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3 June 2015
Online retailers need a pricing strategy, but for the inexperienced retailer, it can be a real headache. It can take a lot of trial and error before you figure out your prices. If prices are too high the profit margins will be good, but you won’t sell many. If prices are too low, sales will be good but you might not make enough money to justify the expense. So what is the sweet spot and how do you decide what prices to list your products at?
There is no right or wrong way to price products. Different business models require different pricing strategies, but if you are looking for a useful starting point, here are some tried and rested pricing strategies you may wish to experiment with.
Everyone has heard of the manufacturer’s Recommended Retail Price (RRP). This is basically a guide price suggested by the wholesaler and if you go with this price you will achieve a reasonable profit margin.
Pros – You don’t have to think too hard and if you achieve any sales, you enjoy a decent profit margin.
Cons – You won’t be competitive if everyone else prices their products at the same level.
Large stores use anchor pricing all the time. Anchor pricing means establishing a high price as a reference point and then reducing the selling price so customers think they are getting a good deal.
Pros – if you set your anchor price very high, the customer thinks they are getting the deal of the century and you have a sale.
Cons – Online price comparison websites makes this a hard strategy to pull off because most people have a good idea of what they should be paying already.
Loss leaders are a common pricing strategy. The rationale behind this is that you sell some of your products at a heavily discounted price in order to attract traffic to your store. The extra traffic should lead to more sales in other categories.
Pros – It’s a great way to boost sales if traffic is a bit sluggish.
Cons – The more you use this tactic, the more likely customer are going to expect super low prices all the time.
Consciously pricing your prices a bit higher than everyone else’s makes your products feel a bit more exclusive. People will often pay more for the same product if it is perceived to be a ‘premium’ product.
Pros – This pricing strategy will have a knock-on effect on everything else you sell, which should give your brand a boost.
Cons – Above competition pricing won’t work if there are too many other similar products for sale at a much lower price.
Ever wondered why stores charge £9.99 instead of £10? This is what is known as psychological pricing, the theory being that people are more likely to buy a product if there is a 9 on the end of the price tag. Prices ending in 3 or 7 are also psychologically appealing.
Pros – Tap into your customer’s subconscious and trigger a spending spree.
Cons – This method won’t work with high-end goods as lower prices devalue the item.
Product bundling lets you come up with a unique price point by bundling together several items in new ways. Be creative – bundle cheese with wine, shoes and in-soles, or gym wear with a protein shake. It works for PlayStation and Xbox, so it can work for you.
Pros – Customers feel as if they are getting a bargain.
Cons – Not everyone wants to pay more for extras they don’t need.
Apple has been very successful in their prestige pricing strategy. Their prices are far higher than other manufacturer’s but because the brand is so popular, people will queue up for days to buy the latest Apple products, no matter how expensive they are.
Pros – Once you have an audience who love your goods, you can charge anything you like.
Cons – This only works if your target customers are happy to pay whatever price you conjure up.
Another supermarket favourite – the buy-one-get-one-free pricing model involves selling two products for the price of one.
Pros – People will often be tempted to go for BOGOF deals because they like a bargain.
Cons – Supermarkets have done the BOGOF deal to death, so you may come across as ‘untrustworthy’.
A dynamic pricing strategy means adjusting the prices of your products according to current market conditions. Airlines do this all the time, but it is harder to achieve the optimum price without excellent up to the minute data.
Pros – Dynamic pricing means you are more likely to meet your customer’s expectations on what they should be paying.
Cons – You will need to monitor the marketplace in real time and be prepared to change prices quickly.
Think of the Pound Shop and you get the idea. You might make a loss on some products, but on others profit margins will be good.
Pros – Flat pricing is really easy for customers to understand, really easy for you to administer, and profits will be higher as a result.
Pros – This method only works if everything you sell at a similar price point.
Sales, coupon deals, and special offers are all excellent ways of boosting traffic to your online store. After all, customers love a bargain.
Pros – Special promotions can help increase knock-on sales of other, non-discounted goods.
Cons – If you overdo the sales, you will devalue your other products.
In theory, offering products at the lowest prices means you are guaranteed sales. In practice, this is hard to achieve without dynamic price checking software and if you continually slash your prices you may end up stuck in a price war with your competitors.
Pros – Low prices will increase traffic to your store and other products will benefit.
Cons – It is difficult to sustain very low prices if you are a small retailer and you could end up making a loss.
Pricing is a moving target – there are so many variables to consider that it will take time and experience before you find the right price point for your products. Be willing to experiment and make adjustments to fit the current market conditions. And if you need any advice on all things e-commerce related, give us a call today!