Part of a sophisticated pricing strategy for your ecommerce store is made up by data science driven insights such as price elasticity, key value items, demand forecasting and more, however an equally important part of the strategy is to define logical rules to ensure that prices make sense throughout your assortment.
Ever noticed that your Netflix plan costs $9.99 instead of $10.00? Amazon Prime Membership costs $8.99 instead of $9.00? H&M T-shirts costs $4.99 instead of $5.00? All of these companies are leveraging price rounding rules or price ending rules to maximize customer value perception while still pushing margins to the limit.
The idea about price endings such as these originates with that customers in the western world read prices from left to right, and by being able to push down the initial digits you are able to create a price that is perceived as lower, even though its essentially the same as the next price point above it.
This is all common knowledge within the retail space, but it is very common that our clients are still not spending too much thought into this topic because they underestimate the true impact it would have. To consider the impact, let's think about it both from the perspective of a price increase and a price decrease.
Now let us imagine we enforce price ending rules and price Product A at $9.49 and Product B at $9.99.
The point is that by enforcing proper price rounding rules, you can have significant uplift on profit or value perception with very little trade offs.
If you have traveled abroad outside the west, you may have ran into different pricing cultures that think about pricing in a different way. For example, if you visit Thailand you will frequently see prices such as 27THB, 7THB, 188THB etc that appear to have been priced at random.
There are ongoing research into consumer behavior that attempts to understand if price endings effect consumer value perception equally across cultures or if this is more of a western phenomenon, if you are active in one of these regions and unsure, the best way is to simply do A/B tests for your store and see how these price changes impact your demand.
Another thing to consider related to price ending rules is to ensure that whatever allowed price points you have in your store is not too spread out. E.g. if you only have .99 as an allowed ending, the difference between $0.99 and $1.99 is +100%. For lower price points its important to allow smaller differences in price endings to ensure that your strategy and price execution have the flexibility for a bit more granular pricing of products.
The next set of logical rules that should be part of any pricing strategy is your product price relationships. These rules are used to ensure that pricing across products make sense and are not purely driven by each individual products demand and price elasticity, but instead takes a holistic view of the assortment into account.
The "Good Better Best" product relationship is a way to define a quality or price hierarchy of similar products that relate to each other in some way, but should follow a certain price ladder.
For example, imagine you go to your local grocery store and want to purchase some chocolate. You may have 3 different types of milk chocolate bars available, one is the "Cheap" one, one is the "Standard" one and one is the "Premium" one. They are all three separate products from separate vendors, but from your assortment and range strategy they are related to each other from a quality point of view.
If your pricing execution and pricing strategy is either based on gut-feel, driven by impulsive decisions or blindly following competitor prices, there is a high likelyhood that these kind of products end up having prices out of order, where for example the "Medium" quality product end up being equal or cheaper than the "Low" quality product.
The consequence of this is that the Low quality product loses its purpose, and there is a high likelyhood of cannabalization where the higher quality product absorb all the sales of the lower quality product.
To circumvent this problem, the solution is to define a product quality relationship (also called "Good Better Best") where you define which products relate to each other, and in what order they should be priced.
For example:
By implementing these rules, you can now enforce that your assortment is priced in a logical manner that takes related products into account as you do price changes, to ensure that each individual product still keep their product role within your category.
The "Bigger Pack Better Value" product relationship is a way to define that different pack sizes of the same product makes sense and provide the expected consumer value.
For example, imagine you go to your local grocery store to buy some Coke. They are selling 1 Coke can for $0.99 and a 6-pack of Coke for $5.99. In this case, it is cheaper for you to buy 6 individual cans of Coke instead of buying the 6-pack ($0.99 vs $0.998) even though you would expect a better value from doing a bulk purchase.
These pricing mistakes can be very tricky to manually keep track off and it is very common that we see this relationship being broken across our clients. The consequence of breaking these relationships is that some of your product pack size loses their meaning or importance within your product assortment, and you risk cannabalizing sales or potentially losing out of value by pushing consumers to the smaller pack sizes (e.g. they may end up just buying 4 cans of coke instead of a 6-pack).
The solution to this issue is to ensure you have proper structured data of your products, and a good understanding of the true content pack size of each product, so that you can automatically calculate a Price-Per-Unit and enforce it across your relationships.
With this information at hand, you can then map these products together and say:
Now, as you change price of one item you can immediately flag when other items of different pack sizes gets out of sync, and automatically adjust it to ensure that the larger pack size keep its role and consumer value.
Many retailers and ecommerce businesses make the decision to do some product development on their own, for example a Birthday Decoration Ecommerce store may both buy Frozen themed birthday party decorations from a vendor, but also buy the license to develop their own illustrations and decorations of Frozen characters.
This means that you can have 2 type of branded products within your store:
Why would you create your own branded product of something that already exists with a vendor? The main reason would be because you are expecting an improved penny profit of those items, if not, why would you not just sell the existing vendors version of the product? Why would you want to spend time doing product development of very similar products, if it cannabalize the sale of an existing product that would generate higher profits?
Because of this reasoning, it is important to enforce that your own branded products actually do keep this profit relationship versus the national branded products. This can be done by mapping the National Branded vs Own Branded versions of your products, which will then allow us to automatically flag or adjust prices when they get out of sync.
An efficient pricing strategy for your ecommerce store is made up by multiple different components that together ensures that you maximize value and customer price perception. These components are:
The first three points focus more on the individual performance of a product, but if you only price each individual product in isolation, you may end up with cannabalization of sales across products or a customer experience that does not make sense. Complementing your strategy with rules as mentioned in this article allow you to ensure that the pricing strategy makes sense overall across your full assortment.