Part 6: Pricing
Beyond Conversion Rate Optimization Pricing—Lazy Ways to More Profit
The consumer isn’t a moron; she is your wife.David Ogilvy, “The Father of Advertising”
How products are priced can make or break the business. Products priced too low will make everything in the business futile. A company without profit is a charity.
Pricing is hard to get perfect since there are many influences. There are competitor prices, manufacturer guidelines, confusion of what metrics to measure, the psychological implications of pricing high or low, and the research cycle of buyers who seek a low price. The challenge of getting your price right is worth it because you can increase profit overnight by typing a few numbers on your keyboard then clicking save.
Read the whole chapter first before applying it to your situation because the individual tactics are connected. All the proven tactics are not meant to increase conversion rate or even revenue—they aim to explode profits. A higher price can mean more profit, even with less revenue or lower conversion rates, thanks to the increased margin.
How To Set Price
Pricing Against Competitors
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. What should you do?
One lost sale doesn’t matter. The challenge is determining whether to price higher or lower than the market as a pricing strategy. Two questions can help you to decide what to do:
- What segment is underserved in your market? Can luxury, high-end, or low-end customers get what they want? What about Fortune 500, corporate, or small businesses?
- What value can you provide to deliver the ultimate product and service? Alex Hormozi in the Offer Creation Checklist, gives this tangible formula to measure value in the eyes of the beholder:
Value = (Dream Outcome x Perceived Likelihood of Achievement) / (Time Delay x Effort and Sacrifice)
If you increase the dream outcome or the perceived likelihood of achievement, you increase value. If you decrease the time it takes to get the outcome or reduce the required effort or sacrifice, you increase value. Hormozi in $100M Offers, expands on the formula, helping you apply it to your business. I encourage you to grab the book then do the exercise.
No product or service can thrive on its own without considering the people who use it. How you price relative to competitors influences what people buy. So, if you want to set a price that truly resonates with your customers, start by looking for the groups of people who may have been overlooked in the past. Understand what they really want, and use that knowledge to inform your pricing strategy. By doing so, you can build a more meaningful relationship with your customers to provide a product with services that truly meets their needs.
Automatically Monitor Prices
You need to monitor competitor prices to see how your products compare to them. If the product has a MAP, monitoring lets you report any violation to the manufacturer to keep the competitor inline for the sake of your business. You have several price monitoring strategies in your arsenal.
If you sell products that others can buy from Google Shopping ads, you can meet them or beat them in price. In my book Google Shopping for Shopify, I reveal how you can use an automated discount feature to deliver a price real-time in Shopify that beats the lowest-price competitor. If you don’t want prices to drop below a certain margin, you can set rules for that.
Google Merchant Center has a price monitoring feature for advertisers with their price competitiveness report. The report lets you compare shopping ads against other advertisers. Be aware that the method only monitors products advertised in Google Shopping.
A comprehensive strategy to track any store you choose is scraping. Create a Google Sheet with the ImportXML rule and XPath data to pull common schema markup like the product name, currency, and price. The downside of this method is it is time-consuming to set up. You also cannot scrape data within JSON+LD, which a lot of stores use for schema markup.
The most complete solution in Shopify 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.
When to Increase Prices
A price increase is the quickest and most dependable method to increase the profit of an online store. If you charge a higher price per product and maintain the conversion rate, you get extra profit per customer that can go towards ads. Paid advertising scales when you can spend more per visitor.
A store on tight margins gets the most relief from 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. Bear in the mind, 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 lifecycle the product is frequently purchased. A customer who spends $2000 on a laptop is more willing to spend extra on speakers from you in that purchase than from a competitor. People are less price sensitive for low-cost items, upsells, 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.
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 effect for yourself.
Furthermore, 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 second chapter on positioning in this conversion book for further help.
When to Lower Prices
Most people in most markets do not want the cheapest option. People buy based on value. Your goal should be to charge a premium price then figure out how to shape the product and marketing to deliver on it, to delight customers.
If your strategy is to competitively price products, lower prices leans towards high conversion rates and extra repeat purchases. Your goal is to improve the economies of scale by lowering the cost of goods sold. This works better with fixed overhead costs. You enter a volume game instead of optimising profit per order.
Zooming in on individual products, the best product candidates for lower prices are high-ticket items that are indifferentiable from cheaper alternatives or ones that start the customer lifetime cycle with your store.
If you have a high-ticket item that is indifferentiable, a more sustainable alternative than lowering price is to create a competitive advantage. You can provide more convenience through speed or location, warranties, guarantees, support, or digital bonuses.
The most reliable way to lower prices is on one product that most of your customers buy first. The loss-leader gets more customers through to your profitable products. Use a loss-leader once you have multiple products to sell and automated strategies built out. Without a funnel in place, you’ll never make the money back.
