Updated:
December 30, 2025
13 min
The Race to the Bottom That's Destroying Ecommerce Margins
Most ecommerce operators set prices using one of two methods: copy competitors or apply a standard markup to costs. Both approaches are negligent.
Copying competitors assumes they've done the pricing work correctly. They probably haven't. You inherit their mistakes while adding your own cost structure-a formula for margin compression.
Standard markups ignore what customers actually value and what your business actually needs. A 2x markup might be excessive for commodity products and insufficient for premium ones. You're leaving money on the table or pricing yourself out of markets without knowing which.
The result of these lazy approaches? 4%-10% net margin average in ecommerce. That's a razor-thin buffer against rising costs, competitive pressure, or economic downturn. One bad quarter can wipe out a year of profit.
Pricing isn't a set-and-forget decision. It's an ongoing strategy that directly determines your unit economics, your competitive position, and ultimately, your survival.
Why Cost-Plus Pricing Fails Modern Ecommerce
Cost-plus pricing-adding a fixed markup to costs-feels safe and logical. You know your costs, you add your margin, you have your price. Simple math.
But this simplicity creates three fatal problems.
Problem 1: It ignores willingness to pay.
Customers don't care about your costs. They care about value. A product that costs you $20 might be worth $100 to certain customers and $30 to others. Cost-plus pricing captures neither-it gives you some arbitrary number in between that maximises nothing.
Problem 2: It invites margin erosion.
When you price based on costs, you have no cushion for cost increases. Supplier raises prices 10%? Your margins shrink or you pass through increases that customers resist. You're constantly reactive, never strategic.
Problem 3: It commoditises your offering.
Cost-plus pricing treats all products as interchangeable commodities. It ignores brand value, product differentiation, and customer experience-the very things that justify premium pricing.
The alternative isn't abandoning cost awareness. You must know your costs intimately-they define your floor. But the ceiling is determined by customer value perception, and the optimal price lives somewhere between floor and ceiling based on strategic objectives.
The Pricing Architecture Framework
The Pricing Architecture Framework provides a systematic approach to setting prices that maximise both margin and volume. It operates across four layers: foundation, strategy, execution, and optimisation.
I developed this framework because pricing is often the most neglected lever in ecommerce profitability. Operators spend months optimising acquisition costs to save $3 CAC while leaving 20% margin improvement on the table through underpricing. The framework below forces systematic analysis of what prices your market will bear-and builds governance to protect those prices from erosion.
Layer 1: Foundation-Understanding Your Economic Floor
Before pricing anything, establish your absolute minimums.
Calculate True Product Cost:
For each SKU, determine fully-loaded cost:
Product cost (purchase or manufacturing)
Inbound freight and duties
Packaging and handling
Warehousing allocation
Payment processing (as percentage)
Expected return cost (return rate × cost per return)
This is your floor-prices below this lose money on every transaction.
Determine Margin Requirements:
Your business has minimum margin requirements to cover:
Fixed operating costs (rent, salaries, software)
Marketing investment (customer acquisition)
Growth capital needs
Profit expectations
Calculate the blended contribution margin required to cover these costs given your expected volume:
> Required Contribution Margin = (Fixed Costs + Profit Target) ÷ Expected Revenue
If you need 35% contribution margin to be viable, any product priced below that threshold must be offset by higher-margin products elsewhere.
Establish Break-Even Prices:
For each product: > Break-Even Price = True Product Cost ÷ (1 - Required Margin %)
A $30 cost product requiring 35% contribution margin has a break-even price of $46.15. Anything below that fails to carry its weight.
Layer 2: Strategy-Choosing Your Pricing Approach
With floors established, select the pricing strategy appropriate to each product category.
Value-Based Pricing
Set prices based on customer-perceived value rather than costs. higher markups from value-based pricing, making it ideal for scaling businesses thinking long-term.
Best for:
Differentiated products with unique features
Products solving significant customer pain points
Premium brands with strong positioning
Products where alternatives are significantly inferior
Implementation: 1. Research what customers pay for alternatives 2. Identify your differentiation factors 3. Quantify the value of those differentiators 4. Price at or near the value ceiling
Competitive Pricing
Set prices relative to market competitors. This acknowledges that customers have alternatives and will compare.
Best for:
Commodity or near-commodity products
Price-sensitive customer segments
Categories with transparent pricing
Market entry or share-building phases
Implementation: 1. Identify direct competitors 2. Monitor their pricing regularly 3. Position relative to them (at parity, premium, or discount) 4. Adjust based on your cost position and brand strength
Penetration Pricing
Set prices below market to gain share, with plans to increase later.
