Do you think effective product pricing is important? It is indeed, but even more when buying online.
When you are in a physical store price comes last as you are attracted by the appearance of the product, the convenience of touching it or trying it out. You like the product, you can imagine it as your possession, actually, you do it unconsciously while touching it and then you can check the price. If it is too high you may raise your eyebrows by seeing it. But missing something that for a while seemed to be yours is not an easy decision. You will likely end buying the product.
It is quite different in online shopping where the price is visible at first sight, right next to the product. In the online context, price is much more significant for the purchase decision.
The importance of price
When it comes to paying for an item, regardless where it is bought (in a shopping mall or through an online store) it is important to take into consideration how prices affect customers choices. It is said that the price is the main determinant in more than 50% of online shopping in the world, with a tendency to increase even more in emerging markets.
Data shows that almost all online customers (about 90 %) spend a considerable time searching for the best product to buy.
And we know they have a wide range of offers to choose. It is estimated that they spend about 10 min per shopping. Also, approximately 1/5 of e-commerce website traffic is provided by different Comparison Shopping Engines and the number is much bigger for items, such as electronic devices whose sales are greatly influenced by their prices. This is the reason why it is important to develop a reliable strategy of pricing with joint efforts and effective methodology.
By doing this, pricing will have a double benefit as it may be used as a tool for marketing and a conversion rate optimizer. There are various ways of how to approach pricing in e-commerce in regard to its status and types of planning.
Prices based on costs
This is a strategy where a specific cost is identified according to the product or service along with the target margin. In this case the value of the products is determined by the cost and profit, which help to formulate the adequate price. When it is done accurately, the sum of the two determinants gives the actual price.
In order to carry out these calculations, one must be skilled in measuring, estimating and formulating the two criteria throughout the company process to offer the products. It is sometimes difficult to define the cost precisely because it is not only the cost of purchase, but much more. A whole range of expenses needs to be considered related to a specific product. Adding the purchasing price to the operational costs defines the item cost of a product. Next comes calculating the target profit margin which is not what the e-commerce company wishes, its more dependent on competitiveness, product type and consumer tastes.
In cases where the price is not a decisive parameter to the consumer, tight margins are not essential when calculating the price. Though, with electronic devices, for example, margins need to be rather thin due to the market competition. The drawback of calculating prices on their cost is the possibility of underrating the product or making it not attractive enough for the consumers. Competition is an essential factor when deciding margins. It is therefore recommended that this approach should be accompanied by other pricing strategies.
With around 12 million e-commerce companies in the world, it is not easy to find your own place under the sun. You need to be alert to the changing image of the market. Severe competition dictates the rules. So you need to have a solid comprehension of your position and the different factors that play roles in the classification among competitors like assortment planning, merchandising, product presentation and many others.
It does not mean that you have to lower your prices to able to survive, but rather make clever adaptations to competitive situations with no harm to your profitability. By comparing yourself with others, you may discover how sensible your prices are, whether they are too high or maybe much lower and you can employ even bonuses for your customers for certain purchased items if you decide to keep lower prices.
There is another way more refined, related to market-oriented pricing where dynamic competitor price tracking can be used as a way to manage your pricing. This requires that you catch up on a frequent basis with the market fluctuations. Thus, keeping in mind profit sustainability, you may use the compound approach where pricing based on costs might define the target profit margins compared to the competitors’ pricing.
Having the consumer in the core of e-commerce pricing is not only a mainstream behavior, but a necessity that requires a serious economic approach. This means, that prior adopting any pricing approaches you must clearly find out who your customers are and what is your unique selling proposition (the factor that differentiates a product from its competitors, such as the lowest cost, the highest quality or the first-ever product of its kind). Moreover, you should make clear what it is related to: the value or the price.
After this step it is necessary to figure out the profit margin targets, the pricing communications and how to act upon this. What prices you will offer largely depends on your customers’ profile, whether they are experienced in targeting low prices or maybe they are not much concerned about prices.
In the first case you should consider the possibility of offering discounts and eye-catching offers while the in the second case the price of the value should be out of the value proposition without focusing on it at all. Bargains and huge discounts are not favorable with these customers not affected by the price of what they are interested to buy. In this case, setting lower prices than the competitors could even be counterproductive.
Psychological Pricing Tips
Pricing should not be viewed only as an economic term since it is much about the psychological side of individuals involved in it. Humans are psychological beings, so we are engaged in various types of thinking and making decisions when purchasing. That is why it is useful to understand how these processes go into a human mind which will help to better determine pricing strategies.
A huge variety of research work has been done on this subject today is known as neuro-marketing. Following are some approaches focused towards consumer-oriented pricing involving the psychological component which might be beneficial for your service.
The power of nine
The power of nine is a well-known notion regarding pricing and numbers. You may tag a price that is much more appealing to the human eye such as $99.00 instead of $100.00. We can see it everywhere around and we are used to it, though a lot of e-commerce companies still have not accepted it as a routine in their online stores. Why do we recommend this strategy? Because it does not only raise your conversion rates but also enhance them to almost 100%.
Round numbers Vs exact numbers
The type of product or service sold defines the way you tag products visually. Speaking of psychology, decisions on purchasing are usually put into two categories: logical or rational purchasing, and emotional purchases. Having this in mind, prices need to have a kind of visual features.
Electronic devices are mainly perceived through their technical details by consumers (for example RAM memory, display and so forth related to computers). This is a rational decision after having considered all the properties acquired of a given product. Hence, when such products are sold, it is not necessary to give a round number as it is based on detailed calculations regarding all the features. Therefore it is more common to see a price of $738.96 rather than $800.00 for a laptop, for instance.
However, when it comes to prices for other products like these household items sold online, we are more emotionally engaged when we make purchase decisions. It is more important how the products fit in our home than their weight or length, as they present our personality in the environment. We are convinced by other criteria rather than precise calculations which, by the way, may complicate the process of purchasing. Therefore rounded prices are more applicable for items that we buy with feelings and emotions.
Smaller font, better prices
Experience has shown that prices with smaller physical size in the website layout, convert better than the huge, noticeable font sizes. Pay attention to how prices are displayed in your online store and think about what size to choose in order to convert more visitors in future.
Fewer words, better prices
Another psychological moment is the articulation of the price tagged to the product. The number of syllables in the word may define visitor’s perception of the price and their decision. For example, $46.93 (forty- six ninety-three) will possibly convert fewer visitors than $ 47.65 (forty-seven sixty-five). We might question whether people really read aloud prices, but the word is processed in their mind.
Absorb pricing as a crucial topic
We shouldn’t take a personal approach to pricing. It should not have to be an individual decision or a small group’s intention. We need to thoroughly understand how it works and be prepared and skilled to take the necessary steps and turn it into a powerful tool that will optimize our conversion rate.
It should be given a priority before or along with any other tasks related to marketing. We do not suggest a scheme of pricing strategies for a business. We only suggest that you should carefully examine the conditions and try to apply the various approaches and techniques which we have elaborated here.