Ecommerce pricing strategies that work

Ecommerce Pricing Strategies That
Work
ConversionFanatics.com

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 backwards 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.
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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."
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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.
Read ecommerce news. Use Google Trends or Google Insights to verify the popularity of
stock keeping units (SKUs). Attend Meetup groups with local ecommerce retailers, and
so on.
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
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.
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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 a cognitive dissonance for your customers,
making it difficult for you to sell them items individually at higher costs.

Anchor Pricing
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."
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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.

Loss-Leader Pricing
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 their 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.
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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...
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...and insurance companies, like Progressive...
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...are well-known for using the Name Your Price strategy.

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.
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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 who 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, device
used by the shopper, customer preferences, history of purchases, and so
on.”

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.

Conclusion
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."

Ecommerce pricing strategies that work

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Ecommerce pricing strategies that work