How to Increase Customer Lifetime Value and Average Order Value
Harvard Business School found an increase in retention of 5% can increase profits by 25-95%. A subscription makes future sales simple. Turn that one hard-earned sale into six.
Your store’s business model could be built around subscriptions. Not enough ecommerce entrepreneurs consider this for a business model. Loot Crate delivers boxes each month with a collection of nerdy items from cups, posters, and clothing. Club Jerky sends out an assortment of jerky flavours every month.
If you have a fast-moving consumable good, offer a subscription option on the product page. This is the most commonly known subscription strategy in Shopify.
Loop Subscriptions lets you set up subscription payments in Shopify, control delivery frequency, reduce involuntary churn by setting up automated dunning rules, gamify subscriptions, and integrate with Klaviyo. Chamberlain Coffee lets customers pick either one bag of coffee or put it on subscription at the desired frequency.
Use this best practices and tactics to optimise your subscription:
- When setting up a subscription, consider that people are unsure of getting a consumable on a repeated basis without first experiencing the product.
- Use Shopify data to predict the expected date of the next order. Klaviyo uses this data to calculate the date on a per customer basis.
- Follow up on all non-subscriptions orders through email, at the time you expect the product to be fully consumed, with a subscription option.
- When pricing subscriptions, test how the cost is displayed to make it appear cheaper. Rather than a monthly price, try a daily price. If the price is substituting something, like a tea replacing the daily latte, you can compare the daily saving to the daily cost.
- Generally, you want to avoid expressing savings as percentage because people struggle to quantify what they mean.
- Consumption frequency matters a lot. If the frequency is too high, people will cancel as they get a backlog of products. If the frequency is too low, you miss profit by not getting your subscribers their purchase soon enough.
- Incorporate elements into your packaging that promote a subscription.
- Help customers succeed with your products by giving them educational content. When customers get the results they want, they are more likely to buy again and refer others.
- Email customers about an upcoming order. Include in the email a link to FAQs.
Bundles boost the average order value. They can also help conversions by providing choice to different consumer segments.
A Harvard Business School piece looked at consumer behaviour 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. 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. You can offer a bundle option to buy additional items at a discount on the product page, or you can create a standalone product that includes other products.
Manscaped has a bundled product that incorporates a customizable subscription plan. This is my only active ecommerce subscription, which speaks volumes to how they’ve executed it. You can let customers customise their boxes with my recommended subscription software Loop Subscriptions.
Cross-Sell and Upsell
A McKinsey report says 35% of Amazon’s revenue in 2006 came from product recommendations. The report also says 75 percent of what people watch on Netflix comes from product recommendations. Personalised suggestions at the right time drive up revenue.
South Record Shop has what I presume is a suggestion of similar music yet provides no context. Half-hazard promotions are likely to be ineffective.
A cross-sell in commerce suggests another product prior to purchase. An upsell either adds revenue to the order with a higher priced option prior to purchase or an offer after payment. The two selling strategies are defined interchangeably in the world of ecommerce.
Cross-sells and upsells are generally revenue boosters rather than conversion boosters. The type of selling aims to increase profit-margins by getting people to spend more. However, an upsell and cross-sell can affect conversions because they give people a targeted alternative, alter confidence in the product, or present a custom offer that prompts urgency.
There are many ways you can use the two selling strategies on your store to increase profit:
- When someone buys a product, offer more of the same product at checkout for a reduced cost.
- If someone looks at a $1,000 television, mention a model up in the product suggestions section. This of course presumes the higher priced item is more profitable. The presence alone of a higher priced item may increase revenue 4%.
- Test “You may also like” and “Customers who bought X also bought” sections on the product page and checkout. Make the products complimentary to increase uptake of the offer. If someone buys shoes, recommend socks that match.
- Add-ons I’ve seen work include extra warranties, product support subscriptions, and training. People love these reassurances “just in case”.
Test your offer because it must not undermine the primary offer through distraction or decreasing the shopper’s confidence. An upsell that makes a promise to achieve x can cause abandonment when the shopper expects to get x from their original purchase. Aside from the offer itself, the timing and design of the offer can be tested.
To do the strategies in Shopify, ReConvert lets customers add additional items to their purchase after payment. The Cross Sell & Cart Upsell app is one way a Shopify store can pick the products they choose to sell with the product viewed. Each app more than pays for itself.
The downsell lives by the motto “any sale is better than no sale”. The person doesn’t want a $500 suit? You give a discount or sell them a $300 suit.
Drew Sanocki from DesignPublic.com and a competitor were the only Google Ads advertisers for a $10,000 lamp nicknamed Lampola. Drew stopped the ad campaign because it gained zero sales yet the competitor continued. Years later Drew met the competitor CEO over coffee then asked him if he sold any of the lamps? “No”, he replied. “Then why were you advertising it so much? I noticed your ads everywhere.” “Because the visitors who clicked on the Lampola ad came to our site and purchased the Crapola, and they bought a ton of them.”
