If you’ve ever managed or worked in a retail environment, you know how much pricing matters. Beyond starting with a good idea and a quality product, price is the single most important factor in affecting consumer purchasing decisions—and arguably the most misused tool in business owners’ toolkits.
Over the last decade, retail giants like Amazon and Walmart have made cutthroat pricing strategies seem like the only path to success. Fortunately there are ways for smaller retailers compete, and in this post we’re going to cover five of them.
You already know how to determine how much your products are worth. By understanding the ins and outs of a variety of pricing strategies, you’ll be able to compare and consider which approach is right for your business, and ultimately use that knowledge to maximize your sales and outsmart your competition.
#1. Price before value
Let’s start with an age-old merchandising question: “price before value” or “value before price”? For new merchants, who have a natural tendency to undercharge, price before value (that is, competing primarily on price) seems an obvious answer. But leading with price, and going head-to-head with the giants from the get-go, can be a dicey proposition.
According to entrepreneur and blogger Andrew Youderian, “It’s not impossible, but competing on price is the hardest way to build a successful ecommerce business as an independent merchant. Even if you’re successful in driving revenues, your margins will likely be so small that you’ll need to scale enormously to receive a decent payoff.”
But putting price before value isn’t always the beginning of a race to the bottom. For hardware/software reseller Royal Discount, knowing that their below-market prices gave them an edge over their competitors, the company decided to A/B test to see if increasing the font size of their discounted prices would affect their sales. Conversions jumped a whopping 36.54 percent. Of course, not every business will see those kind of results, but in an industry where 81 percent of shoppers say price is their number-one consideration, the strategy makes a lot of sense.
To make “price before value” work, you have to be able to negotiate supply costs, keep your overhead low, and actively and creatively promote your rock-bottom prices. Even then, without the resources to maintain a high level of service—which customers will still demand, no matter how great a deal they’re getting—it’s not easy. Bottom line? Lead with price all you want, but just make sure you’ve got another ace in your hand first.
#2. Value before price
“Good to the last drop.” “The happiest place on earth.” “Melts in your mouth, not your hand.” There’s a reason why some of the most memorable ad slogans in history emphasize experience rather than price.
According to researchers at Stanford University, marketing messages that focus on the experience of a product are often more powerful than those focusing on money. In one experiment, the researchers set up a lemonade stand—“operated by two six-year-olds, to make it appear authentic”—and created three separate signs:
- “Spend a little time and enjoy C&D’s lemonade”
- “Spend a little money and enjoy C&D’s lemonade”
- “Enjoy C&D’s lemonade”
The results were illuminating: the sign emphasizing time attracted twice as many customers as the sign emphasizing money. Those customers were also willing to pay significantly more for their lemonade (all customers were told that they could pay between $1 and $3 a glass). Even at these very low price points, the study showed that leading with value almost always trumps leading with price.
It’s also instructive to consider the example of Apple, a brand that famously doesn’t compete on price—at all. Despite pricing well above market value, Apple continues to make gains on the more affordably-priced PC market because their products live up to their promises, they provide excellent customer service, and, as everyone knows, their brand is way cooler than their closest competitor. Of course, few companies can get away with charging premium prices and still win business, but if you take the Apple approach, you might just find you’re one of them.
#3. Loss-leader pricing
How many times have you walked into a store intending to pick up one single sale-priced item, only to end up at the checkout with a whole cart full? If so, already know how loss-leader pricing works—attracting customers with one low-priced product and profiting from all the other products they discover and purchase while visiting your store. Anyone who’s ever shopped at Target knows they’re exceptionally good at this.
A loss leader is typically priced below its normal profit margin, but not necessarily below cost. When you know that certain products are in demand, whether it’s a one-off purchase like a pair of headphones or an everyday staple like toothpaste, you can offer them at a steep discount to draw new customers into your store. According to Melissa Eisenberg of WisePricer, “Even if the profit is not impressive, this strategy stimulates client acquisition, opening the door to further marketing efforts. The value of customer acquisition outweighs the value of the transaction.”
While you’re reducing the price on a few loss-leader items, you can also consider incrementally raising prices on others. This strategy allegedly increased the overall profitability of Andrew Youderian’s company Right Channel Radios by around 30 percent. Youderian recommends “pulling an 80/20 maneuver” and focusing on raising the prices of your most popular products—those that account for roughly 50 percent of your total revenue. “Optimizing pricing on these items will give you the most bang for your buck from a time invested perspective,” he says.
