Is the Price Right? Pricing Strategies for Internet Businesses

Marginal Cost Definition - Is the Price Right? Pricing Strategies for Internet Businesses

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You may have the greatest product/service in the world, but you won't get in any place if it isn't priced properly. In this article, we'll contemplate discrete pricing strategies so that you can find the one that is best for your business.

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Marginal Cost Definition

Generally speaking, there are three original pricing strategies Internet firms employ: Pops, Caps, and Vaps. Each strategy is explored below. If properly implemented, these strategies can help firms under price their competitors while being just as profitable.

Physical Object Pricing Strategy (Pops). This pricing model works well if you are selling a bodily good that needs to be shipped to your customer. For instance, merchants like Amazon.com and Wal-Mart fall into this category.

In order for such firms to decide their prices, they need to start with a base level of what it costs them to yield and deliver one additional unit (this number is known as the marginal cost,). For instance, Wal-Mart sells microwave ovens. What does it cost them to yield an additional microwave oven? What does it cost them to buy it from their supplier, put it in their store, get the buyer to come to the store, and execute a transaction with their customer?

To decide their final price, firms should add a ration growth to the marginal cost. This ration growth is known as the operating behalf margin. To find out what percent they should use, they should look for similar firms, and try to price accordingly. Amazon, for instance, has an operating behalf margin of 6% at the time of this writing. Contentious retailers should look to have a similar operating behalf margin -- preferably lower if they are able to.

Key Idea: Firms that can construct the most sufficient company processes will be able to minimize their cost, which in turn will allow them to keep prices low while still retaining bright margins. This will allow them to offer lower prices but still enjoy the same level of profitability.

Cost of Acquisition Pricing Strategy (Caps). Pops works very well if your original cost is the cost of the actual good that you are delivering. But firms that are selling a product/service where the original cost is marketing-based -- meaning the costs related with getting visitors to your site -- may advantage from utilizing Caps to decide their final price. Caps involves firms answering two key questions:

1. What will cost it to get citizen to my site?

2. What ration of my site visitors will make a purchase?

The answer to demand #1, divided by the answer to demand #2, tells the firm its cost per acquisition. The operating behalf margin can then be added to decide the final price.

Example: A retailer may find that on mean it costs .10 to get a visitor to the site, and the ration of site visitors that make a buy is 1%. From there, we simply do the math: .10 / .01 = . With a cost per acquisition of and assuming competitors have an operating behalf margin of 20%, the final price should be set to .

Key Idea: The key here is obviously to minimize the cost per acquisition. To do this, firms need to place a high priority on addition the ration of visitors that make a purchase. The site's conversion rate is the most leading metric.

Value Added Pricing Strategy (Vaps). For businesses in which the marginal cost is zero -- for instance, the sale of digital products like ebooks and online courses -- or businesses in which there is not much of an established precedent, Vaps can be an excellent pricing strategy. This is simply a more ad hoc strategy in which the good is priced based on how much value it offers to the consumer. There is no real formula to this strategy, which can be comforting or disturbing, depending on your preference.

Key Idea: Vaps works best when you can originate a company model that allows you to payment a separate price to separate clients. For instance, if you are selling consultation services or customized products, you can offer your client a quote based on how much the goods is worth to them.

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