At what price should you sell your products? Price them too low and you may discover that even though sales are pouring in, you’re still in the red when you take into account all your other expenses.
Price them too high, on the other hand, and you may give an impression of luxury and exclusivity, thus attracting fewer but more affluent consumers whose capacity to purchase at a higher price-point could compensate for the lower sales volume, but what if your customers see that your prices are significantly higher than your competitors’ but provide no real, additional value? That is also going to hurt your bottom line.
Finding your pricing sweet spot is tricky. “It’s probably the toughest thing there is to do,” says Dr. Charles Toftoy, Professor Emeritus of Management at George Washington University. “It’s part art and part science” and it involves factoring in specific components, such as “pinpointing your target customer, tracking how much competitors are charging, and understanding the relationship between quality and price.”
As with most facets involved with improving your conversion rates, however, there is no fail-proof pricing strategy or formula that will work with every ecommerce business or product. But there are a number of helpful strategies that you can split-test and employ in order to optimize the pricing of your products.
When The Price Is Right, Your Business Will Prosper
Angelica Valentine of Wiser: “Price influences the consumer’s likelihood to purchase. In fact, 80% of shoppers say that competitive prices drive their purchase decisions. In a crowded market with so much inventory overlap, retailers need to provide effective pricing to be considered. Luckily, retailers don’t always have to present incredibly low prices because value is the other side of price. Shoppers ask themselves, ‘How much is this product and what am I getting for my money?’
The perfect price is always changing because there’s no such thing as one right price in retail. Would you pay more for ice cream on a summer day than a cold winter one? Probably. You also pay less to see a matinee movie than a Saturday night. Both of these examples translate directly over to online retail. Some key variables that influence pricing are seasonality, time of day, supply and demand, and competitor pricing.”
How To Create An Ecommerce Pricing Strategy
Manish Punjabi: “Everyone would love to charge higher prices, as that usually leads to higher profits. Most companies try to be either a low-cost provider or a premium-seller. But you can do both and win.
If you’re venture-backed, then you may choose to lose money on each sale just to gain market share. This can go as far as your investors are willing to ignore your P&L statements in search of a big exit when you go public. Unfortunately, this doesn’t work for 99% of companies.
A better way is to know your 90-day customer value and work backward from there. You’re using loss-leader pricing, but you’ve got a predictable funnel in place. For example, you might sell a $20 widget at your wholesale cost of $10 at a customer acquisition cost of $40, knowing your first-time customers will come back and spend another $60 at retail pricing within 90 days.
Now you’ve got a nice customer acquisition model in place and every sale after that first 90 days from those new customers is pure profit.
What about selling higher-margin products?
Premium, exclusive inventory leads to higher prices. It’s just too easy to bargain hunt for deals. Source exclusive distribution rights or create a line of signature products.
And what about your checkout process?
The more streamlined your conversion process, the higher your conversion rates, the lower your CPA costs, the higher your repeat purchases, and the higher your average order value will be. When’s the last time you looked at a heat map or a user-testing video of your site? Is it an effortless experience?
What do people think about your products, customer service, and marketing?
Are they leaving reviews on your site? If not, ask them to. Get feedback and improve your products and inventory. Lower customer inquiry response times. Add FAQ’s, chat, and phone support to your e-commerce site.
Build a brand, not just a business. The stronger your brand, the more you can move to the higher-end of your industry price spectrum.
In short, to build higher prices…
- Use a funnel customer acquisition strategy
- Iron out your conversion process
- Source more desirable and exclusive inventory
- And nature your brand.”
Know Your USP
What makes your company special? How does it stand apart from competitors? Your response to these questions yields your USP (unique selling proposition), which is imperative to your business’ success, including the effectiveness of your pricing strategy.
As an online retailer, your USP could be exceptional customer service, free or expedited shipping, or a product you can’t get anywhere else, to name a few.
Pricing competition is at an all-time high says Melissa Eisenberg, so you may need to get a little creative when it comes to crafting a promotional strategy. For instance, some companies have achieved good results by appealing to their customers’ benevolent side and donating a portion of the company’s proceeds to charity—a tactic that is especially effective during the holidays.
Ricky Padilla, the owner of Brown Water Coffee, “donates $1.00 to fund clean water projects every time someone purchases coffee form his ecommerce shop.” Plus, he “offers free shipping on orders over $20—which is a great pricing strategy that encourages people to buy more than 1lbs of coffee.”
