From the November 2005 issue of Entrepreneur

Not long ago, you could count on web shoppers to base their purchasing decisions solely on price--and set your prices accordingly. No longer. Online consumers have become more sophisticated and now take into account customer service, privacy and security, product selection, and more before buying.

"Web shoppers are no longer looking for the lowest price," confirms Jane M. Reiner, a principal who focuses on e-commerce at Procon Management Services, a management consulting firm in Fort Lauderdale, Florida. "Instead, [e-tailers] should make sure they are viewed as a fair deal."

Jeff Rhoads, president and founder of SportStation.com, a retailer of sports collectibles and apparel based in Anaheim, California, agrees. "You have to run an e-business like any other business," says Rhoads, 36, whose company had sales of $2.5 million last year and is on track to make nearly $4.5 million this year. "You can't be one-sided with just price."

So while Rhoads does keep a close eye on competitors like MLB.comand NFL.com--"We know that, all other things being equal, we have to have a lower price than the goliaths," he says--his prices have gone up over time, and he offers fewer discounts than in past years. "When people were very, very price-sensitive, they were getting worse customer service," says Rhoads. "But people today want good customer service, and they want to make sure the website they are purchasing from is secure. And these things cost money, which impacts pricing."

"Only a few years ago, if you were selling on the web, you didn't really have overhead," says Reiner. "But now there are higher expenses." For example, today you have to make sure your company appears in the top spots on search engines--a strategy that costs money. "You have to make sure you address these issues when thinking about pricing."

Before developing a pricing strategy, savvy e-tailers first consider how to differentiate their business from the competition. "This justifies you not being as conscious of your competition's pricing," says Reiner. "It basically raises the bar."

That being said, it's important to stay informed about what competitors are charging for similar products. Before setting a final price, however, you should also factor in your true direct and indirect costs, your goals and objectives, and any tangible and intangible benefits associated with a potential sale.

Lastly, be careful when including promotions as part of a pricing strategy. Says Reiner, "While [they] typically stimulate short-term sales and create quick cash, the overall impact of offering promotions may be negative, since the people who missed out on the promotion may not do business with you until you have another one."

Of course, price-based promotions do have their place, such as if you have to get the product out because of inventory issues or if you need to stimulate cash flow. "[Just] understand that there may be some long-term effects," Reiner says.

Rhoads, for one, says his company only has promotions bimonthly or quarterly. "If you do them every week, customers are not going to shop regularly with you; they are just going to wait until they get the coupon," says Rhoads, who prefers to offer promotions involving shipping and handling, such as a free shipping upgrade from ground to three-day. "If someone buys a $100 item, and it is a $2 upgrade, then it is only 2 percent rather than 15 percent off the entire sale."

Tools of the Trade
Clearly, pricing is a major challenge for growing businesses. That's why so many e-tailers choose to hire pricing or e-commerce consultants who can help create a strategy. The best place to find one of these consultants is through your business contacts. But keep in mind: When working with a consultant, the earlier you get help, the better your return.

E-tailers can also use software tools such as strategic price planning software that provides structure and expert help in the decision-making process. One such product is the $230 PlanWrite for Pricing from Business Resource Software. Whether your goal is to maximize profits or to capture market share, it will help you determine the right price to achieve that goal.

Regardless of whether you work with a consultant, use software, or just discuss pricing with your associates or colleagues, make sure you take the time to create a pricing strategy that works for you. After all, setting the right price is a tremendous competitive advantage.

Melissa Campanelli is a marketing and technology writer in New York City.