Feeling downhearted that you can't compete with the "major players" in the Ecommerce world? OK, so you're not going to take on Amazon anytime soon but there are other canny ways to compete - and it all starts with thinking about, then developing, a competitive ecommerce pricing strategy.
Where to start?
1. Know Your Margins
All companies need to be concerned with their margins. Why is it so important? Well, if your margins aren't high enough to cover operating expenses, you are losing money and you will need to raise your prices or cut your costs to increase your margins sufficiently to achieve a net profit.
For retailers, gross profit measures their markup over wholesale.
Gross Revenue - Direct Costs = Gross Profit
Margin = Gross Profit/Gross Revenue
You might think that raising your prices is not an option because you are in a highly competitive situation. Really? You do need to review your pricing strategy often and determine if you want to be the low-cost provider, the most-expensive provider or somewhere in the middle.
You need to try to predict your customers' behaviour with each scenario. Will your existing customers switch providers if you raise your prices or is it too much trouble for them to do so? What new customers might you attract if you raise your prices? Are they better and more valuable customers? Will they spend more with you?
The reality of ecommerce is that the lowest price doesn't always win. Even with plenty of paying customers, you may still not make 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.
You really don't want to get into a price war because if you consistently price too low, your customers will always expect the lower price, even when it is unsustainable to your business. It's also unlikely that these customers will remain loyal because they are just looking for a bargain.
2. Offer Incentives
Once you know your margins, and price accordingly, then you can offer incentives to motivate your customers to buy. 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. One example (to give a sense of urgency) might be “purchase in the next hour and receive 20% off!”
The language you use can attract customers and minimally affect your bottom line. If you have a surplus of products, you can profitably offer a 2 for 1. Additionally, people perceive large percentages as big savings. For example, “Buy one, get one 50% off!” The customer sees the 50% off, but really they are only getting a 25% discount.
Being savvy with your incentives allows you the ability to get attention for your products, and build a reputation for having good deals, without losing money.
3. Know Your USP (Unique Selling Point)
A unique selling point/proposition is a factor that differentiates a product from its competitors, such as the lowest cost, the highest quality or the first-ever product of its kind. A USP could be thought of as “what you have that competitors don’t.”
A successful USP promises a clearly articulated benefit to consumers, offers them something that competitive products can’t or don’t offer, and is compelling enough to attract new customers.
How do you stand out from the crowd? Every online business has to tackle this question to determine their value proposition and target market. For online retailers, a unique factor could be excellent customer service, free delivery or the fact that what you sell can't be found elsewhere.
4. Introduce a Loss-Leader (Selling Below Market Value)
Highly discounted pricing can be advantageous if paired with the appropriate merchandising strategy. The Loss-Leader pricing strategy assumes that an item sold below market value will encourage customers to buy more overall. Using this pricing strategy, you will have the opportunity to upsell, cross-sell and increase the average shopping basket value
Even if the profit is not impressive, this strategy stimulates purchasing, opening the door for further marketing efforts. The value of customer acquisition outweighs the value of the transaction. A follow-on strategy is to 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 e.g. "cheap" printer, expensive replacement ink cartridges.
5. Diversify Product Offerings
Having a better idea of what your customers want gives you the opportunity to sell and generate profit from diversified products. When in doubt, give your customers multiple options to help them figure out what they want. In the lecture, "Are We In Control of Our Decisions" Dan Ariely recounts an MIT experiment he conducted to test the effects of product and pricing diversification.
He found that giving a customer more options influences their choice and their perception of a ‘good deal.’ Specifically, one unattractive option can emphasize the utility of other options, helping the consumer decide on an option that best suits them. The end result of proper diversification is that online retailers will offer bad options to emphasize the good, driving customers to act based on perceived value.
6. Use Pricing Analytics
The pricing analytics should evaluate past performance in specific market conditions and suggest what you’ll be able to sell in a particular product line. Analytics will allow you to track prices, goals and performance.
With objective evidence from pricing analysis, it makes it much easier for you to make a decision on whether a discount is necessary.
Look at a wide variety of direct and indirect competitors to gauge where your price falls. If your value proposition is operational efficiency, evaluate your competitors on a regular basis to ensure that you’re maintaining competitiveness.
7. Consider Amazon, But Don’t Let Them Scare You
Amazon is always going to be difficult to compete with on price, and there’s naturally every chance that you are charging more than them. So does that mean you should give up? Absolutely not!. Just remember:
"The cheaper the items, the less important it is that you need to match Amazon’s price. This is especially true if the product details offered on Amazon are scarce. This is where having a great page with amazing product videos can help you get away with charging a few pence/pounds more."
Also, look to see if the products are Prime eligible and how many reviews they have. If there are few reviews and customers aren’t able to get it delivered for free within 24 hours you’ve got more room to charge a bit more as the Amazon alternative isn’t quite as attractive.
8. Try "Pay What You Want"
The pay-what-you-want strategy (PWYW) has been around for a while but has not been used heavily in the online retail space. A few years ago online retailer brandalley.co.uk had a one-off sale offering designer goods with a discount of 80% featuring premium collections and beauty products including labels such as Chloe, Gucci and Galliano shoes, DVF, Ghost and Jade Jagger.
The special 4-day sale ‘Pay what you want’ allowed members to choose what they wanted to pay for designer clothes, beauty and homeware (although there was a minimum payment of £1.00). If visitors chose to pay more, the profit went to Help for Heroes.
If you believe that your customers are fair-minded and understand the value of your products, then PWYW might be an effective pricing strategy to consider. If your site shares revenue with charities, then PWYW could work, as customers often pay more to help the charity, increasing your share of the revenue in the process.
You could also tie the PWYW strategy with an incentive - such as an additional product once the price exceeds a certain threshold, say £10. This threshold can be kept secret or made public on the site as a marketing tactic to encourage customers to pay more.
9. Consider Flat Pricing
Flat pricing is a strategy where a limited number of prices are used for all product offerings, such as in pound shops where every product is priced at £1. This strategy works well if you are selling many similar products at a similar price. If this is the case, flat pricing is simpler to manage, easier for your customers – and also results in greater profit.
10. Introduce Personalised Pricing
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, device used by the shopper, customer preferences, history of purchases, and so on. This strategy is best suited for the following types of online retailers.
You have many products in your online store and introduce new products regularly. This makes personalized pricing more effective as repeat customers see the new product and the new promotional pricing to reward their loyalty, or to encourage an initial purchase of a new product.
You have wide profit margins. This can allow you the freedom to offer discounts at any time. If the product is sitting in a shopper’s basket for a few days, you might offer a discount or drop the price to encourage the shopper to complete the purchase.
You have repeat customers. Customers know that they will be rewarded with personalized pricing and promotions based on their loyalty to your site.
Don't you think it's time to re-think your pricing strategy and get real about just how you can compete successfully in the ever expanding world of Ecommerce. Set yourself and your company up for success by rising to the challenges that pricing poses, sooner rather than later.
There is no 'one size fits all' solution to pricing strategy that will fix all of your issues in one go, but investing in pricing software is a very good place to start. At the very least it will help you compete on a level playing field.
Recognize past mistakes and meet them head on to find a final pricing strategy that is right for your business - then revisit that strategy often to fine-tune it as your business and your customers grow and evolve.
You may also want to read
Confessions of the Pricing Man:how price affects everything, Hermann Simon 2015
Pricing Strategy:tactics and strategies for pricing with confidence, Warren D. Hamilton 2014
Pricing Strategy:setting price levels, managing price discounts and establishing price structures, Tim Smith 2011
So Why Do I Care? Management, marketing and innovation insights for a changing world, Tom Coughlan 2006