Ecommerce pricing strategy isn’t always easy to get right, and it can take some testing and experimentation to find the best strategy.
In this article, with extracts and ideas taken liberally from Dan Barker on Twitter, we’ll look at some key strategies and tips for finding the right price point, and how you can use pricing to maximise profits.
Testing your pricing strategy
There’s no easy rule to follow on setting pricing, and so many elements in pricing are specific to your company, its products and customers, so you have to test to find the right level.
Unless you sell at a huge scale, changing the price of a selection of items by small percentages is unlikely to have much of an impact.
This means it’s better to make more significant changes when testing so you can learn more from the results.
Why prices end in .99
Psychology plays a key part when in pricing strategy, and the use of certain price points reflects this.
For example, you’ll often see a price like $69.99 rather than $70. The reason? It’s all about the numbers before the dot rather than after. The first price simply sounds a lot lower than $70.
If your customer is price sensitive, this can be an effective tactic. Some shoppers, as seen occasionally seen in user tests, even mentally round the prices down to 60.
Other variants include $69.90, $69.97, and so on. The same principle can even work for much higher price points.
For example, here’s Net-a-Porter using a similar tactic for expensive fashion items. The very high price hasn’t been knocked down, but the others have. Customers can be price conscious even at higher price points.
Price sorting order
When customers click on product category pages or site search results for example, retailers have choices to make about the order in which products are shown.
As a general rule, pricing from high to low can increase average order values but reduces revenue.
In a situation where people are very likely to buy, pricing from high to low can work well. For example, restaurant wine lists and property websites often work like this.
People read from top to bottom so this sorting order means they’re more likely to find a product that interests them at a higher price first. If buyers are highly motivated, this benefits the retailer.
The idea of the price point can be more important than the actual price. If customers feel they are getting a good deal, they’ll spend beyond the price they have in mind.
In some competitive sectors, the use of discounting and offers means that retailers are taking a risk by not having offers themselves.
For example, furniture retail is a sector in which discounts are used a lot, so many sites are looking out for competitor promotions and matching them.
Here, two competing retailers are offering almost the same promotion, even the same colour and use of a countdown timer.
How to display discounts
Retailers have options around how to display a discount – is it best to show the value of a discount or express it as a percentage?
As a general rule, if an item costs more then $100 (or £100 / €100) showing the monetary value of the discount can be more effective.
Saying you can save $30 on a $150 product sounds more, and is easier to immediately understand than saving 20%.
Sometimes increasing prices on products has little or no impact on sales. For example, some tests with products discounted by 50% show no impact on sales when the discount is reduced to a less generous 30%.
Sales may not change, but this increases margins and profits for the retailer.
Pricing up can be a smart move even if it does reduce sales volumes. Again, it’s about increasing profit margins rather than order numbers.
In some cases, higher prices can increase demand for. Champagne is a prime example of this. People don’t buy Cristal purely for the taste, it’s popular because it’s expensive.
Products like this are known as ‘Veblen goods‘, after Thorstein Veblen, also responsible for the related idea of ‘conspicuous consumption’.
Other examples where pricing can increase demand include occasions where people buy gifts. You wouldn’t just buy your mother the cheapest box of chocolates for Mother’s Day.
It can also be about quality. People will often pay more for better quality electrical items because they’re more likely to last longer.
Price Anchoring’ is also a popular tactic on ecommerce sites. By showing a moderately priced item next to a similar, more expensive one, it seems a more reasonable price.
For example, if a customer sees a TV at a higher price first, the other prices will seem to be better value, even if they themselves are relatively expensive.
Pricing by customer
Pricing by customer can be a good way to incentivise certain actions, such as repeat purchase, or perhaps to increase order values.
For example, loyalty schemes can be used to reward repeat visits, by offering member discounts or other bonuses like free delivery.
Pricing by channel
Some sites may also offer different prices for different marketing channels, often those sites that are listed on price comparison sites or use affiliates.
This may be an exclusive deal that has been negotiated with another site, or perhaps a higher price to cover the cost of acquisition.
Setting the right pricing levels
If you are not selling other people’s products, those with a pre-determined retail price (RRP) then setting a price can be an arbitrary task.
Some will set an initial price and then use markdown rules which come in during the product life cycle.
Markdown rules often work like this:
- After being online for a set period of time, check whether every product is reaching its target sell through rate (STR).
- If it’s hitting or exceeding the STR, then maintain the price.
- If below the STR target mark down by a set percentage. This is based on how close the product is to its sales target.
There are several reasons why products may not be selling. It may be poor visibility, a lack of demand,poor product images, confusing or incorrect product details, or perhaps as a result of negative consumer reviews.
Price reductions are a useful lever to increase demand, but there may be other factors involved in poor sales results.
Pricing by category
Differing price strategy by category is also very popular in ecommerce. For example retailers may make a very low margin selling electrical items like laptops, but make a bigger profit on accessories such as cables, software and bags.
For this reason, retailers will often have KPIs such as ‘attach rate’ and will work hard to maximise the sales of these extras, with ‘customers also buy’ recommendations for extras.