Best for:
New market entry
Products with high lifetime value potential
Categories where scale creates cost advantages
Building customer base for future monetisation
Warning: Penetration pricing trains customers to expect low prices. The "increase later" plan often fails because customers resist increases.
Premium Pricing
Set prices above market to signal quality and exclusivity.
Best for:
Luxury or premium positioning
Products with demonstrable quality superiority
Customers who equate price with quality
Categories where status matters
Implementation requires supporting the premium with quality, branding, and experience. Premium pricing without premium delivery destroys trust.
Layer 3: Execution-Setting and Presenting Prices
Strategy determines direction; execution determines results.
Psychological Pricing Techniques:
Charm pricing: $49.99 vs. $50 (perception of "under $50")
Prestige pricing: $100 vs. $99.99 (signals quality, avoids "cheap" perception)
Anchor pricing: Show original price crossed out to establish value reference
Bundle pricing: Package products to obscure individual pricing and increase perceived value
Decoy pricing: Offer a strategically inferior option to make target option look better
Price Presentation:
How you present price affects perception:
Monthly vs. annual pricing (monthly looks smaller)
Per-unit vs. per-pack pricing (depends on what favours you)
With or without shipping included (total matters more than line items)
Comparison to alternatives (frame your value explicitly)
Promotional Pricing:
Discounts drive volume but erode margin and brand perception. Guidelines:
Discount selectively (don't train all customers to wait for sales)
Use discounts for clear purposes (inventory clearing, customer acquisition, loyalty reward)
Protect full-price integrity (if everything's always on sale, the sale price is the real price)
Measure true impact (discount-driven revenue often cannibalises full-price revenue)
Layer 4: Optimisation-Continuous Price Improvement
Pricing isn't static. Market conditions, costs, and customer willingness to pay all evolve.
A/B Testing Prices:
Test different price points on subsets of traffic:
Use statistical significance (don't declare winners too early)
Measure conversion AND margin (winning on conversion at lower margin may be a loss)
Test incrementally (10-15% changes, not 50%)
Consider segment responses (price sensitivity varies by customer type)
Elasticity Analysis:
Understand how volume responds to price changes: > Price Elasticity = % Change in Quantity ÷ % Change in Price
Elasticity < 1: Inelastic (price increases hurt volume less than they help margin) Elasticity > 1: Elastic (price increases hurt volume more than they help margin)
Products with low elasticity can support higher prices. Products with high elasticity require competitive pricing.
Regular Price Reviews:
Establish cadence for pricing evaluation:
Monthly: Review promotional performance
Quarterly: Evaluate margin by category, adjust outliers
Annually: Full pricing strategy review against market conditions
Dynamic Pricing: The Amazon Standard
2.5 million daily changes on Amazon, meaning the cost of a single product is revised on average every 10 minutes. This dynamic pricing strategy has increased Amazon's profits by 25%.
Dynamic pricing-adjusting prices in real-time based on demand, competition, and other factors-is no longer optional for competitive ecommerce. 5% sales increase from dynamic pricing according to McKinsey research.
When Dynamic Pricing Works:
High-velocity SKUs where manual adjustment is impractical
Competitive markets where prices change frequently
Products with variable demand (seasonal, event-driven)
Categories where customers price-compare actively
When Dynamic Pricing Backfires:
Premium/luxury positioning (constant changes undermine prestige)
Trust-sensitive categories (healthcare, baby products)
B2B relationships (customers expect stable pricing)
When poorly implemented (visible, erratic changes destroy trust)
Implementation Approaches:
Rule-Based Dynamic Pricing: Set rules that automatically adjust prices:
"If competitor price drops below X, match within Y%"
"If inventory exceeds Z units, reduce price by W%"
"If demand exceeds threshold, increase price by V%"
Simple to implement, limited in sophistication.
Algorithmic Dynamic Pricing: Machine learning models that optimise prices based on multiple variables:
Historical sales data
Competitor pricing
Inventory levels
Time of day/week/season
Customer segment
More powerful but requires significant data and expertise.
Hybrid Approach: Manual oversight of algorithmic recommendations. The system suggests; humans approve or modify. Balances automation efficiency with strategic judgment.
Pricing for Customer Segments
Not all customers have the same willingness to pay. Segment-specific pricing captures more value.
Geographic Pricing:
Different markets support different prices:
Adjust for local purchasing power
Account for local competition
Consider logistics cost differences
Respect currency and payment preferences
Australian customers may support different price points than US customers for identical products.
