Pricing is as simple as doubling the cost of goods sold. Or is it?
I say no, but not because setting the right prices is complicated. Sometimes you can just multiplying numbers and earn good margins. But in order to boost your profit while impacting customers’ decisions, there’s essentially an art and science behind pricing.
This article will explore 12 ultimate pricing strategies to boost your sales and profit. Ready to find out?
Old as the ocean, nowadays the discounting approach has dominated nearly the entire world of eCommerce.
If spending money is an unavoidable pain shoppers must go through to buy something, an offer can ease that pain. The lesser the pain, the more likely the purchase.
This works particularly well with the price-conscious group of customers. It helps you clear out slow moving inventory, attract lots and lots of traffic to your store and undoubtedly influence people’s decision making.
But why shouldn’t you implement discounts store-wide, all-time?
Because overdoing it may signal negativity to your customers. “Are they really that low?” Gradually, your customers will hesitate to buy your items for regular prices.
Also consider your profit margin. Are the discounted prices covering your costs and leave you at least some money? Get a clear understanding of your earnings and expenses before these offers eat into your profit.
2. Charm pricing
Ever noticed sometimes you tend to treat differently between a $8.99 item and $9.00 one? The $8.99 product “feels” much cheaper, despite the fact that they’re just 1 cent apart.
Well, you’re not the only one.
This phenomenon is call “the left-digit effect” (often called “charm pricing”), and it happens because our human brain processes $8.99 as $8.00.
Researchers Thomas and Morwitz concluded in their study: “Nine-ending prices are perceived to be smaller than a price one cent higher when the leftmost digits of the prices differ (e.g., $3.00 to $2.99).” Note that charm pricing doesn’t work if the left-most digits are the same (e.g., $3.60 to $3.59).
Knowing this, you can reduce one cent from a round number so it now ends in 9 or 99. For example, instead of selling a shirt at $40, make it $39.99. That way, customers are more likely to find it attractive than something…fortyish.
Look how Komono prices their watches: The whole store are priced with nine-ending numbers.
3. Premium pricing
Look at Tiffany & Co., Loui Vuitton, Apple. Why would customers want to buy a $500 item when they can just look for a $50 alternative on Amazon? With the competitive pricing war everywhere, shouldn’t those “premium brands” be dethroned?
Yet they stand tall and proud. Despite their insanely expensive prices, shoppers still order from them. Why?
Simply put, pricing is also branding. By pricing their products higher than the average market, brands position themselves as luxurious, prestigious, or exclusive. Customers don’t just buy products, they buy those feelings and status.
And though unstated, high prices often signal quality and superiority.
Here’s an inspiring story from the book The Psychology of Persuasion (Dr. Robert Cialdini). There’s a jewelry shop selling to travelers. Among the items, one piece just doesn’t sell. The owner, out of frustration, asked her assistant to cut the price in half. However, the assistant misunderstood her boss, thus doubled the price.
What do you think would happen?
The jewelry, priced twice as normal, was sold out.
That given, please don’t even think of premium pricing without having a decent product. People can be easily tricked, but not twice. And when the trust is gone, you know what’ll happen next.
4. Slightly different prices for similar products
Are you familiar with the paradox of choice? Too many options can be demotivating to consumers.
What happens if shoppers land in your store and see dozens of products in the same niche, at presumably similar price? Chances are they’ll be paralyzed and postpone making a decision, a no-no for any ecommerce business.
How can you fix that? Try slightly adjusting prices.
According to new research from Yale, if two similar items have slightly different prices, consumers are more likely to take actual actions, rather than deferring decision.
That small change also shifts shoppers’ focus from “Should I buy at all?” to “Which one should I buy?”, eliminating a mental obstacle for you.
For example, if an item is $28.50, another item should be $27.99. Not a big difference in value, but it means something psychologically.
5. Rounded prices
We’ve talked about the power of the left-digit effect (eg. $9.99), could it imply that a round number like $10 should be avoided? Not always.
In fact, round prices can come in handy in emotion-driven industries like fashion.
Research by Kuangjie Zhang and Monica Wadhwa showed that since rounded numbers are more fluently processed (easy to understand, remember, require an effortless judgmental process), they encourage reliance on feelings.
In other words, rounded numbers “feel right”, as long as the purchase is driven by feelings.
Look at The Modern Shop: Rounded prices give off an effortless, comfortable feeling across the whole store.
6. Precise prices
The opposite is also found to be true. For products that require logical thinking like technology or automobile, non-rounded prices appear to work better.
As a customer’s mind temporarily switches to rational processing, a rounded price (like $95) now seems made up.
Precise prices (like $93.49), on the other hand, imply a greater level of knowledge and therefore can be seen as informative of the true value of the item, as suggested by the researchers from Columbia University.
So if your store focuses on rationality purchase, consider adding some cents to your prices. Look at how BioLite set prices to their products.
7. Price Anchoring
People used to think price is absolute. In fact, price is relative, meaning your perception of $1000 is “reasonable” if the product is sitting next to a $5000 item, but “expensive” if the neighbor item is $200. This effect is called Anchoring.
