Have you ever wondered how online retailers manage to differentiate themselves despite selling the exact same merchandise? Pricing in ecommerce is an essential way for retailers to stand out and secure customer loyalty. There are three different pricing strategies that online retailers have widely adopted, both historically and recently.
Loss leading is a strategy that top online retailers like Amazon use. These retailers continuously have the lowest price, but as a result, also have slim profit margins. Another pricing strategy is psychological pricing. Researchers and pricing experts alike have noticed that “psychological prices” sell better because they are widely used, and are thus easy to recognize. Lastly, dynamic pricing is a type of price discrimination that changes prices depending on external factors, such as time of day, inventory level, and competitor pricing. I will go into depth about each of these three ecommerce pricing strategies below.
Amazon’s Loss Leading Strategy
Amazon truly is a revolutionary online retailer and the company’s mission statement says it all. Amazon aims “to be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices.” Here lies the loss leader pricing strategy; sacrificing profit for sales volume and market share. Don’t get me wrong, this strategy has done wonders for Amazon. The company is just 20 years old and locked in number 35 on the 2014 Fortune 500 list.
Loss leaders generally sell products below market value in order to sell more overall. Amazon is great at this on many fronts. The company recently changed its free shipping minimum from $25 to $35. This move accomplished two things. First, it made Amazon Prime seem like a better deal – because consumers would get unlimited free shipping for a flat yearly fee. Second, for those who don’t shop on Amazon very much, it gave them an incentive to spend a little bit more.
The loss leader strategy has worked out very well for Amazon, as it has become one of the top 10 retailers in the US. Its sales even topped $44 billion in 2013, which was a 27.2% increase from the previous year. The only problem with this strategy is that a retailer must be selling a lot in order for it to work, which is why retail giants are generally the only ones that are able to pull it off. So how can retailers sell more? Adjusting prices to make consumers believe they’re getting a good deal is one way.
All those 9s in prices are not a coincidence. These prices are psychological pricing hard at work. At its core, psychological pricing means that retailers choose prices that play into the way that our brains work to increase sales. Using 9s is called charm pricing and shoppers perceive prices with 9s to be a better deal, even when there’s a cheaper option! In fact, researchers at MIT and the University of Chicago did a study and found that when presented with women’s clothing priced at $34, $39, and $44, participants chose the $39 option more often. On average products with 9s in them sell 24% more often, so don’t sleep on this strategy.
Another way that retailers take advantage of psychological pricing is through tiered and relative pricing. Tiered (also known as version) pricing is a way for retailers to appeal to different customer segments by offering a few versions of the product that vary in price and features. This can be an effective way to target price-sensitive consumers or clear inventory by making one version seem like an unbeatable deal. Apple does this effectively by offering iPhones at several different price points, with pricing depending on memory and model.
Relative and anchor pricing tie into the tiered strategy because they involve pricing that appears to be a great deal when compared to another. The first price consumers see becomes anchored (get it?) in their minds and they compare all others to it. Therefore, a good price is only good if it’s compared to another that isn’t quite as appealing.
How do retailers make sense of all the psychological pricing trends out there? A great way to optimize for profit is to combine them and test what works best for your business. No two ecommerce businesses are the same, which leads me to my final pricing strategy: dynamic pricing.
Price Discrimination’s Best Bet
When you hear “price discrimination,” I bet you don’t think of the most positive things, but it’s not the bad guy in pricing. This age-old pricing strategy does have a very popular component that online retailers are beginning to grasp the importance of and it goes by the name dynamic pricing. It doesn’t fit neatly into the three degrees of price discrimination: from price based on maximum willingness to pay to different prices based on quantity purchased, to pricing based on customer segment demographics.
Instead, dynamic pricing goes beyond that and is characterized by fluctuating prices that maximize profit, sales, and revenue. It utilizes big data relating to numerous factors in order to change prices in real time. Static prices are not a good idea because ecommerce is a fast paced industry that waits for no one. With industry leaders, like Wal-Mart, repricing over 50,000 times a month, prices that can’t immediately respond to competitor and market changes are a recipe for failure.
While dynamic pricing used to only be available to retail behemoths, its use is becoming widespread across the retail landscape. Especially in terms of repricing software because keeping up with dozens of competitors and changing prices manually is impossible for most businesses.
What These Trends Mean for Ecommerce
These ecommerce trends have a significant impact on the sales, profit, and revenue for all retailers. Retail giants like Amazon and Best Buy have shown that pricing is key to online success. It is only a matter of time until other retailers catch on en masse.
What other factors do you think are important for online retail success? Share your thoughts below in the comments.
By contributing writer, Angelica Valentine, Content Marketing Manager at Wiser .
Wiser provides a complete suite of solutions to give retailers, brands, and manufacturers the edge to stay both competitive and most importantly, profitable.
Wiser’s core product is WisePricer, full-featured dynamic pricing and merchandising engine that monitors, analyzes and reprices retail products in real-time. WisePricer enables retailers to boost profit margins and revenue, price with confidence, and improve merchandising through powering the development of a sound pricing strategy. Wiser’s Magento extension, WisePricer, was recently featured as one of Promodo’s best extensions to make ecommerce easier.
Wiser also offers a MAP monitoring solution, WiseMapper, for brands and manufacturers to monitor and protect their pricing across the thousands of retailers selling their products.
Want to know more about ecommerce pricing strategy trends? We are happy to discuss any related questions.