Why is a Pricing Strategy the Key to Selling Success in Online Retail

By Moira McCormick on February 26, 2016

Introduction

Online retailing continues to expand nationally and globally – as customers abandon historic high streets and shop from home or on the go. Two examples of online retailers challenging traditional purchasing behaviours include VictoriaPlum.com and ASOS. 

 

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VictoriaPlum.com is an online only bathroom and bedroom retailer. Founded in 1999, it won Retailer of the Year in the home products section at the Venda ECMOD Direct Commerce Awards in 2013. The company is listed at number six in the SME rankings for Yorkshire. It is going from strength to strength and a majority stake was recently acquired by US Private Equity Firm TPG.

 

ASOS.png

 

ASOS is a global online fashion and beauty retailer. Established in 2000, 16 years later it is a Public Limited Company (PLC) with revenues of over £1billion.

In the online marketplace, the price of a product can draw in enthusiastic customers or make them hastily click onto another website. Get your pricing strategy right and it can pave the way to ecommerce success – get it wrong and you're in trouble!! I'd like to say there is a black and white approach to pricing online but the reality is you need to consider many different options when deciding on what will work best for your business.

There are several ways to compete - and it all starts with developing an effective ecommerce pricing strategy, dependent on the type of business and products/services being sold. 

 

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What is the Right Price?

First things first – get the price right. One of the most exciting, yet nerve-wracking aspects of online retail is determining at what price to sell your product or service. It's both an art and a science that requires an experimental attitude coupled with an intuitive feel for how you want to be perceived - price your products too low and you might get loads of sales yet not make enough to cover your costs. Pricing your products higher than the competition may attract a smaller number of customers – but what you lose in volume you gain in price.

Ultimately, you'll have to decide 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. Keep in mind though that when you have a range of products, you can sometimes risk lowering prices for one as long as you also sell products that are marked up at a higher price.

 

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Here are 5 suggestions that will help you develop a successful ecommerce pricing strategy:

1. Know your Margins

The reality of online retail pricing is that the lowest price doesn’t always win. In fact, pricing battles usually end with you pricing your products too low. Even with plenty of customers, you still may 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.

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. As a result, you could lose even loyal customers over time.

 

2. Know 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 delivery (i.e. Amazon Prime), 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, which Holly Tucker and Sophie Cornish 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. 

 

3. 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, e.g. “purchase today and receive 20% off!”

If you have a surplus of products, you can profitably offer 2 for 1. Additionally, buy one product, get 50% off the second. In actual fact the customer is only really getting a 25% discount. Being savvy with your incentives allows you the ability to garner attention to your products, and build a reputation for offering good deals.

 

4. Diversify Product Offerings

First, understand the market demand. 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 emphasize the value of other options, helping the consumer decide on an option that best suits them. The end result of this diversification is that online retailers will offer bad options to emphasize the good, driving customers to act based on perceived value.

 

5. Test your Ecommerce 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, find out if your ‘Summer Sale’ (where you implemented one of these strategies) increased your conversion rate, or if the newer products in your online store are generating more profit than older products.

 

Advantages and Disadvantages of Some Pricing Strategies for Online Retailers 

A "Keystone" Pricing Strategy

Essentially, this is when a 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 sense then you might be selling yourself short - and could possibly get away with an even higher markup. However, if your products are easily available elsewher keystone pricing may not be right for you.

  • Pros: works as a quick-and-easy rule of thumb that ensures an ample profitability margin

  • Cons: 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 a retailer use to sell their products. The reason manufacturers first started doing this was to help standardize prices of products across multiple locations and retailers.

  • Pros: 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".

  • Cons: you’re unable to carve out or sustain an advantage over your competitors because you're stuck with the MSRP.

 

Bundling 

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.

  • Pros: 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.

  • Cons: when you bundle products up for a low-cost, you'll have trouble trying to sell them individually at a higher cost later on.

 

Discount Pricing 

Consumers love sales, coupons, rebates, seasonal pricing and other promotion related markdowns – i.e. getting a bargain. 

  • Pros: 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.

  • Cons: if utilised too often, you gain the reputation of a bargain retailer, which could hinder consumers from purchasing your products for the "normal" price.

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Loss-leading Pricing

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. Even if the profit is not impressive, this strategy stimulates client interest, opening the door for further marketing efforts. Maybe the value of a customer purchase outweighs the value of the transaction. 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. expensive shampoos, cheap conditioners.

  • Pros: 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.

  • Cons: similar to the effect of using discount pricing too often, when you overdo loss-leading prices, people will always expect bargains from you.

 

Psychological Pricing 

If you help minimise any "pain" experienced when making a purchase, it's possible to increase the liklihood of your customer buying your product – and returning in the future. Traditionally, merchants do this with ending the price with an odd number like 5, 7, or 9. An example would be using £8.99 instead of £9.00 as your purchase price.

When it comes to deciding which odd number to go to, the number 9 reigns supreme. Researchers at MIT and the University of Chicago ran an experiment on a standard women's clothing item with the following prices $34, $39, and $44. The result was that the item at $39 outsold its cheaper counterpart price of $34.

  • Pros: you tap into the irrational part of a consumer’s brain and trigger impulse purchasing through the perception of a bargain deal.

  • Cons: when you're selling luxury goods, lowering your price from a whole number like £1,000 to £999.99 will actually hurt the brand perception of what it is you're selling

 

Below Competition

This refers to using competitor pricing data as a benchmark and consciously pricing products below them to lure consumers onto your website.

  • Pros: 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.

  • Cons: if you are a smaller retailer, this can be difficult to sustain given the lower margins you’ll be making.

 

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Premium Pricing

This is where you benchmark your competition but consciously price your products above theirs and brand yourself as being more luxurious, prestigious, or exclusive.

  • Pros: this pricing strategy can work a magic effect 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.

  • Cons: could be difficult to pull off if your usual demographic are price-sensitive and have several other similar and cheaper purchase options.

 

Anchor Pricing 

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 to draw the customer's attention to it.

  • Pros: it will automatically trigger a response in the consumer of having found a great deal, pushing them to act on their impulsive buying habits.

  • Cons: consumers can readily research the original prices anywhere on the internet and if your anchor price is perceivably unrealistic it can lead to distrust.

 

Conclusion

The key is to understand who you are targeting, with what and why. Only then can you begin to develop an effective pricing strategy.

 

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