Always a key event on the online seller’s calendar, Amazon Prime Day is fast approaching. So, now is the best time to get prepared.
In this article we look at the main approaches to price-setting, before moving on to more advanced techniques that you can use to improve your pricing strategy.
Cost-based pricingOne of the simplest ways to set prices is to do so by cost. First, you add up all the known costs for a product – materials, labour, shipping, etc. – and you then decide on the profit margin you’re happy with.
This is great for beginners in ecommerce as it’s relatively quick and easy to do.
Another good option for beginners, though slightly more work-intensive, is competition-based pricing.
With this approach you research your competitors’ pricing habits, looking at a fairly broad range. You then take the average price and use that as a basis. This way, you can effectively position your products in the completive landscape.
Try not to undercut the average price (unless your pricing strategy is consciously based on being low cost) as this could potentially damage your brand and prompt a race to the bottom with your competitors.
A combination of cost- and competition-based pricing, this method is a little more complex than both but can yield greater returns for more experienced online sellers.
First work out the cost-based price and the average competition price for a particular product. Then factor in the value of the product – the quality, the benefits and the unique selling point (USP), as well as the value as perceived by customers – and how it compares to other products on the market.
For instance, say you work out the cost- and competition-based price of a product but you find that your product outperforms others in a similar price bracket, you can then mark it up based on its value.
With all of these pricing approaches (especially the last one) it’s best to experiment and see which prices bring the best returns.
When testing prices, make sure you have a plan. Set specific goals and timeframes and make sure you monitor the effects daily.
It's best to do in increments. Make minor adjustments to prices and stick to a small sample of products. This makes analysing the impact more manageable and limits the risk if the changes you make negatively affect sales.
Once you’ve got your main pricing strategy sorted, you can begin looking at slightly more advanced techniques. Here are four tactics you can try.
You might be tempted to price similar products at the same price, assuming that customers will choose the product they like most rather than the cheapest. But a study into price differentiation by Yale University yielded some surprising results.
1. Differentiate your prices
When two products had identical price points (in this example it was packs of gum at 63 cents each) 46% of participants chose to make a purchase, while 54% opted to pocket the cash. When the packs of gum were priced differently – at 62 cents and 64 cents – 77% chose to buy a pack.
This suggests that having the same price point can make the purchasing decision more difficult. As a result, customers might decide not to buy rather than make a choice. The lesson? Try to differentiate your prices, perhaps using the value-based approach above, to tackle buyer indecision.
Leading on from price differentiation, one factor that may have helped increase sales in the previous example is the buyers’ perceptions of cost and value.
2. Anchoring and pricing levels
This brings us to anchoring, a cognitive bias that means our opinions and decisions are influenced by reference points, or ‘anchors’. To put it simply, advertise a £25 t-shirt next to a £60 t-shirt and the former seems much more reasonable in comparison. It’s the same reason why it’s good to clearly include the original price when offering a discount.
Similarly, having different pricing levels – cheaper, middle-ground and premium options – can influence what people choose to spend their money on.
In one study, researchers experimented with different selections of beer at different price points. They found that when there were two beer options, 80% went for the more expensive of the two and 20% for the cheaper. When they introduced a third, even more expensive option, only 5% chose the cheapest option, 85% went with the middle-priced beer, and 10% splashed out on the premium product.
There are two key takeaways here. One is the perceived value due to anchoring. Though the prices didn’t change, sales of the most popular beer went up from 80% to 85%, as it didn’t seem so expensive when there was an even costlier option.
The second is that by having different pricing levels, you can cater to different buyers who may be willing to spend more or less than others. You can also then up the margin slightly on the most popular products, increasing revenue.
This perception of price and value works in part due to the context. Buyers use the pricing context to gauge the value and cost of the products they’re viewing.
But price isn’t the only contextual influence on buyer behaviour. For example, if you were in a high-street clothing store, £20 for a top would seem reasonable. Now imagine perusing a charity shop and coming across the same top for £10. You’d probably think it was hugely overpriced, because in the context of the charity shop things should be much cheaper.
Similarly, the context of your online store – such as the web design, the copywriting, the descriptions and the imagery – all set the tone for your buyer. They create subconscious expectations and communicate value, so take time to polish your sales platform.
According to neuroeconomic research, prices cause the pain centre of the human brain to light up: we perceive parting with money as a painful experience. And when spending becomes too painful to justify the gain, we choose not to buy.
4. Reduce financial pain points
So, psychological techniques that ease these pain points can make consumers more inclined to buy. Here are some tactics you could employ:
- Clever copy
- Keep costs transparent
Review your strategyAs with any kind of strategy, you need to review and evaluate it to see what’s working and what’s not. Experiment with different techniques and monitor the results, tweaking things if needed.
Of course, you don’t want to be constantly changing your prices – that's a sure-fire way to irritate your customers – but reflecting on performance and taking well-thought-out action is the key to a successful long-term pricing strategy.
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