Part 6: Pricing
Price Strategies to Increase Profit
“The consumer isn’t a moron; she is your wife.”David Ogilvy, “The Father of Advertising”
Price optimization is hard. There is the manufacturer’s price guidelines, competitor prices, confusion of what metrics to measure, and the complex research cycle of today’s buyers who spend hours researching the best place to buy. The challenge of getting your price right is worth it because you can increase profit overnight with minimal work.
A good price maximizes the lifetime value of a customer—the goal of all good conversion optimization. All the tested tactics and effective practices provided will not increase your conversion rate or even revenue, but they have jaw-dropping power to explode profits. Even if you decrease sales and revenue, a higher price point can mean more profit from the increased margin. Read this whole section then apply because the individual tactics are connected.
You can do everything right to make someone crave a product then have a savvy online shopper buy from a competitor because they offer it cheaper. I have found this regularly true for high-priced items ($300+) because people spend hours searching options for the best deal.
Manufacturers with a minimum advertised price (MAP) stop destructive price wars of stores who undercut each other on price. A high-priced item with a MAP is most likely best priced at the MAP.
People are less price sensitive for low-cost items, up-sells, and cross-sells. Make the golf club you sell competitively priced, then have good margin on the golf glove available as a cross-sell at checkout.
Give yourself the edge on pricing relative to your competitors with value propositions. Irresistible guarantees and return policies are ways to distinguish yourself from competition rather than a raw battle on price. Refer to the whole positioning section in this conversion guide for further help.
Monitor competitor prices for high-priced products to see your relation to them. If the product has a MAP, it lets you report any violation to the manufacturer to keep the competitor in line for the sake of your business.
You have several price monitoring strategies in your arsenal. Google Merchant Center has a price monitoring feature for advertisers with their price competitiveness report to compare shopping ads against other advertisers. This method only monitors products advertised in Google Shopping.
A more comprehensive manual and free strategy to track nearly any store is scraping. You create a Google Sheet with the ImportXML rule and XPath data to pull common ecommerce schema markup like the product name, currency, and price. The downside of this method is it is time-consuming to setup and you cannot scrape data within JSON+LD, which a lot of stores use now for schema markup.
The most complete solution that updates pricing for you based on competition is PriceMole. The software monitors the prices and stock levels of your competition then lets you automate your response with pricing strategies of your choice.
Raise Your Prices
A price increase is the quickest and most dependable method to increase the profit of an online store. A store on tight margins is most suited to consider a price hike. An increase of 10% can bring in 50% more profit provided it does not damage conversions.
If you sell an exclusive product, a price higher than competitor substitutes puts your product as the quality option. The higher costs can form a halo effect to help customers see your store as high-quality provided all messages are aligned. Other factors impact the halo effect. If your store looks like it was designed in 2005, a higher price just makes you over-priced.
Consider at what stage of the customer life cycle the product is frequently purchased. A customer who spends $2000 on a laptop is more willingly to spend extra on speakers from you in that purchase than from a competitor.
It’s normal to be concerned that a price increase will terrify visitors. Your worst case scenario is you decrease profits for a period. Your best case is you increase profits for the life of the product. Test a few of your bestsellers at the start of the month (for measurement accuracy) to see the affect for yourself.
Lower Your Prices
The best product candidates for lower prices are high-ticket times that can be purchased cheaper from elsewhere or ones that start the customer lifetime cycle with your store.
Lost-lead pricing is a retail strategy to attract people with a bargain. Consider this strategy when customers can buy multiple products and you have follow-up marketing in place to optimize customer lifetime value.
Display your price and every possible charge clearly on the product and cart pages. Worldpay found unclear pricing is the number one reason for cart abandonment:
Consider tax, delivery and return charges. In what currency are the costs? Wristwatch company MVMT make their pricing crystal clear. A flat-fee or free delivery cost helps price clarity by saving people the effort of calculation or proceeding to the checkout to view the full price.
A subscription makes future sales simple. Turn that one hard earned sale into six or more.
Your store’s business model could be built around subscriptions. Not enough ecommerce entrepreneurs consider this for a business model. Loot Crate delivers geek boxes each month with an assorted collection of nerdy items from cups, posters, and clothing. Club Jerky send out assorted flavors of jerky every month.
What can you do if you are an existing store with one-off sales to create a recurring subscription? UK company Who Made Your Pants? have a “Year of Pants” collection where visitors get charged 12 times for 5 boxes of underwear delivered at random times. The number of payments mismatching with box numbers, and the boxes being delivered at random times, make it an average example of subscriptions (but the novelty could make it work as well as having payments spread out.)
Herbal Tea Direct have a clear subscription option on the product page that lets people buy the tea at a lower price and select the frequency of delivery. Consumption patterns vary so this is a great idea.
The Recurring Orders app lets you setup subscription payments in Shopify, control delivery frequency, and offer a discount. Factor in consumption frequency otherwise people cancel if they get too much or you miss profit by not getting your subscribers their purchase soon enough.
