Online retail has grown significantly whilst traditional shopping on our high streets has seen a marked decline - once proud small retailers have now been deposed by coffee shops and charity stores.
So, on the face of it, all is looking promising for you online retailers - at the very least you don't have to maintain costly shops in town centres nor pay ridiculous business rates for the pleasure of a high street presence.
However, despite the obvious advantages of providing an online shopping experience you probably often feel under pressure to get your pricing strategy right. It can be both exciting and scary deciding at what price to sell your product or service but how do you wish to be perceived?
Is it as the retailer who sells below the competition to get loads of sales or the one who sells at a higher price but gains added respect because of the value and service you offer?
Ultimately it's up to you whether you want higher prices for your products and a lower volume sold or lower priced products and higher volumes sold, and which direction will enable you to achieve profitability. Read on to better understand the available pricing strategies for online retail.
Pricing strategies for online retailThe lowest price doesn't always win
Know your margins. The reality of online retail pricing is that the lowest price doesn’t always get the sale. In fact, pricing battles usually end with you pricing your products too low. Even with plenty of customers, you still may not enjoy a profit.
If you are lowering your prices to a point where you are losing money, you should consider finding a better source, or adjust your product offerings to include more profitable items.
Getting your online store into a pricing battle could hurt you in the long term as well. When you consistently price too low, your customers will always expect the lower price, even when it is unsustainable to your business. Over time you could lose even your most loyal customers.
Can you really afford to let this happen?
Realise your USP (Unique Selling Point)
What makes you different? Every company has to tackle this question to determine their value point and target market. For online retailers, a unique factor could be excellent customer service, free and speedy delivery, (e.g. Amazon Prime's "get it tomorrow"), or a unique product you can't find elsewhere.
Not On The High Street is an award-winning website where you can find highly original gifts. The company, launched in 2006, supports over 1500 British small businesses, providing them with an attractive platform on which to market their wares.
With pricing competition at an all-time high, retailers have to think outside the box when crafting a marketing or promotional strategy for their online store.
Once you know your margins and have priced accordingly, then you can offer incentives to motivate your customers. Even if you can’t sustain an ultra-low price in the long term, you can always offer limited time pricing to reach these customers, e.g. “purchase today and receive 20% off!” This also gives a sense of urgency to the purchase, i.e. tomorrow will be too late.
If you have surplus products, you can affordably offer 2 for 1. Additionally, buy one product, get 50% off the second. In reality, the customer is only getting a 25% discount.
Being shrewd with your incentives allows you the ability to harvest attention for your products, and build a reputation for offering good deals.
Understand the market demand/fashion. Make sure that you are up to date with current trends by reading ecommerce news. Use products like “Google Trends” or “Google Insight” to check the popularity of a stock keeping unit (SKU).
Dan Ariely, a professor of psychology and behavioural economics, found that giving a customer more options influences their choice and their perception of a ‘good deal.’ Specifically, one unattractive option can emphasise the value of other options, helping the consumer decide on an option that better suits them and offers greater value.
Online retailers can offer less attractive options to emphasise the good, driving customers to opt for the more expensive option.
Buzz monitoring is the monitoring of consumer responses to commercial services and products in order to establish the marketing buzz surrounding a new or existing offer.
Similar to media monitoring it is becoming increasingly popular as a base for strategic insight development alongside other forms of market research. Buzzmonitor offers "Pick a plan that's right for you" - the three options are "Free Forever", "Squirrel" at $500 a month or "Bear" at $1500 a month, obviously with increasing services.
Test your Online Pricing Strategy
As with many things in ecommerce, one size does not fit all, so it is important to measure and test the success of changes you make to your online store's pricing strategy. Ideally, every change should be tested and validated with an analytics tool.
Pricing Analytics tools (also known as Price Optimisation Tools) can analyse your historical data and support you by making recommendations to increase or decrease specific prices in order to either increase profitability or drive revenues.
For example, Pricing Analytics will reveal if your ‘Summer Sale’ increased your conversion rate, or if the newer products in your online store are generating more profit than older products.
"Keystone" Pricing Strategy
Here an online retailer simply doubles the wholesale cost they paid for the product to determine the price. There are however a number of scenarios in which keystone pricing may be too low or too high for your business.
For instance, if you have products that have a slow turnover, have substantial delivery and handling costs, or are unique and scarce in some way then you might be selling yourself short - and could possibly get away with an even higher markup. If your products are easily available elsewhere keystone pricing may not be right for you.
Keystone pricing works as a quick-and-easy rule of thumb that ensures an ample profitability margin. However, depending on the availability and how competitive a product is, it’s usually unreasonable for an online retailer to mark up a product that high.
Manufacturer Suggested Retail Price (MSRP)
This is the price the manufacturer recommends that you as an online retailer use to sell their products. The reason manufacturers first started doing this was to help standardise prices of products across multiple locations and retailers.
As an online retailer, you can save yourself some stress by taking yourself out of the decision-making process and just "go with the flow". However, you’re unable to carve out or sustain an advantage over your competitors if you're stuck with the MSRP.
