If you're selling online you'll know the importance of getting your pricing right: small variations can mean the difference between being market leader or losing out to the competition, especially in the current economic climate. There's a lot more to pricing strategy than just being the cheapest though, we'll take a look at some potential pitfalls below.

1. Increasing Prices In Large Jumps

Most of us have to increase our prices from time to time, and it can be a sore point with some customers. One technique to avoid that is making more frequent but smaller increases, rather than larger increases which happen only occasionally.

For example, if your prices will need to rise by 20% over the next year, you might think your customers would prefer you to hold current prices for as long as possible then increase in twelve months. However, studies have shown customers react better to a 10% increase in six months, and a further 10% increase in twelve...even though that works out to be more expensive to them!

In retail 10% seems to be the upper limit beyond which customers start to see a price increase negatively, so if possible try and keep below that – even if it means having to introduce multiple price increases over time.

2. No Use of Anchor Pricing

Anchor Pricing is a concept almost as old as retail itself, yet it's often used poorly or not at all in ecommerce. The basic principle is simple and relies on our minds tendency to focus on the first piece of information in a series (the "anchor") to make judgements about subsequent data.

For example, say you're selling a TV with an RRP of £1,000. You'll sell more of the item if it is presented alongside a TV at a cost of £2,000, whereas if you place the TV next to a £500 unit you will sell demonstrably less of the £1,000 model over time. The mid-priced TV seems like a bargain when positioned alongside a more expensive model, but is perceived to be more expensive when placed next to the lowest priced item.

It's a simple and well established technique, but as most ecommerce software relies on a few basic methods of ordering products within a category (name, newness and price) it may not be employed. If your site has to show products in this way consider having a "hero" area highlighting two products on the first page of each category, one your mid-priced bread and butter type item and the other a high end, expensive model. You'll see more sales as cognitive bias kicks in and people subconsciously think of the item as better value.

3. No Pricing Intelligence

At Intelligent Eye we provide automated pricing intelligence software that can keep you updated on competitor pricing in real time, but basic pricing intelligence can be gathered on a budget simply by browsing your competitor's websites regularly, signing up for their promotional communications, etc.

Gathering data like this by hand can be tedious, but it's also essential. Even if you're just covering a handful of core lines and your top three competitors you'll have a better idea of what's happening in the market, and what you can do to stay ahead of it.

4. No Price Testing

Ecommerce makes testing different pricing strategies very simple, allowing you to home in on the best price, yet few SMEs have a price testing strategy, much less a well defined one.

One simple testing method is showing different visitors points along a "price curve", and selecting the most profitable point for you. For example, you're selling an item that costs you £50 and you typically retail for £100, and you typically sell 100 a day:

  • At £95 you sell 110 units, for a profit of £4,950
  • At £100 you sell 100 units, profit: £5,000
  • At £120 you sell 80 units, profit: £5,600

The sweet spot will depend on a huge range of factors of course, but the key message is don't assume your pricing is "correct", always be testing prices and making sure your assumptions about the best price point are backed up with data!

Article by James Mishreki of Competitor Monitor.

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