Price Management

How to Reduce eCommerce Price Sensitivity

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*The following is a guest post from Wiser partner, Sweet Tooth.

In eCommerce, pricing products correctly is a must-do because customers can be price sensitive. Reducing prices isn’t always an option, but don’t worry; there are other ways to help reduce a customer’s price sensitivity.

Let’s first define what price sensitivity is. From Investopedia:

“The degree to which the price of a product affects consumers purchasing behaviors. The degree of price sensitivity varies from product to product and from consumer to consumer. In economics, price sensitivity is commonly measured using the price elasticity of demand.”

Or, in plain English:

“How a customer’s decision to purchase changes as the price increases or decreases.”

Price sensitivity usually gets a lot of attention around the holiday season, when the topic “showrooming” is frequently mentioned. For tips on dealing with showrooming particularly, read my blog post “Dear Best Buy, Target & Other Retailers: Showrooming Isn’t Your Problem.”

If you’re interested in price sensitivity, I’d definitely recommend reading the book “The Strategy and Tactics of Pricing” by Thomas Nagle and Reed Holden. These tips are based on their nine laws of price sensitivity and consumer psychology.

1.  eCommerce Product Copy Must Disarm Alternatives

Simply put, your product copy must position the product as superior to a consumer’s alternatives.

For example, if you’re selling a bike you need to position your product copy to differentiate the bike versus other bikes, driving, roller blades, etc.

This positioning can be either direct, or indirect; meaning that you can directly identify and disarm alternatives, or indirectly position the product to be superior without mentioning alternatives.

All of this is meant to target the “reference price effect”, which states that price sensitivity increases as a product’s price increases relative to perceived alternatives.

2.  Create a New Product Type/Category

Instead of making a product seem better than its alternatives, reposition the product so that it is in a brand new category or class so that it has no alternatives.

This is meant to solve price sensitivity using the “difficult comparison effect” where buyers are less sensitive to the price of a product when they have difficulty comparing it to potential alternatives.

Hubspot does a good job of this by calling themselves an “Inbound Marketing Platform” rather than compete against others in the very competitive “Marketing Automation” industry.

3.  Premium Pricing – When Possible

This is a no-brainer, but understanding the psychology behind this is important.

The goal is to leverage the “price-quality” effect. This is where buyers are less sensitive to price when a higher price can signal higher product quality. Keep in mind that this won’t work for most products, but when it can work higher pricing can actually help with price sensitivity.

An extreme example to demonstrate this is bungee jumping; most people would rather pay $100 instead of $5 for bungee jumping. The $100 price tag indicates that there is higher quality, and probably a safer jump, even though there may be no difference at all. Consumers will go with the $100 jump, over the $5 jump in this instance. Compare this to a situation where there is a $4 jump and a $5 jump. In this situation, consumers are more price sensitive and are likely to choose the $4 jump, since there is no premium pricing to indicate quality.

4.  Package Pricing

Packaging items together is a great way to deal with the “price proportion cost” factor. The price proportion cost factor basically states that customers evaluate the price of an item based on its proportion of the total overall cost of the benefit they are trying to achieve.

For example, if a customer is trying to buy a suit they will be less price sensitive to the price of a pocket square than a suit jacket since the suit jacket contributes more to the overall cost of what they’re trying to get. The price of a pocket square is only a small fraction of what the total package costs, so they will spend less time evaluating its price.

The goal is to package products together so that lower cost items can make up for the price sensitivity consumers have for higher cost items. Be sure to push cross-sells and try to sell a “benefit package” rather than just a single product.

5.  Stop Being A Vending Machine

A vending machine is just a product and a price. If all you have to offer is a product and price, then you’re no better than a vending machine.

The above tactics are great ways to help reduce a customer’s existing price sensitivity, but the most effective way to deal with price sensitivity is to remove it from your customers altogether. A great way to do this is to create fervently loyal customers who do not even consider alternatives.

Offer your customers a great customer experience, a loyalty program, and status-based perks that reward their ongoing patronage. Great examples of this are using loyalty points or extending the return policy for repeat, long-time customers.

When your customers don’t even consider alternatives or competitors, you’ve eliminated most of their price sensitivity – and created stable, predictable sales.

Steve Deckert has run an eCommerce business, been involved in eCommerce consulting, and is now a co-founder of Sweet Tooth, a loyalty app for e-commerce stores. Sweet Tooth has created over 3,500 loyalty programs in over 40 countries and has rewarded over 15 million happy customers.

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