Anyone who’s studied marketing, or worked in a business environment will have heard of “The 4 Ps” (Product, Price, Promotion, and Place), the four parts of the product mix you have to get right to maximise sales.
Despite knowing about all four, most retailers spend the majority of their time and budget working on Product, Promotion, and Place leaving Price as an afterthought. Even those who give great consideration to price before product launch frequently forget about it completely once the product is live.
It might have been possible to get away with that in the offline world where the customer would literally have to get up and walk into another shop to find out the price of alternative products. But in the age of the internet, the customer has all the pricing data they want at their fingertips and frequently use it to make their buying decisions.
Not all retailers are considering price optimisation as a way to increase sales, so if you start now you may get a competitive advantage from it.
So, should you just price match your cheapest competitor? No. You should set your price as well as you can at the start, then monitor performance and the marketplace to optimise the price over the lifecycle of each product.
Setting the Initial Product Price
You wouldn’t start your marketing without knowing your objectives, and you need to take the same approach to price setting.
Your price-setting objective will usually be to either maximise unit sales or margin.
Whichever you aim for you will need to work out what that means in terms of the margin you will achieve per product.
Maximising unit sales is usually with an aim to take market share or increase brand awareness. There’s often a margin point you won’t go below, maybe 5% over breakeven, or sometimes below breakeven on specific products such as loss leaders you sell to get people into your brand before making money on the customers’ next purchases.
Maximising margins almost always means shipping fewer units, but it generates greater profits that can be invested in building the brand and marketing. This usually means setting a margin target that you aim to reach or exceed for every product.
Retailers often have different margin targets for different products or product categories, either because of the prices they are forced to buy at or sell at or because different products and categories fulfil a different objective.
In order to use margin to make sure your prices are in line with your strategy you need access to the cost of every product.
Common Price Setting Strategies
Once you’re clear on your objectives and have access to product cost data, you need to actually set some prices.
Not everyone sets their prices the same way. There are many different ways to work out what the price for each product should be.
Cost-plus pricing is the most common, and the simplest to use. Take the cost of each product, then increase by your margin.
If your objective is to maximise margin then value-based pricing is for you. Start by working out how much the customer thinks your product is worth, then set the price based on what they expect to pay. This is used by many a luxury retailer as the brand value has a bigger impact on price than the cost of manufacture.
If you are first to market and have no competition, you might choose a price skimming strategy. Set a high price to begin with and as the market evolves lower it — always aiming to maximise profit at each stage of the product lifecycle. Often employed by retailers of electrical goods.
If you are looking to quickly break into a new market and maximising unit sales then consider penetration pricing — set the price low initially to win market share, then raise the price as the brand becomes better known.
A lot of thought and planning should go into setting your initial prices for products, but once they’re live in the dynamic e-commerce market the work continues and you need to monitor and manage those prices.
Managing live product prices
Managing the prices of products that are live is a lot more complex than setting initial prices because there is a lot more data to consider.
For your own products, you now have sales data, per product website conversion rates, and the performance of the advertising for each product. Plus, there is what your competitors are doing with the prices on directly competitive products — are they increasing, decreasing, or remaining static? And how is that affecting your sales?
Being able to monitor all that data makes it possible to test the impact of different price points on your sales and overall profits. Would you better achieve your objectives if you raised prices? Or lowered them?
This table is an example of the impact of increasing and decreasing the price of a £10 product:
At the £6 price point, the unit sales were the highest, whilst maintaining a positive margin.
At the £12 price point, the highest margin was achieved, whilst still driving sales. But, the huge drop in views per day compared to the £10 price point means it might be better to settle for a slightly lower margin, but double the contribution each day.
Price doesn’t just affect the conversion rate, it also affects how many people click to the product page from your marketing and category pages. Too high a price and no one will even look at it.
Monitoring Competitive Prices
Any pricing tests you run are affected by what your competitors are doing with their prices. They could be changing their prices or running a big promotion and that will directly impact your sales.
Thus it’s important to monitor what they’re doing with their prices and react accordingly.
“The era of price transparency is here”
Weldon W. Whitener, PhD, Chief Analytics Officer, Pricesearcher.com
To start doing this on all your products would be overwhelming, so start by monitoring competitive pricing for the products that are most important to your business. That’s usually going to be the bestsellers or recently launched items.
If you sell the same products as other retailers then track what your competitors are selling the same product for each day.
If you sell unique products track the prices of the products you’re being seen next to on search engines and the marketplaces you operate on because that’s where the customer is making the decision to buy your product or someone else’s.
Initially check this once a day. If you find the prices are changing every day then increase how often you check; if you find the prices change infrequently then you can check them less often.
There are some free tools available that can help with this process. For example Google Shopping can provide Benchmark Pricing information to retailers in certain scenarios.
Further details on this report are provided here but it is an easy way to see how your products in Google Shopping compare to others. This can be useful for a variety of reasons. For example, if you see sales suddenly drop but you haven’t changed pricing, then looking at the Price Competitiveness chart you may see yours suddenly has moved above the benchmark price indicating competitor activity such as your competition having a sale
Don’t just look at the price competition are selling at— check whether they are in or out of stock. A popular competitor being out of stock can be an opportunity to increase price and margins as their customers come to you.
You can then compare these price changes to your own sales. How much of an impact does it make? Would it be worth changing your prices in response?
If you find you’re spending a lot of time price checking and tweaking your product prices then it may be worth investing in price monitoring software that will do some of the legwork for you.
But remember you should only ever sell at a loss if you’re following an aggressive market penetration strategy, or the cost of the products sitting in your warehouse and taking up space on your website is greater than the loss you make selling it.
The customer doesn’t just consider the product price
Of course, the customer doesn’t just consider the product price when they’re deciding what to buy they are much more interested in the total amount they’re going to pay to get the goods delivered to them. Customers also consider the shipping costs (see our article on Shipping Cost Strategy), and on an international marketplace like Fruugo tax has a role to play as well.
Ongoing price optimisation that takes into account competitor activity and customer behaviour is a great way to increase your sales and profits, but a tactic many retailers are neglecting. Adopting it for your business could create a competitive advantage, but don’t start unless you are clear on your objectives and your product costs.
Thanks to
Weldon W. Whitener, PhD, Chief Analytics Officer, Pricesearcher.com for his help in researching this article
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