Price Management

Best Pricing Strategies for Online Retailers

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Pricing strategies are the key to success for eCommerce retailers. The price of a product can draw customers or make them scoff and visit another website instead. Discovering the right price will rake in significant revenue and help pave the way to eCommerce success. There are strategies that will work, but there are also strategies you’ll want to avoid.

Why Does Pricing Matter?

Katharine Paine, the founder of The Delahaye Group, Inc., put it very simply, “The moment you make a mistake in pricing, you’re eating into your reputation or your profits.”

Pricing can help build your reputation as a brand. Many people associate higher prices with products that are more valuable or useful. Low prices carry a similar relationship for many brands. A low price can hint to a customer that your product is not as supreme as its more expensive counterpart. While these indications may not always reflect the actual value of the product, they still affect consumer perceptions.

If we look at smartphones, we can see an obvious relationship between price and reputation. Apple is one of the most valuable brands in the world, they have the power to price accordingly. The iPhone 6 is being priced at $299, making it one of the most expensive smartphones on the market. Their closest competitor’s product, the Samsung Galaxy S5, is priced at $199, and Nokia’s Lumia is priced at $99. Apple’s brand and reputation allow it to price its phone $200 more expensive than a standard smartphone.

What Goes into Pricing?

If you have taken an economics course, you know that supply and demand can have significant effects on the market price. When demand for a product increases, so will the price. As long as people want your product, they will sometimes pay premium prices to obtain it. Same goes for a lower demand. If no one wants your product, it is probably a really bad idea to price it like an Apple iPhone.

Another aspect that goes into pricing is added value from services or experiences caused by your company. If you offer fast delivery, you may be able to charge a premium. About 63% of shoppers want a delivery date early in the shopping process, and 58% of shoppers will add additional items to their cart for free shipping. As you can see, shipping and handling really matter to people, so charging a little more for good service will probably work out very well for your company. Another service people like is lenient return policies. If you offer free returns, then you may satisfy the 66% of shoppers who look at the return policy before making a purchase. A good return policy removes a little bit of fear caused by potential buyers’ remorse.

What Works and What Doesn’t

Anchor pricing is a psychological pricing trick that makes shoppers feel like they’re getting a deal. Having an original price visible as an anchor when an item goes on sale makes it more psychologically appealing for the customer. If a watch used to be $45 and is now advertised for $20, you should definitely let the customer know that it used to be $45. That higher price provides additional value for the customer. The challenge that comes with this is the rising trend of mobile shopping. Mobile makes comparison shopping easier than ever, and ⅔ of consumers use smartphones in store to expand their shopping capabilities.

One-price policy yields a single price, issued by the manufacturer, for all retailers to follow. For example, Samsung and Sony recently adopted a unilateral pricing policy for all flat screen televisions. This means that no matter where you look, Sony and Samsung televisions will be the same price not only on their websites but across other retailers as well. This strategy helps eliminate showrooming and price erosion, but it leaves the retailer with limited decision-making abilities.

Segmented pricing provides similar products at different prices for different market segments. One example of segmented pricing is present at Target stores. If we look at two of Target’s interior design product lines, Room Essentials and Threshold, we can see segmented pricing at work. Room Essentials offers pillows in the $0-$24 range and is aimed towards teenagers and younger adults. Threshold has very similar pillows, but they mostly lie in the $15-$49 range. Threshold is targeted towards young professionals, delivering a higher price range. While a segmented pricing policy works to deliver similar products for different market segments, customers may not see the value in the more expensive segment’s products due to their similarities.

Lastly, dynamic pricing is a strategy that allows you to change the prices of your products with changes in the market. For example, if traffic is low late at night on your website, lower the prices of your items. People who stumble upon headphones at a lower price have more of an incentive to buy them. Changing prices in real-time based on external and internal metrics make it possible to price for profit and stay competitive.

As you can see, there are plenty of ways to update your pricing strategies to fit your business needs. Pricing your products can be stressful because of the large impact it holds on your profits, but simply listening to your market and responding to trends can allow you to find the most appropriate prices for your products.

Do you have any strategies you’d like to add? Let us know in the comment section!

Contributing Writer: Brian Smyth

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