Cost-plus pricing strategies are the most common in all areas of business. Nevertheless, they might not be the most suitable for eCommerce businesses or other types of online resellers. Competition in the digital world is brutal and with users that are increasingly sensitive to price comparisons, you must develop the right strategy to keep ahead of the competition while ensuring your profit margin.
Raising your prices using the classic production cost formula is a legitimate way to maintain the profitability of your business. But how long can this be used? How do classic cost-plus pricing strategies affect eCommerce businesses? Let’s examine this point by point.
What is cost-plus pricing? Formula and strategy
Cost-plus pricing strategies are based on the classic calculation of product performance. Through analysis of the acquisition costs for each product, the desired profit margin is established and added to obtain the retail price.
What do you need to consider when calculating the cost of acquisition for an eCommerce business? All necessary maintenance costs on a prorated basis.
Price = production cost + structural expenses + profit margin
So, your calculation should start with the cost of the product itself and the cost of the domain for your online store, including production, if the product is manufactured in-house, and any shipping costs involved.
This pricing strategy is the simplest one and is the one that’s traditionally used in standard businesses, such as those that sell groceries, fashion, or basic utilities.
Advantages of cost-plus pricing strategies
If cost-plus pricing strategies are the most common in a large number of sectors, this is precisely because they offer many advantages, both in terms of definition and execution.
- Makes calculating the final price for each product simple.
- Ensures you receive the anticipated profits from your pricing strategy.
- Allows you to adjust the margin at all times, knowing that the costs are covered.
- Offers unique prices that only involve monitoring the expenses of the eCommerce business.
- Maintains the same strategy of margins and percentages for all products in the same line.
Disadvantages of these pricing strategies
Despite all of these advantages, the truth is that a cost-plus pricing strategy isn’t always the best option for an eCommerce business. This is because the changes in the online sales paradigm have an enormous influence on the success of this type of pricing strategy.
Digital users and potential buyers expect and demand a new type of relationship with online stores since they have more options than ever before to purchase the products that they want.
What are the disadvantages of cost-plus pricing strategies when it comes to eCommerce businesses?
- They establish a unilateral profit margin without considering competitiveness in the eyes of the user.
- They don’t respect market trends due to seasonality or the volume of supply and demand.
- They are unattractive to the digital buyer who’s used to comparing prices and looking for sales.
In the end, all of these inconveniences result in an obvious loss of sales opportunities due to prices that don’t reflect the concerns of your potential buyers.
How to adapt cost-plus pricing to your eCommerce business
To make a cost-plus pricing strategy successful for your eCommerce, you must take into account the fluctuations that occur in the market, both in demand as well as in the prices that can be used to cover them.
The key method to overcoming the disadvantages of this type of strategy centre on monitoring the competition. Monitoring the prices of your competitors will allow you to know the changes that other online stores, brands, and marketplaces are making to products that are identical or similar to your digital sales at all times.
Price intelligence software is precisely what will allow you to adjust the prices of your entire catalogue at any time according to the reality of the market. This is how you’ll transform your cost-plus pricing strategy into an up-to-date dynamic pricing strategy. What advantages does this offer your pricing operations?
- You can automate price adjustments on all products, by batch or based on certain changes in the competition.
- You can set minimum margins or price limits for your dynamic prices to move between.
These repricing strategies based on the competition will allow you to always retain the profit margin from cost-plus pricing while always knowing which extremes to move between to keep your business competitive and profitable.