Channel-Specific Pricing:
Your own website vs. Amazon vs. retail partners may warrant different pricing:
Direct sales can command premiums (better experience, direct relationship)
Marketplace presence may require competitive pricing (price comparison is easy)
Wholesale pricing must account for retailer margins
Customer Tier Pricing:
Reward loyalty with better pricing:
VIP customers get early sale access
High-volume buyers get bulk discounts
Subscribers get locked-in pricing
First-time buyers get acquisition offers (but not best pricing)
Time-Based Pricing:
Prices can vary by:
Day of week (weekend shoppers may be less price-sensitive)
Time of day (lunch-break shopping vs. evening browsing)
Season (demand fluctuations justify adjustments)
Product lifecycle (launch premium, maturity competition, decline clearance)
The Pricing Decision Matrix
Use this matrix to select pricing approach by product type:
Product Type | Recommended Strategy | Price Position | Dynamic Pricing? |
|---|---|---|---|
Hero Products | Value-based | Premium | Limited |
Commodity Products | Competitive | At/below market | Yes |
New Launches | Penetration or Skimming | Depends on strategy | No (until data) |
Clearance | Aggressive discounting | Below cost if needed | Yes |
Bundles | Value anchoring | Premium vs. components | No |
Subscriptions | Penetration + lock-in | Below one-time | No |
The 60-Day Pricing Optimisation Sprint
Phase 1: Foundation (Days 1-20)
Week 1: Cost Audit
Calculate true landed cost for top 50 SKUs by revenue
Include all variable costs (shipping, processing, returns)
Identify any products priced below cost
Week 2: Margin Analysis
Calculate current contribution margin by product
Compare to required margin threshold
Flag underperforming products
Week 3: Competitive Mapping
Document competitor pricing for key products
Identify your position (premium, parity, discount)
Note competitor pricing patterns and changes
Phase 2: Strategy Development (Days 21-40)
Week 4: Segmentation
Categorise products by pricing strategy type
Identify value-based pricing candidates
Identify competitive pricing necessities
Week 5: Price Adjustment Planning
Calculate optimal prices based on strategy
Prioritise changes by margin impact
Plan implementation sequence
Week 6: Testing Framework
Design A/B tests for price changes
Set success metrics and thresholds
Prepare monitoring dashboards
Phase 3: Implementation (Days 41-60)
Week 7: Priority Price Changes
Implement highest-impact changes first
Monitor conversion and margin effects
Adjust based on early data
Week 8: Secondary Changes
Roll out remaining price adjustments
Launch A/B tests for uncertain changes
Document results and learnings
Week 9-10: Optimisation
Analyse test results
Refine prices based on data
Establish ongoing review cadence
Common Pricing Mistakes to Avoid
Mistake 1: Pricing All Products the Same Way
Different products deserve different strategies. A hero product commanding value-based premium shouldn't be priced like a commodity SKU requiring competitive positioning.
Mistake 2: Ignoring Price Perception
A $99 product and a $100 product feel different to customers. Use psychological pricing intentionally, not accidentally.
Mistake 3: Racing to the Bottom
Competing solely on price is a losing strategy unless you have structural cost advantages. Someone will always go lower, and you'll all lose.
Mistake 4: Discounting Without Purpose
Every discount should have a clear business objective: acquire customers, clear inventory, reward loyalty. Discounting to "drive sales" without measuring true profitability is margin destruction.
Mistake 5: Set-and-Forget Pricing
Markets change. Costs change. Competition changes. Prices reviewed annually are prices that drift from optimal.
The Margin Maximisation
The Margin Maximisation North Star
The goal of pricing isn't high prices or low prices-it's optimal prices. Optimal pricing maximises contribution profit dollars:
> Contribution Profit = (Price - Variable Cost) × Units Sold
A higher price with fewer sales might generate less profit than a lower price with more sales. Conversely, chasing volume through low prices might destroy margins faster than volume compensates.
The optimal price is the one where the derivative of contribution profit with respect to price equals zero-where any price movement, up or down, reduces total profit.
Finding this optimum requires: 1. Understanding your cost structure (the floor) 2. Understanding customer value perception (the ceiling) 3. Understanding price elasticity (the slope) 4. Testing and iterating toward the optimum
5-8% profit boost on average for businesses that implement it thoughtfully. That 5-8% on a $3M revenue business is $150K-$240K in additional profit-from the same customers buying the same products at better-optimised prices.
Your pricing strategy is probably leaving money on the table. The question is how much.
The only way to find out is to build the framework, measure the gaps, and optimise relentlessly.
Your margins depend on it.
