As a part of initial release for Liftsuggest Price Discovery Engine, we had carried out a detailed research by speaking to many experts & Directors of E-commerce companies. What we found really was eye opening for us especially about the subjects that we were dealing with.
We found myths about how the pricing is set by e-commerce firms & I thought let me share our learning by debunking several myths:
Myth 1: Setting prices involves marking up prices (cost-plus)
“When setting price for my e-commerce store, all I have to do is to just to add a markup on each product in my excel sheet“
Most e-commerce businesses grow up using a multiple of cost to arrive at the selling price. For example, to achieve a 25 percent gross profit, the cost is multiplied by 1.33. However, that strategy doesn’t include the most important factor of establishing price: determining the value of the product to the potential customer, and adjusting prices for the differences with respect to the features of closest competitors.
Many other factors also need to be part of the pricing consideration, such as if you are offering free shipping (is this price near to free shipping cap?), quantity discounts, In establishing a price for an item, it’s more effective to estimate or at least have a sense of a demand curve and establish a price that will generate the most gross margin dollars.
Also, prices don’t need to be the same in all situations. Price reductions must precede by barriers for the consumer, such as quantity, coupons and rebates, which require the customer to take some type of action to achieve the discount. When you get vital information with analytics you can form your future campaigns significantly better.
Myth 2: Increasing market share OR increasing revenue involves a trade-off between price and share
It’s often assumed that lowering price will create a greater market share or increase revenue, but that’s not always the case. In fact, it often results in fewer gross margin dollars.
Adding products/new categories and product delivery based differentiations are better tools to gain market share rather than changing in prices. The objective of pricing is to increase the appeal to a larger segment of the market and to maximize gross margin dollars that will cover fixed costs and create profit.
Myth 3: The highest-volume customer should receive the lowest prices
This doesn’t happen in lot of e-commerce businesses however, we do feel that an internal need to provide discount to win high volume business. However, the reality is a high-volume customer recognizes the value you bring and will likely be agreeable to higher prices, in most cases.
Rafi Mohammad provides a great example with summary that we as sellers generally are keen “to capitalize on the law of diminishing utility”
Myth 4: Discounting to get in the door will lead to premiums once a product proves its value to customers
This is a very relevant case to e-commerce store that are either starting or in the markets where the e-commerce is just offing. When you offer significant discounts/rebates calculating the life cycle value of customer is higher, you are training/anchoring customers to expect discounts/less prices. This will lead to making a customer always on looking out for lowest price & thereby ensuring that customer goes to other new players who are always offering VC money as discount ! If you differentiate based on services, that doesn’t reward in short run but in long run thats much profitable.
Offering “deals” is a key pricing strategy for most sellers. Deals fulfill an innate consumer need as well as provide a call to action to purchase for customer so you can get away from that. A better way of course if to make the how the discount/deal is perceived by customers. For example “originally $1,000 but only $400 over the Columbus Day weekend” is better deal than 60% off flat.
Myth 5: Higher operating margins signify pricing excellence
Higher margins are great — but the real measure is not just the margin percentage, but the gross margin dollars of contribution. For e.g. your margin is 36% but the grossing $ value is just $45k. In this scenario optimizing for prices may lead to lower gross margin of 12% resulting in $60k in gross $ value. Obviously latter is a better choice for most business.
When looking at the demand curve for a product or service, there are different price points for different products, product features, quantities, delivery time, service levels, etc. You as e-commerce entrepreneur would have tactics on your back to go from A to B in terms of margin % but would you go & work on pricing strategy for that? I doubt, would love to learn more about it from you my readers!
Myth 6: Lower prices to regain lost volume
An across-the-board discount is a really bad solution. Being a price seller normally brings small profit margins and reduced gross margin dollars. Overall, business owners should keep in mind that one price doesn’t fit all if they want to appeal to a larger segment of the market. Creating product or service differences and different means of prices such as financing, leasing, guaranteed sale, bundling, coupons, rebates and private labels can all be effective elements of successful pricing which will help regain the lost volume.
Pricing tactics should be dynamic, include a variety of concepts to appeal to a greater market and designed to create the largest amount of gross margin dollars.
As it is very clear from the learning of recent debacle of JC Penney with its new pricing strategy that just lowering prices will not win you anything significant.