Basic economics teaches us that nothing affects demand quite like price, yet it is potentially something that eCommerce businesses often spend little time reflecting or studying on as they instead focus on crucial yet peripheral areas such as SEO, shopper experience, and order fulfilment. Pricing of products is not a process in retail, it is very much science when done correctly. Any successful retailer will tell you “pricing implemented correctly, will deliver the results you and your customer want.”
There’s the old anecdote of the grocer who takes delivery of tomatoes and puts half at the front of the store on sale and the other half at the back at double the price. Those wanting a bargain buy the discounted tomatoes and those wanting quality buy the expensive ones. The grocer is happy because he sells out both.
As this anecdote illustrates, even though the price is the decisive factor for most consumers, simply being cheapest is not always the best strategy for maximising sales or revenue. Price optimisation is about adjusting product pricing to achieve the best possible outcome for your store, and sometimes that might mean putting prices up.
Companies such as Amazon can change a product’s price up to six times per day, and average almost four changes per product per day. They do this to:
- Maximise yield for each sale
- Increase sales for lagging products
- Improve profit margin for products with a limited competition or with good brand positioning
- Maximise profit based on market comparisons
There are three basic steps that your business can take to optimise its pricing: analyse competitor pricing, measure willingness to pay, and test your price points. Playhouse’s CEO, Luke Goldsworthy, who also a former Woolworths executive can’t emphasis enough, “Always analyse, always measure and always test your price points”.
Analyse Competitor Pricing
To effectively analyse competitor pricing you’ve got to define your competition, track their prices, and analyse the results. The challenge here is tracking competitor pricing. As mentioned above with reference to Amazon, this can change multiple times per day, and if you’ve got a large product offering doing this manually across the board would be nearly impossible. At The Playhouse Group, we can build an in-house pricing engine for you, or recommend price tracking software. Alternatively, you can just select a few key products to analyse.
Once you’ve gathered your competitors’ pricing data, you can analyse it to react immediately to their pricing decisions, and over time to determine patterns in their pricing behaviour. This analysis will provide valuable insights to help you gain a competitive advantage, such as exposing who competes over the most popular brands and products, for which products your competitors offer the most competitive prices, and which products the big retailers mostly compete on.
Willingness to Pay
There are many ways that businesses set their pricing. The worst is to take a “cost plus” approach. Potential customers aren’t concerned with your costs, but will evaluate the price based on their expectations. Alternatively, you can copy your competitor pricing, but this may not work as each business has different costs, value propositions and market alignments. Finally, you could just take the average price of your competitors, but this will leave you lost amongst the herd.
What is important to take into consideration is your customers’ willingness to pay. Your market should be differentiated from that of your competitors in some way, and they will have different expectations of price. This willingness is affected by factors such as location, demographics, and consumption behaviour. To understand your market it is helpful to conduct targeted surveys to find out what is the maximum price they are willing to pay for a product, and what price do they think it should be offered at. Not only will this information help you set the optimal price, it will also give insight into which products represent the highest profit opportunity and which will need to be discounted.
In a recent post on the value of A/B testing, we discussed how you can use it to optimise your eCommerce store, and it is particularly useful for assessing price points. Competitor pricing fluctuates constantly online, so you will need to continually reassess and test new pricing points to find the right price/demand ratio for your products.
In addition to the above strategies, many eCommerce businesses rely on dynamic pricing engines, either built in-house or utilising licensed software, to be able to automatically update their prices according to demand, supply, competitor pricing, and other factors. These frequent price changes help maximise revenue, but rely on significant data collection and analysis and can only be done by computers.
If you would like to learn about dynamic pricing, and want help in setting up an A/B test, with assessing your pricing structure, or for any other eCommerce related matters, please don’t hesitate to click below to set up a free consultation with one of The Playhouse Group specialists.
Get in touch with our team and we can talk to you about this or any eCommerce questions you may have.