Diversify Your Offers
In addition to knowing your USP like the back of your hand, you also need to have a solid grasp on your market demand. Do you stay up-to-date on current trends? Do you know what your customers really want? Well, you should.
When you’re knowledgeable of what your customers want, you have greater opportunities to diversify your product offerings and increase your profits. Melissa Eisenberg says, “When in doubt, give your customers multiple options to help them figure out what they want…Specifically, one unattractive option can emphasize the utility of other options, helping the consumer decide on an option that best suits them.”
Top Pricing Strategies That Work
Multiple pricing, which is also known as bundle pricing, is a strategy in which retailers sell more than one item for a single price, offering a discount on individual items when customers purchase them as a package as opposed to individually. You often see this technique used in grocery stores or with common apparel items, such as socks and t-shirts.
The multiple pricing strategy is effective at creating a “higher perceived value for a lower cost, which can ultimately lead to driving larger volume purchases,” says Humayun Khan. However, multiple pricing can also create cognitive dissonance for your customers, making it difficult for you to sell them items individually at higher costs.
Leveraging the anchoring cognitive bias, the anchor pricing strategy is a psychological tactic that works by listing both the sale price and the original cost (the anchor) of a product as a way to highlight the savings a customer will gain by making a purchase right then and there.
Humayun Khan of Shopify: “A study by Dan Ariely found that when students were first asked to write the last two digits of their social security number and then asked to consider whether they would pay this number of dollars for items that they didn’t know the value of like wine, chocolate, and computer equipment.
Next, they were then asked to bid for those items, and Dr. Ariely found that students with a higher two-digit number submitted bids that were 60-120% higher than those with lower security numbers.
The original price establishes itself as a reference point in the minds of consumers which they then anchor onto and then form their opinion of the listed marked down price. The other way you can take advantage of this principle is to intentionally place a higher priced item next to a cheaper one to draw customer’s attention to it.”
Just make sure that your anchor price doesn’t seem too unrealistic, as this can breed distrust and upset among your customers who—don’t forget—are savvy and armed with their mobile devices and can easily research the typical cost of any product or service.
Melissa Eisenberg of WisePricer: “Highly discounted pricing can be advantageous if paired with the appropriate merchandising strategy. The Loss-Leader Strategy assumes that an item sold below market value will encourage customers to buy more overall. Using this strategy, online store owners have the opportunity to upsell, cross-sell and increase the total shopping cart value (average revenue per user).
Even if the profit is not impressive, this strategy stimulates client acquisition, opening the door for further marketing efforts. The value of customer acquisition outweighs the value of the transaction. A corollary strategy is to choose products that have a low CPA (cost per acquisition), to minimize loss. The end goal is to sacrifice losing money on one item in order to make a profit on the rest of the products sold (i.e. cereal cheap, milk expensive).”
The downside of the loss-leader strategy, however, is that if you use it too often, your customers will become trained to expect discounted prices from you on a regular basis.
Think Outside-The-Box: Unusual Pricing Strategies That Work
While most ecommerce professionals use either a cost-plus or value-based method of setting their prices, you do have other options. Here are four lesser-known but effective strategies for pricing your ecommerce offers. See how well they can work for you!
1. Pay What You Want
The Pay What You Want pricing strategy (PWYW) is pretty self-explanatory, allowing customers to pay their desired amounts for specific products or services, including $0 (sometimes a floor price may be set) or even more than the suggested price if the quality or experience were deemed excellent.
Panera Bread has used the PWYW strategy at its five Panera Cares locations. The band Radiohead has used it to sell their album In Rainbows. And Headsets.com has used the PWYW strategy as a means to entice customers into trying key products.
And while PWYW may not typically lead to a significant profit—or loss for that matter—it does generate a lot of free marketing, helping you to reach a wider audience, which is one of the most compelling reasons to consider adopting this strategy.
How Can You Benefit?
You have fair-minded customers – If your customers understand the inherent value of what you have to offer, then PWYW can work.
When Bonvoy Adventure Travel told travelers they could pay any amount in between a trip’s asking price and the company’s hard costs, “while most customers [chose] to pay somewhere in the middle, some have paid full price even when given the option to discount their trip,” reports Lisa Evans.
Plus, according to Carl Shan, you can encourage customers to be more generous by…
- “Appealing to their sense of fairness – e.g., ‘I’ve spent a great deal of time making this music, and would appreciate if you would pay a fair price.’