The Crapola lamp had high margins and high volume. The CEO was sure to include the lamp as a suggested product for Lampola.
Not all downsells are healthy for business. Any sale is not better than no sale. A downsell is laden with risk in ecommerce because the purchase funnel and life cycle of a customer is not linear. Everyday people abandon cart on purpose to get a discount in an email. Downsells are hard to do without jeopardising profits as you train visitors to eat at profits.
The goal is to aim for maximum lifetime value rather than any sale. If you decide to downsell with coupons, review your analytics to see how long it takes on average for a shopper to buy. Test the follow up of email coupons around this time period. Even then, you have to consider future purchases. What’s your average customer lifetime value?
All things equal, you are more likely to cut profit from price cuts when you sell exclusive products because your visitors have fewer perceived options.
The most reliable downsell is a cheaper product in a “similar items” listing on the product page. It could have less features or be a model down. If it has higher margins at a lower cost to the customer, that’s better for your bottom-line.
Price Principles for All
How to Price for Free Delivery
You hurt conversions and profit with an unoptimized delivery cost to the customer. When the visitor is required to visit the checkout to see delivery charges, your abandonment rate will always be higher than its potential. Unexpected charges are the number one reason for cart abandonment.
Free is a power word in the English language that makes people do irrational things. In a famous study cited 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. When each chocolate was lowered by one cent, 69% of people picked the free Hershey Kiss. 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 retailers for free shipping is a minimum order value (MOV). Free shipping is provided to customers once their order gets above a certain total.
Provide an upsell to push the visitor to free shipping when you have a MOV and the order amount is short. Monster Upsells sends a clear message of how much more a customer needs to spend in the order to qualify for free shipping. Golden Greens Organic uses the app to show the shopper the dollar amount to reach free shipping. A second threshold, that is higher than free shipping, is shown as the goal post to get a free gift.
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.
You likely think about average order value in the wrong way. Your AOV is revenue divided by the number of orders. By definition, it is an average. Store owners look at their AOV in an attempt to raise it by setting a free shipping threshold about it. Whether the strategy works is a dice roll.
You can be more certain by grasping the statistical concept of “mode”. The mode is the most frequent number in the sequence.
Let’s say you sell a protein supplement for $50 and t-shirt for $20. The free shipping threshold is at $40. Your order history for the day looks like $20, $50, $50, $70, $20, $20, $50, $20. Your AOV calculates to $300/8 = $37.5. Does anyone ever make an order for $37.5? No, they don’t. But a free shipping threshold, or Facebook bid cap, is often based on this information.
The number you care about is your mode—here it is $20 as there are 4 orders of that amount. You’ll likely get more profit setting the free shipping threshold, and cost cap bid, 25% above that amount at $25 than $40.
The next step is to dig into all $20 orders to see what they consist of. Export your orders for as long of a timeframe as possible that reflects your current inventory strategy, sort from high to low, then eliminate the orders far outside your mode.
In our example, we know it’s one product with a new price. Reality will have orders containing varied prices so look at orders above and below your mode. When you’ve done that, you can strategize to increase the value of those orders.
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%.
With your new free shipping threshold, unleash it at the start of the day. Track it to see the effect on average order value and conversion rate. Once you have acquired enough data from different shipping offers, use our free online store and shipping calculator tool to see what gets you the most profit.
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 repeated studies have found these prices 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 change on the first digit. 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.
Use Zeros Wisely
Prices can appear higher by adding zeros to the end like $19.00. The strategy is good when you want prices to be seen high like for free gifts or the standard price of individual items within bundles.
On the flipside, prices can appear lower by removing zeros from the end like $19. Most products should be priced without decimals to lengthen the gap between the perceived low price and high value.
Make Prices Clear
Baymard Institute surveyed 4384 respondents in the US for the reasons they’ve abandoned cart online in the past 3 months. The study found an unclear total price paid by the customer as the number one reason for cart abandonment:
Display your price and every possible charge clearly on the product and cart pages. Communicate all tax, delivery, and return charges. Wristwatch company MVMT makes clear the pricing of the product, and all other charges, to lower cart abandonment rates.
A flat-fee, or free, delivery cost saves people from having to calculate the total themselves or proceeding to the checkout to view the full price.
Pricing is a crucial aspect of any ecommerce business as it determines profit and influences the conversion rate of your Shopify store. A well-optimised pricing strategy can help you attract and retain customers, boost sales, and increase revenue. However, finding the right balance between profitability and affordability can be challenging, and it requires constant testing and tweaking. By implementing the pricing strategies and psychological tactics outlined in the chapter, you can profitably scale your Shopify store in a competitive market.
- Priceless: The Myth of Fair Value (and How to Take Advantage of It) by William Poundstone.
- Predictably Irrational by Dan Ariely.
- I cannot recommend Loop Subscriptions enough to grow your recurring revenue.
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.