as a corporate-strategy, where you try to lower your costs in order to be able to lower your prices. So instead of focussing a 100% on sales, you might focus 20% on sales and 80% on development to make the product cost less. That way, you’ll be able to ask the lowest price in the market.
Instead of focussing on costs, you focus on what a customer is willing to pay. You research what the expectations for a certain product are and what consumers are willing to pay, and than you overdeliver just slightly so it will feel worth it for the consumers, even if they heavily overpay.
With coupons, you can convince a consumer that they’re striking a good deal. You’ll make them feel special as if no-one else receives that discount. Coupon codes can be a gift, a themed discount like christmas, or a loyalty gift for returning customers. By adding a time-limit, you’ll add pressure to buy as soon as possible: ‘Special for you: use the coupon code ‘SANTA18’ to receive a 10% on you christmas outfit! Valid until december 24th’.
With complicated algorithms, advanced software and thorough market-monitoring, businesses adjust prices according to the circumstances in the market, much like the dynamic pricing strategy.
A temporary decrease of the prices on your products.
With dynamic pricing, you adapt to the circumstances on the market, while keeping in mind a certain strategy. The hotel industry makes extensive use of dynamic prices, in combination with a demand-oriented pricing strategy. When the demand large for hotel rooms in a certain period, the price of that room increases enormously. But in quieter periods the prices fall again. There may even be a distinction between certain classes. For example: premium products might have a higher increase in price when demand is high than budget items. The best known example of dynamic pricing is the stock market.
This pricing strategy is based on prices that are as cheap as possible. Well-known users of this pricing strategy are the DollarStore, Big Bazar, SoLow, Walmart, Action, Ryanair, Transavia, etc. By using this pricing strategy, people know they can expect the lowest price possible.
Expert judgement pricing
Sometimes, the costs or value of a product or service is not clear. It can help to get a second opinion, especially if there isn’t sufficient expertise in a company to make an accurate estimation of the costs or value. An external expert is asked, who will make a judgement based on a certain set of criteria which are usually mainstream in the field of that product or service. This will result in a judgement from the expert, hence the name.
Flash sales are a term for temporarily offering products at a reduced rate. There is often a clear time-limit. This is meant to entice consumers to buy as soon as possible before the deadline is over and they’ll have to pay the full price again.
Flat rates are more mainstream for services, but may also apply to products. It’s basically a pricing system with a fixed price for use, regardless of how many times or how long you use it. For example, you may rent a car for a week for a fixed price, and drive it as much as you want.
The practice of asking different prices depending on the location is called geographical pricing. For example: an iPhone may cost €650,- in Western-Europe, but only €350,- in Eastern Europe. This may have to do with shipping costs, but also even the GDP of a country. You basically consider the purchasing abilities of the consumers in a set area.
You can set up a system of incentives to bind consumers and build a loyal customer base. Incentives are also a means to attract new consumers. Think of incentives like free gifts, free shipping, free content (blogs, whitepapers, ebooks, videos), discounts, vouchers / coupons etc.
An incumbent is a person in a certain position, think of a politician in a certain office (minister or premier). An incumbent in business is usually a market leader, or a company with a certain status. For example, Apple is an incumbant. Not because they’re the market leader, but they differentiate themselves in several ways from their competitors, which gives them an incumbent value. Their loyal customers see a certain value in Apple which is why they will by Apple and only Apple. Based on this incumbent value, a company can charge a price that their competitors can’t.
To up the sales of another product, you can lower the price of related, cheaper products. In our blog, we use the example of the Citroën-case. The C1-model was sold under cost price, in order to 1) sell more luxury models and 2) have more cars in maintenance to increase revenue of the garage.
The loss leader strategy is in essence the same as the integral pricing strategy. You sell an item under its cost value to stimulate sales of other items. With integral pricing, you finetune it more on specific, related products. A loss leader is more focussed on attracting customers in general. Think of a supermarket that sells filtered coffee under cost price, but locates it next to an expensive brand of cookies.
This is very much the same as the competition based strategy. A product is compared to the same products or substitutes the competition offers and is either made better or sold at a lower rate.
Manufacturer’s suggested retail price MSRP
The manufacturer of a product also recommends at what rate it should be sold. This is to standardize pricing and help resellers. In case of franchising, it may even be mandatory to use these prices as part of a larger, domestic strategy or to prevent competition between companies of the same franchise.
Minimum advertised price MAP
This resembles the manufacturer’s suggested retail price closely, but is slightly different. Instead of suggesting a price, the manufacturer has a policy where its resellers are not allowed to offer the product under a certain price.
The Nash equilibrium is actually a really complicated concept that covers a lot more than just price. It tries to predict behaviour in the market when certain changes occur. The Nash equilibrium tries to establish optimal conditions where every provider has a commensurate market share. It goes much further than basic pricing strategies. The formula used is:
This is the same as charm pricing or psychological pricing. Instead of using even prices like €50,00 or €125,00, odd prices are used like €49,95 or €124,99.
Optional product pricing
There is a core product that the consumer wants. Once the consumer ‘starts’ buying, you’ll offer optional products. Think about booking an plane ticket. You just want to get from A to B. During the process, you’re offered insurance for your luggage, extra leg space, a premium meal option etc. All of these cost extra, increasing the overall price of the one product you wanted.
