Is your pricing strategy costing you?

We at WisePricer are data fanatics. When we’re not helping merchants grow their businesses and getting more competitive, we like hacking our own databases to discover patterns.

In this post I will categorize three types of merchants. All graphs are extracted from real competitors data we collect and periodically analyze.

1. Anchor Pricers

Image: Merchants “Green” and “Black” is actually a single merchant using the Anchor Pricing tactic.

As presented by Dan Ariely in his book, ‘Predictably Irrational’, an Anchor Price is a price set to pose as a point of reference. People are influenced by random numbers, so without a point of reference, people would anchor the first seen price and everything else be compared to it.

Scanning our databases looking for patterns, we encountered this wonderful example which can be seen in the graph above.
Different stores’ prices fluctuate in the same manner. moreover, those prices are set in a way that one store serves as a reference for the price of the other store. In simple terms, when a customer stumbles upon the higher priced store not knowing if “the price is right”, by directing him to another store (owned by the same merchant), the slightly cheaper prices might convince him to make a purchase.

2.  Beat them all!

Image: Merchant “Blue” is a “Beat Them All” enthusiast.

J.C. Penny recently introduced their “Fair and Square Everyday Pricing”, promising simple everyday low pricing for their products and doing away with the traditional dynamic pricing model. The results to date have been dismal. By committing themselves to their “Everyday Pricing” and abandoning the “normal” pricing strategy their customers were used to, they were unprepared to react when their competitors lowered prices and real-time market conditions changed. In the end their prices were not actually the lowest out there, and they did not develop the intelligence tools to ensure they would be able to adapt as their competition introduced seasonal discounts and coupons.
E-commerce businesses that are able to develop a dynamic pricing strategy which can respond swiftly to changes in the market will be able to capitalize on this crucial deciding factor by offering prices which accurately reflect “real-time” market conditions.

3. The Late Bloomer

Image: Merchant “Red” is late to the party.

In today’s  world, it is crucial to know where you stand in terms of your companies pricing, especially how they relate to the market in general. The “Moment of Truth” (introduced by Procter and Gamble in 2005), describes the critical moment when the customer is viewing your product and making the decision to purchase. Google has recently added the “Zero Moment of Truth” capturing the idea that the shopper now goes some way towards making up their mind about what they going to buy well before they reach the shelf (if they reach it at all). Bearing out this trend,  a recent study found that  61% of purchasers did research online before buying. What this means for you and your e-commerce is simple. By the time the customer gets to your store, they already have a fair idea of what the product should cost, and what they expect from it.

When you’re too late to adjust to the rapidly changing online market, don’t be surprised if your conversion rates drop. When everyone else sells the same product at an average price  - and your increasingly educated consumer is aware of exactly what this average price is, you need to be meeting their expectation on pricing. If your competitors pricing is considerably lower than yours, unless you are a big branded marketplace like Amazon, or have a celebrity CEO like Zappos, don’t expect to be selling like they do. Your online store needs to be able to adapt rapidly to your competitors, and you need to ensure that you have the right business intelligence tools to ensure you do not get left behind.

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Roey Brecher

  • http://www.facebook.com/arie.shpanya Arie Shpanya

    Well done. almighty CTO ;-)

  • http://twitter.com/DoctorAtlantis Doctor Atlantis

    Very interesting. I think I first read about the irrationality of purchasing decisions in Michael Shermer’s The Mind of The Market. He makes a good case that we only think we’re making rational decisions when it comes to money – but usually that’s not what happens at all.

    • http://www.wisepricer.com/ Roey Brecher

      Thanks. Also notable are the works of Daniel Kahneman and his peers. I love how the examples they present us with can actually improve our buying decisions.

  • Elan

    Great post. I’m a big Dan Ariely fan.

    Just a quick question:

    What are the labels for the x and y axes?

    If Y is ‘price’ and x is ‘time,’ we know what the price is at any given time, but were these prices effective?

    In other words, how much did adjustments affect conversion rates?

    Thanks!

    • http://www.wisepricer.com/ Roey Brecher

      Hi Elan,
      Yes, x is ‘time’ and y is ‘price’. Since there are other parameters involved when measuring conversion rates it’s hard (though not impossible) to decide what’s your best pricing strategy would be.
      For example, selling the cheapest products won’t effect your conversion rates if your site lacks the “Trust Factor” (think Amazon vs. eBay).

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