#4. Dynamic pricing
If you’ve booked a flight in the past few decades, then you know how important it is to buy your tickets at exactly the right time (57 days out for flights within North America, according to a recent study). But while the transportation and hospitality industries caught on to dynamic pricing years ago, it’s only just beginning to take off in ecommerce.
So how does dynamic pricing work? Essentially, it gives merchants the flexibility to decrease prices to increase sales when business is slow, and increase prices to generate more profit when business is booming. Just as airline tickets fluctuate depending on the destination, time of year, and what can seem like the whims of the airline, prices in a brick-and-mortar or online store can vary depending on everything from who’s buying to when they’re buying it.
“Static vs. dynamic pricing really boils down to a question of price points,” writes Dan Virgillito in a recent Shopify Plus article. “With static pricing, you have one price and that remains the price until you recalculate it manually or adopt a new pricing scheme across the board. Dynamic pricing changes this picture entirely. Essentially, it means multiple price points instead of one.”
Those multiple price points can be based on just about anything, but four tactics seem to be most popular with online retailers:
- Peak pricing, which lets merchants take advantage of fluctuations in demand, increasing prices during times of high demand and scarcity. This is why a flight home costs twice as much in December as it does in January.
- Segmented pricing, where retailers offer one price to a certain group of customers while charging others something completely different. Sometimes this means different prices for the exact same product, but more often it means different prices for slightly different products—a value price for a value product, and a premium price for a premium product.
- Time-based pricing, where merchants adjust prices according to how long a product has been on the market. This is a popular strategy for increasing demand for an older product while justifying higher prices on a newer one.
- Penetration pricing, which lets retailers debut products at a lower price point in order to win customers, before raising them as the product becomes more popular. You see this strategy used all the time for crowdfunded products—if you preorder before a product has launched, you’ll often get a better price than if you wait until it’s been fully funded.
Part of the reason ecommerce has been comparatively slow to adopt dynamic pricing strategies is because, until recently, most retailers haven’t had access to the same type of pricing intelligence software that airlines have. Previously, merchants would have to manually track their competitors—an incredibly difficult task given that Amazon changes its prices multiple times over the course of just 24 hours. These days, merchants can use apps like Prisync to keep tabs on their competition, and increase or decrease their prices as they see fit. (Stay tuned for our Q&A with the co-founder of Prisync next week!)
#5. Psychological pricing
It’s an age-old marketing trick that you see every day, but prevalence hasn’t diminished its effect: $19.99. Of course everyone knows that $19.99 is as good as $20.00, but there’s still something about “9” that makes it convert better than any other number. In fact, when researchers at MIT and the University of Chicago ran an experiment to test that exact hypothesis, they found that between items priced at $34, $39 and $44, the $39 items sold the most—even when the exact same item was offered for $34.
But the seemingly irresistible number nine isn’t the only weapon in your psychological pricing arsenal. You should also consider pricing fluency, or the ease with which we process pricing information. A nice, round number like $100 is processed fluently, whereas a non-rounded price (like $98.76) is processed disfluently. According to research analyst and blogger Nick Kalenda, there are advantages to both: “When consumers can process the price quickly, it ‘just feels right.'” But when a consumer is making a very rational purchase—such as a new laptop or speaker system—a number that takes some time to process can actually work better because it has a more intentional, calculated appearance.
And finally, if you’re really fastidious, you can consider the number of syllables a consumer has to pronounce when verbalizing a price tag. According to a study published in the Journal of Consumer Psychology, prices that have more syllables when spoken aloud are actually perceived as more expensive by consumers. If you take $17.89 or “seventeen-eighty-nine” and $18.12 or “eighteen-twelve,” the latter will convert better almost every time—never mind the fact that the former is actually the better deal.
When it comes to product pricing, there’s no one-size-fits-all approach, and the options we’ve presented here are by no means exhaustive. Many merchants will find that there’s no singular strategy that works for every product in every situation, but by being creative and blending different approaches, they can find ways to keep customers happy and turn a profit.
Have you used any of these strategies in your store? Let us know how it’s worked for you, or if there are any others you’d recommend.