Overpricing is usually done at market entry. At that moment, it’s hard to determine at what point a company will break even, so the company plays safe. It can always adjust the price downward, while increasing the price is never well received by consumers. This way, the company prevents never breaking even at all. It’s the opposite of the penetration pricing strategy.
In order to enter the market, you initially ask a very low price to attract clients and create brand awareness. Later on, the price can be increased. The low price has the sole function to penetrate the market by creating brand awareness and a customer base. It has an overlap with the underpricing strategy.
This is the value a consumer perceives in a product, compared to other products. This is basically the outcome of a research where consumers consider the benefits of one product against other, related products and how much they are willing to pay for it. The perceived value is than the difference between the costs and what the consumer would pay.
The pocket price is the netto price. To calculate the pocket price, you deduct all additional costs to a product from its gross price. Think of shipping costs, rebates, payment costs, even some taxes etc.
Many companies use psychological prices, even though you often do not notice this as a consumer. This is precisely the intention! Psychological prices are prices that feel like a good deal or purchase, making it easier for the customer to purchase. The most common form are the discussed charm prices or odd-even prices.
With this strategy, you ask prices so low, your competitors will not be able to compete with you and are forced to leave the market.
With premium prices, a high and fixed price is generally used for a product or service. The competition is always low and the product is unique. Think of Apple products, luxury car brands like Lamborghini, perfumes like Chanèl etc. This pricing strategy is strongly linked to the status of a brand.
Price benchmarking is close related to competitive pricing. With price benchmarking you select certain competitors you want to use as beacons. You basically choose a pricing strategy and select competitors that resemble that strategy. You close follow what they do and adopt it to your own business. If they raise their price, you do too. If they offer a special christmas deal, you do too. These companies will serve as your benchmarks to confirm your strategy and effectively adopt it, assuming those companies know what they’re doing. Price benchmarking is in its essence exactly copying the behaviour and best practices of your successful competitors, or if you want to differentiate, you use this data to adopt a strategy that suits the position you believe your company is in.
Price lining is all about psychology. By asking different prices for products in the same category or product group, the products with a higher price will be perceived as being of a higher quality.
Price skimming is a great strategy when initially the break even point, cost price or other indications aren’t clear. By price skimming, you initially ask a high price and, once you’ve gathered more data, you periodically lower the price to finally reach a balance between costs and revenue. This is a safe method to find out the right price when calculating doesn’t work.
This strategy is also often used of new products. A company will ask a high price as long as it’s the only one marketing the product, until competition also enters the market.
Product price elasticity
Price elasticity is the room you have to ‘play’ with your price. If the demand is ‘inelastic’, an increase in price should generate more revenue, because consumers will buy anyway. If the demand is very elastic, a change in price has a huge impact on how much you’ll sell. The formula is:
Price elasticity(%) = Change in demand(%) / Change in price (%)
Recommended retail price
This is the same as the manufacturer’s suggested retail price.
Scarcity pricing is a method to put pressure on a potential buyer. If your browsing for a product, a notification may appear such as: ‘only 1 item in stock’. Or: ‘there is one other user looking at this room, be fast’. The potential buyer would feel there is a time-limit and if he/she wants to have this product/service, he/she has to decide now!
With complicated algorithms, advanced software and thorough market-monitoring, businesses adjust prices according to the circumstances in the market, like the demand pricing strategy.
Time pricing has the same principle as scarcity pricing. Instead of putting pressure on scarcity, you give a time limit such as: ‘you still have 9 hours, 3 minutes and 5 seconds to score this deal’. The consumer knows that if it wants the discount, he/she will have to buy within the set time limit. Other forms are discount codes with an end date, such as Sovendus.
Tiered pricing is a strategy to increase bulk buying for a set product. For example: 1 items costs $1. 5 items cost $4 and 20 items cost $16. The more of the same product you buy, the less you pay per unit.
Transparant pricing is a relatively young strategy. With transparent pricing, the overall price is accounted for. For example, an item costs $10. In the advertisement or product information, the supplier explains that resources cost $1, man-hours cost $2, a fair price for a farmer in Cambodia was paid, which raised the costs another $1 etc. This appeals to the consumer and makes the product seem a responsible purchase.
Underpricing is basically another term for the penetration pricing strategy. To penetrate the market, you ask a price under cost price in order to be the cheapest. Once you’ve gained popularity and constituency, you can raise the price again. It also often occurs in the stock market on the first public offering of a certain stock.
Instead of focussing on the costs of a product, the price is determined according to the perceived value of the consumer. Usually this perceived value is measured by asking for reviews and conducting surveys with ultimately the question: ‘What are you willing to pay for it?’
Instead of focussing on costs or value, the velocity of sales of a certain products is the parameter for its price. If a product has a high velocity the price can be either decreased or increased to see if the overall revenue will ultimately increase. The same goes for products with a low velocity.
Walk-away pricing is a strategy where you go just low enough before consumers lose interest in buying. That is, low enough from the sellers point of view. This is a common practice in the automobile market. A car seller will try to ask the highest price possible, before a consumer walks away.
If you, after reading all this, still have no idea what to do, you may have more luck with our blogs. This long list was purely meant as an explanation to many terms and jargon. On our blog, we discuss many pricing strategies and best practices for web stores and how to implement it successfully.
Need a good, complete strategy for your webstore? Download our free whitepaper where we provide a lot of information and tips to set up a complete strategy for your webstore.
Do you have questions about a term that’s not in the list? Let us know and we’ll add it!