A common tactic where merchants sell more than one product for a single price. A study looking at the effect of bundling products in the early days of Nintendo's Game Boy hand-held console found that the most products were sold when the devices were "bundled" with a game.
Traditionally, online retailers use this strategy to create a higher perceived value for a lower cost which can ultimately lead to driving larger volume purchases but when you bundle products up for a low-cost, you'll have trouble trying to sell them individually at a future higher cost.
Consumers love sales, coupons, rebates, seasonal pricing and other promotion-related markdowns, i.e. grabbing a bargain.
Discounts are great for attracting a larger amount of traffic to your online store and getting rid of out-of-season or old stock, whilst attracting a more price-sensitive group of customers.
However, if utilised too often, you might gain a reputation as a bargain retailer, which could deter consumers from purchasing your products for the usual price.
Groupon offers discounted voucher deals and draws trade by advertising such as "up to 73% off", "limited time offer", "choose between two options" and indicating how many customers have taken advantage of the "fantastic" deal.
This strategy assumes that an item sold below market value will encourage customers to buy more overall. Using this strategy, online retailers have the opportunity to upsell, cross-sell and increase the total shopping basket value. Even if the profit is not impressive, this strategy stimulates client interest, opening the door for further transactions.
Maybe the value of a customer purchase outweighs the value of the transaction. Choose products that have a low CPA (cost per acquisition), to minimise 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. cheap shampoos, expensive conditioners.
This tactic can work wonders, especially, when you consider any complementary or additional purchases a consumer might make, resulting in a boost in overall sales. However, when you overdo loss-leading prices the effect can be similar to discounting – consumers will always expect bargains from you.
If you help minimise any "pain" experienced when making a purchase, it's possible to increase the likelihood of your customer buying your product – and returning in the future. An example would be using £8.99 instead of £9.00 as your purchase price.
By using psychological pricing you tap into the irrational part of a consumer’s brain and trigger impulse purchasing through the perception of a bargain deal.
However, it doesn't work when you are selling prestigious goods - lowering your price from a whole number like £1,000 to £999.99 will actually hurt the luxury brand perception of what you're selling.
Along with the power of 9 in the prices, a tiny $ or £ sign helps take away the sting of the price - you might even want to do away with the monetary sign altogether. Amazon creates a sense of urgency to encourage sales with the following - "only 2 left in stock - order soon", which is a psychological tactic.
This is when an online retailer fixes or sets more than one price for a product, irrespective of its production and distribution costs being the same.
- Geographical Locations: in areas or regions where the customers are less price sensitive, the prices of products are higher and vice versa.
- Based on perceived value and customer segments
- Discounts are given for large/bulk orders. Offering a product package or a bundle could reduce the cost and is a form of segmented pricing.
Segmentation must be done keeping in mind the cost parameters. Further, the perceived value of the product must be constantly assessed and it must be ensured that the image of the brand doesn’t get degraded at any stage due to this activity.
This refers to using competitor pricing data as a benchmark and consciously pricing products below them to lure consumers onto your website.
This strategy can be a winner if you manage to negotiate a lower cost per unit with your suppliers, while at the same time focusing on cutting costs elsewhere and actively promoting your special pricing.
However, if you are a smaller retailer, this can be difficult to sustain given the lower margins you’ll be making.
Do you have a prestigious product to sell? Using premium pricing you benchmark your competition but consciously price your products above theirs and brand yourself as being more luxurious or exclusive.
This pricing strategy can work its magic on your business and products by giving consumers the perception that your products are of better quality and more exclusive due to the higher amount they’ll be paying for them.
On the other hand, it's difficult to pull off if your usual demographic are price-sensitive and have several other similar and cheaper options.
This is another psychological tactic where you list both a sale price and the original price to establish the amount of savings a consumer perceives to be gaining from making the purchase.
The original price establishes itself as a reference point in the minds of consumers which they then anchor onto to form a favourable opinion of the marked down price.
Another way you can take advantage of this principle is to intentionally place a higher priced item next to a cheaper one on your website to draw the customer's attention to it.
Anchor pricing will automatically trigger a response in the consumer of having found a good deal, pushing them to act on their impulsive buying habits. However, these days consumers can readily research the original prices anywhere on the internet and if your anchor price is perceivably unrealistic it could lead to distrust.
Implement Great Pricing Strategies
Building an online business involves a lot of experimentation to understand which pricing strategy works most advantageously for your particular business. The wisest approach is to choose a goal for every campaign, start small and measure the results. Understand who you are targeting – and why.
The best pricing strategy for online retailers may be one or more of those outlined here. As consumers take advantage of all the latest technologies and trends, the online retailer must have the latest strategies, tools, tactics, and prices for success.
You will need to formulate and implement great pricing strategies – and monitor your competition’s pricing and products 24/7.
The Strategy and Tactics of Pricing, Tom Nagle and John Hogan 2016.