Anchoring is our tendency to subconsciously rely on the first piece of information offered when making decisions.
You could have heard about the Williams-Sonoma bread maker case study. After much consumer research, the company launched a bread maker for $275 but saw only tepid sales. In response, they introduced a better functioning model and doubled the price. Immediately, sales took off. But not the premium model, it’s the $275 whose sales skyrocketed!
As explained by The Wall Street Journal, the first bread maker of Williams-Sonoma was a brand new product in the market at the time. There was nothing to compare it to, so no reference to tell if $275 was actually a good price. The later model changed that. Posing as a slightly better product at a significantly higher price, it made the $275 item seemed like a great deal.
You could achieve the same result by placing a “premium product” beside your ordinary items. Look how William Henry’s $750 bracelet seems like a fair deal next to a $2995 one.
Let’s say you’re looking for a pair of shoes. There’s the sneakers you like, priced $63, but you also need a shoe care kit which normally prices $10. Then there’s a bundle offering both products at $69.
That’s a win-win deal where you can save a percentage on each item, while the seller can easily increase their Average order value.
Now, the secret for successful bundles is relevance: Your bundled items have to be complementary or like-minded to create enough motivation for customers, or else they’ll stick with individual purchase. Simply bundling random items not only leads to failure, but also signals unprofessional practice.
Look how Soundtoys offer their Effect Rack. This bundle combines 21 individual items but offers a much attractive price.
Pay-what-you-want (PWYW) pricing is simple: You let your customers decide how much they pay for the products. Payment can be higher or lower the regular price, and there may be a suggested price.
Wouldn’t it hurt your revenue? It may, in many cases. The fact that it’s so easy to underpay something makes this idea intimidating to many store owners. Why bother trying if it does more harm than good?
Because whoever dares to implement pay-what-you-want strategy must be really confident in their products, and that confidence conveys. More importantly, PWYW is a traffic magnet, far better than any kind of advertising. This, in turn, will lead to sales and can possibly recover your loss in average order value.
In 2007, Radiohead released their In Rainbows album and chose PWYW pricing. In the end, they earned more money from the digital sales of that album than the total digital sales of all their other albums combined.
But that’s easier said than done. To success with PWYW, Psychology Today recommends you use this strategy selectively:
- For last minute sales to fill capacity otherwise empty (hotels, airlines) or to clear up slow-moving inventory.
- When customers already has personal attachment to your business.
- When charity is concerned.
Just remember: Always provide a based price as an anchor for customers. If people have an idea of a “reasonable price”, they’re likely to stick near it.
10. Loss leading
Loss leading pricing works when customers are attracted to your store by a desirable discounted product and then also buy additional items on the way out.
Much like pay-what-you-want mechanism, loss leading strategy use a traffic magnet to pull shoppers, in this case a heavily discounted item or free gift.
One indispensable elements of this pricing strategy is what comes afterward. One they’re in store, you can then adopt a whole range of tactics to encourage more items sold, thus increase your store Average order value (AOV).
11. Break it down
Imagine you’re considering subscribing for an online course. Which one do you think is a better deal:
- A $84/month subscription
- A $1,000/year subscription
A normal human being would go for $84/month, although both options are basically the same. Whatever value it is, $84 sounds much lower than $1000.
That’s how you reframe a big number into a smaller equivalence (monthly, daily). That framing influences people to perceive a lower overall price, according to a research by Gourville.
What if your products can’t be broken down into daily equivalence? Gourville also proved that the same effect can be achieved by by comparing your price to a petty cash expense, such as a cup of coffee.
Take this previous online course as an example: “If you can afford this cup of coffee at $3/day, you can afford this course at $2.8/day.”
12. Change how the price looks
If you’re reaching this point of the article, you’re unlikely to be surprised by another psychological hack. But even the most trivial area like visual display can affect how customers perceive your price.
Our human brains might be developed, but when it comes to differentiating between visual and numerical size, the line is blurred.
A research by Coulter shows that shoppers will perceive the sale price to be smaller (better deal) if it’s print in a smaller font size.
In another study by Cornell University, diners spent significantly more when the dollar sign ($) is left out. This is due to the strong correlation between dollar sign ($) with spending money.
Last but not least, prices containing more syllables seemed drastically higher to shoppers, according to another paper by Coulter in the Journal of Consumer Psychology.
Look at the following price structures. Which one feels lower to you?
Although both are the same in value, the bottom structure feels less costly. How? Because the brain verbally processes the first number: “One thousand eight hundred and ninety,” whereas the second is “eighteen ninety”.
It doesn’t matter if no one reads it aloud. Your brain subconsciously encodes the auditory version anyway.
So keep your pricing display as simple as possible.
This puts to an end to our article about eCommerce pricing strategies. I truly hope you found something interesting.
As I stated earlier, setting prices is not complicated. But pairing your pricing with human psychology is never an easy task. Some of these pricing strategies will work well for your store, some may not. The real answer only shows up once you’ve done enough testing.
Again, all information in this article is based on academic research and might/might not be expanded to your specific eCommerce scenario. Now it’s your turn to experiment, and don’t forget to come back and update us on what you’ve found.
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