When setting up a subscription, also consider that people are unsure of getting a consumable on a repeated basis without first experiencing the product. I encourage you to follow up on all non-subscriptions orders through email, at the time you expect the product to be fully consumed, with a subscription option.
Bundles boost the average order value. They can also help conversions by providing choice to different consumer segments.
Thanks to Tommy Walker, now editor of the Shopify Plus blog, I discovered a Harvard Business School piece that looked at consumer behavior and profit when Nintendo bundled games with their console system. “Pure bundling” where the pieces were only available together resulted in worse revenue than if the products were available separately, or in a bundle and separately. People who didn’t care about the bundled games or were more price sensitive grabbed the bundle, while high-end gamers (me!) liked to spend more on the console then pick their desired games.
The most important ecommerce rule of bundles is to make the items complementary. What constitutes a complementary product can be logical to you or gathered from your data of what people purchase with the primary product.
Offer a bundle option to snag the two (or three) items at once on the product page. Amazon do a great job by bundling items based on customers who purchased the viewed product. (Use their store and others for bundle ideas.) Test price discounts and bundle contents to optimize your offer.
The Product Bundles app provides the technology to, you guessed it, bundle products in Shopify.
The Left-Digit Effect
Psychologists found the first digit in a group of numbers exert more influence than the digits that follow. A price of 79.99 is judged mostly by its “7”. It’s not accidental the price of Dyson products in Target are jacked with nines. The left-digit effect has three implications for retail.
Firstly, we interpret prices by slashing off the remaining digits. The rule of retail is to end your prices in “7” and “9” because these prices in repeated studies have been found to get more sales. An MIT and University of Chicago study found a clothing item sold best at $39 compared to $44 and $34.
Secondly, reconsider the use of cents for items where quality is important. 99-cent endings can give the image that an item is of low or questionable quality,” says Robert Schindler, a professor of marketing at Rutgers University. A bargain-oriented store should use cents everywhere.
Thirdly, whenever you discount, consider the first digit change. A cut from $357 to $307 is far less appealing than if it were $297. It’s not just the $10 difference that has an influence, but the left-digit effect. A price of $4.6, down from $4.7, is less appealing than a price of $4.9, down from $5. The right price is not always the lowest price.
You jeopardize conversions and profit with un-optimized delivery costs to the customer. When the visitor is required to proceed to checkout to see delivery charges, your abandonment rate will always be higher than it could. Unexpected charges is the number one reason for cart abandonment.
Major retailers clued into digital have some type of free shipping. The offer works because it is attractive and makes pricing simple.
Free is a power word in the English language that makes people do irrational things. In a famous study city by Dan Ariely, Lindt chocolate truffles were battled against Hershey Kisses. 73% of people chose the Lindt chocolate when it was available for 15 cents compared to 27% of people who chose the Hershey Kiss for 1 cent. Do you think it was because Lindt is the better chocolate? When the Hershey Kiss was free, 69% of people picked it. We love a deal and even more love a steal.
Free delivery gets people to buy more when done right. When poorly executed, it eats profits. How can you ensure free delivery builds your profits more than charging for delivery?
The most popular method by big retailers is free shipping for a minimum order value (MOV). Offer free shipping above an order total. Use my free online store and shipping calculator tool to see what gets you the most profit:
Provide an up-sell to push the visitor to free shipping when you have a MOV and the order amount is short. Shoe brand Mahabis provided clear directions to get free shipping in a lightbox message when I clicked “checkout securely”. The Motivator app sends a clear message in the header how much more a customer needs to order to qualify for free shipping or some promotional discount. See it in action on Lifestyle Labs.
A MOV works when a percentage of customers spend extra to meet the requirement. Pick a MOV that is a percentage above your average order value and average shipping cost while giving extra profit. Consider complementary products that fit.
A MOV is ineffective if your products do not complement each other because the goal is to get visitors spending extra dollars to meet the requirement. A flat delivery fee calculated from the average delivery cost can work and so may unconditional free delivery. Consider factoring in the cost of free delivery with an increase in product price – particularly for more expensive products. Always calculate profit to gauge the true effect.
Make free shipping obvious early with a value proposition in the header and automatic at checkout to simplify the promise for people. Do not require any coupons. One retailer cut the requirement of coupons for orders over $100 to increase conversions by 50%.
Once you have two reasonable shipping charges that may grow your store, test to see the affect on average order value and conversion rates.
- Priceless: The Myth of Fair Value (and How to Take Advantage of It) by William Poundstone
- Predictably Irrational by Dan Ariely
- 10 Questions to Ask When Pricing Your Product
- There are two other pricing apps worth mentioning. Bold’s Product Discount app for temporary sales and urgency, and the Quantity Breaks for tiered pricing to encourage higher-value purchases
You’ve almost finished learning all the best ways to get more customers from visitors. The last part is the final step of the purchase where you learn how to make your checkout compel people to buy.