Pricing is more than just simple arithmetic

E-commerce Pricing is more than just simple arithmetic

Published on 18.05.2021 by Stephan Lamprecht, journalist

Pricing is a fundamental part of the everyday work involved in retail. The situation is always the same: customers don’t want to pay too much for a product, while retailers want to get the best price. In this article, you’ll find out what matters in a pricing strategy.

At first glance, pricing is just commercial arithmetic based on the purchase price of a product. Indeed, this is fundamental, because the only way you can cover your costs and sell at a profit is to know what your costs are. But there is more to a pricing strategy than simple arithmetic. In digital retail in particular, your strategy needs to take account of external factors as well, and this involves a good deal of psychology.

A question of price acceptance

On particularly cold days, fuel prices go up. And when holiday season begins, travellers have to pay more for petrol at garages. In both instances, the aim is to increase the profit on a product. This requires a bit of intuition, as prices for particular items fluctuate within a narrow range. Customers all have an idea of how much a product is “worth” to them. Price acceptance varies between two extremes: “too expensive” or “too cheap”.

The price a retailer can charge for a product depends on all sorts of different factors. These include:

  • Time factors (payday at the end of the month, national holidays, etc.)
  • Regional factors
  • Weather (fashion!)
  • Stock levels
  • Competitors’ prices
  • Time of year
  • Company goals
  • Real-time shop information, e.g. visits, purchases, baskets
  • Purchase prices.

All these factors have to be taken into consideration to ensure the product can be sold at a “competitive” price without losing money.

What makes up a strategy

Repricing and dynamic pricing systems promise digital retailers veritable miracles. In practice, however, it’s not enough in most cases to simply activate these systems and then react to competitors on a given marketplace. The more this kind of software is capable of doing, the more questions the supplier’s advisors will ask about the retailer’s strategy.

Here are some important aspects you should consider:

  • Long tail: the price of slow-moving items has to be changed in such a way that the seller can generate the best possible return on sales at any point in time.
  • Markdown pricing: it is important to pay particular attention to stock levels and potential write-offs for products that have a limited lifespan or experience a rapid drop in value. The goal is to avoid squandering a profit margin by discounting too much or too early.
  • Product bundles: bundles are a good way to increase purchase frequency and profit. They also offer the benefit that they cannot readily be copied by competitors.

Determining the perfect price is therefore also a strategic decision.

How to present your price properly

Now we’re getting into psychology: after all, it’s a proven fact that the way you present a price visually also has an impact on a buyer’s purchase appetite. Here are a few tricks of the trade for retailers:

  • Reduce unit numbers: this is the technique of making goods appear scarce. For legal reasons, you cannot make any false statements. With that said, there’s a good reason why TV ads and even Amazon mention how many items are “still in stock”.
  • Give your products an emotional appeal: when customers say that a product is too expensive, what this means is that they either simply can’t afford it or feel they’re not getting enough value for money. In these instances, it’s worth giving an emotional weight to your products. The retailer could offer a premium range that is available only to VIP members and made of “high-end materials”. One example of this is the success of many watch manufacturers, who ultimately make their products using standard components and mechanisms that have been produced countless times. Despite this, they are still able to charge prices that suggest Swiss quality.
  • Benefit from product bundles: these could be additional components, or even just products that customers probably wouldn’t actually buy. Here is a classic example from the publishing industry: e-paper subscription: 89 francs; printed version: 139 francs; combo subscription for printed version + e-paper: 139 francs. In this scenario, hardly anyone is going to go with just the printed version. Ultimately, people are going to feel they’re getting a lot more for their money with the combo offer. In fact, this is not the case, but by then it’s too late.
  • Offer instalments: this is an old trick that shopping channels also like to use. A high-tech vacuum cleaner for 600 francs? When you pay in six instalments of 99 francs, that’s almost a bargain.
  • Show “hidden” costs: purity, hand-picked ingredients, 100% fair trade – these are all subtle hints as to why a certain product might cost more.
  • Separate out delivery costs: 14.95 francs plus 3.95 francs for delivery and packaging comes to a total of almost 19 francs. In all probability, customers will go for this deal rather than the same product for 19 francs with free delivery.
  • The threshold price: this one is a trick of the mind. We read from left to right – in other words, the first numbers we see tend to stick more strongly in our memories. As such, an item is going to be a lot more appealing if it costs 0.45 francs rather than 0.50 francs. Even if a customer buys a computer for 1,949 francs, they will probably still go away feeling as if they bought their device for around 1,000 francs.
  • Set the right discounts: discounts are really interesting from a psychological point of view. There is an almost magical threshold of 100. Two examples for you: a product normally costs 50 francs, and the retailer offers a discount of 10 francs. A smart move is to give the discount as a percentage. In this instance, it’s 20 percent. The saving is ultimately the same in both cases, but “20” suggests you save more. The interesting thing here is that, when it comes to larger numbers, the opposite is true. For example, a discount of 20 percent on a product worth 2,000 francs is not as attractive to customers as the tantalizing promise of a discount of 400 francs. Studies on the subject have established a threshold of 100 for this phenomenon. If the price is below 100 francs, it’s a good idea to advertise percentage discounts. If the price is higher than that, you are better off using absolute numbers.

Finding the best price involves a great deal more than simple arithmetic.

Stephan Lamprecht, journalist

Stephan Lamprecht has been following e-commerce developments in Germany, Austria and Switzerland for two decades as a journalist and consultant.

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