- Anchoring a price in their mind – e.g., ‘Typically, books like this are sold between $15-$25, but we’re letting you pay what you want.’
- Offering tiered products – e.g., ‘If you pay more than $10, you’ll receive a bonus 45-min. audio file where I discuss this topic in-depth.’”
You’re affiliated with a charity – Customers are often willing to pay a higher PWYW price if they know that a portion of the proceeds goes to a good cause.
You offer incentives – To leverage the PWYW strategy to your advantage, you can tie it to an incentive, such as providing customers with a free gift or upgrade if their purchase price exceeds a specific threshold, which you can either disclose or keep secret as a ploy to encourage customers to pay more.
You limit PWYW to a few products or categories – The PWYW pricing strategy doesn’t have to be employed for all the products and services you offer. You can limit it to a few select items or categories where it’s most appropriate.
2. Name Your Price
The Name Your Price strategy is similar to PWYW but with a catch: the price you name has to surpass a certain threshold in order for the purchase to be viable. The threshold price, however, is not revealed to customers. Several travel websites, like Priceline…
…and insurance companies, like Progressive…
…are well-known for using the Name Your Price strategy.
How Can You Benefit?
Ecommerce businesses can also use the Name Your Price strategy to their advantage if they sell the following types of products, says Gagan Mehra:
“Imprecise value – The products can be sold at a wide range of prices and still generate a profit. This could include one-of-a-kind products or art, where it is difficult to assess the value.
High perceived value – The perceived value of the product is much higher than the cost of procuring it, prompting the consumers to name a higher price. This can apply to books, music, and food products.
Defined price ranges – Gifts site where NYP can be a guide to show products that are within that price range. NYP can be used as a guided selling tool to show gifts within a defined price range. The retailers can use price discrimination in combination with this strategy to increase their profits.”
3. Flat Pricing
Flat pricing, or a flat rate, is a strategy that charges a limited number of fixed fees for all a business’ product offerings. The Dollar Store is probably the most well-known example of this type of strategy, pricing just about everything in the store at $1.
How Can You Benefit?
You offer a lot of similar products – Does your site offer a mix of similarly priced products? If so, flat pricing may work well for you, as it’s simpler to manage and makes shopping easier for your customers. Plus, it can result in greater profits.
You have subscription pricing – As a new trend in the biz of ecommerce, subscription pricing allows customers to sign up for a flat monthly rate and then receive a bundle of products each month. Companies that have been implementing this strategy well include the Dollar Shave Club, Birchbox, and the Honest Company, which has a “$1 billion valuation.”
4. Personalized Pricing
Gagan Mehra: “This is a relatively new strategy where specialized yield management algorithms are used to personalize the price offered to each visitor.
With the rise of Big Data, most of the personalized pricing is done in real-time by analyzing a variety of factors like customer loyalty, [the] device used by the shopper, customer preferences, history of purchases, and so on.”
How Can You Benefit?
You introduce new products regularly – Personalized pricing is more effective when an ecommerce business has lots of products in its store and introduces new items regularly. Personalized pricing can be used with new products to reward repeat customers for their brand loyalty enjoy or with new customers to encourage them to become a first-time buyer of a new product.
Your business has wide profit margins – If your products have good profit margins, you can afford to offer discounts whenever you want. For example, if a customer has an item that’s been sitting in his or her shopping cart for a while, you might offer a 10% discount or free shipping if that person completes his or her order.
I’ve had this happen to me while shopping for clothes at Express. After leaving a camisole in my shopping cart for a few days, I received an email from Express with a coupon code for 15% off my order if I completed my purchase that night.
And guess what? It worked! I now own the above lattice neck cami in black.
You get repeat customers – If you already have a lot of repeat customers or if you want to attract more customers, using personalized pricing and promotions as a way to reward your customers’ brand loyalty is a highly effective tactic.
Creating a pricing strategy that works well can be tough, as there is no one-size-fits-all strategy. Consequently, you need to have a solid understanding of your margins, your USP, and your market demand. Then, with any pricing strategy you try, you need to measure and test its rate of success with your ecommerce business. Ideally, you should validate any tweaks with an analytics tool, such as Google Analytics, Mixpanel, or the Shopify Sales Dashboard.
Additionally, marketing experts like Patrick Campbell, the CEO and Co-Founder of PriceIntelligently.com, advocate that in order to protect your brand and avoid unnecessary PR backlash, “price transparency is key.”
Have something to add? Leave a comment. And be sure to share, like, and subscribe.