For those who have ongoing e-commerce business, have you ever thought about how much time you spent on the optimization of your price levels (affordability + willingness to pay + accuracy)?
One of the common mistakes (or neglected points let’s say) that many businesses do is to base all the prices according to business perspective solely, which is to adjust the prices based on competitor prices or the costs. However we cannot ignore the 3rd dimension, which is the effect of customer perspective (or perception).
Competitor price tracking is a must, that’s true. (Actually not only the prices but also the stocks should be tracked as much as possible in e-commerce cases). Whereas this is not a big hassle as the technology provides us with convenient ways to track: bizrate.com is one of the famous example price comparison website.
http://prisync.com is another start-up (a fully automated competitor tracking and monitoring app) that was recently launched by one of my ex-colleague and his team. This product is different than the others with its positioning (based on the needs of business owners, rather than the customers) Just check it out and see an example of how things are improving in our benefit.
On the other hand, cost based pricing is something that all the business owners know by nature. (You don’t need to study accounting, not necessarily). It’s about addition and substraction, so I won’t go into details. All I can suggest shortly is to make sure the gross margin and operating costs (and EBITDA and so on) satisfy yourself and your investors. (which means yourself in a way 🙂 )
What is the third dimension?
It is about how your customers perceive your prices. Many business owners try to figure it out by asking customers directly about what they think, or by doing A/B testing. Whereas they forget the fact that customers tend to say what exactly they want to pay, which is usually less than how much the product is actually worth. Moreover, people don’t really know what the product is actually worth. They don’t know what the fair price is, the method they frequently use is to compare with others. (Which I mentioned earlier). There are various methods to measure what they want without asking them, but let me introduce you a very quick way (especially if you are not a start-up and if you have enough sales records) to take a snapshot of what YOU OFFER vs what THEY WANT.
Find out “what you offer”
- Prepare a list of all the items that are active on your website (excluding sold outs)
- Work with a histogram of these items with number of different items (not the units). Adjust the bins (the intervals of prices: do you want to group them as 5$-10$, 10$-20$ or 5$-20$, 20$-35$ etc..)
- Transform number of different items as the percentage of total. (to be able to compare with what customers want part
Find out “what your customers want”
- Prepare a list of all the items that are sold (make sure the difference btw date of activation of these items are not so different than each other) each with number of units sold
- Work with histogram of these items with number of different items (with their amount of units – for the weighted effect). Adjust the bins (the interval of sales prices: make sure that the prices that you put are sold prices, not the current prices)
- Transform number of different items as the percentage of total. (to be able to compare with what you offer part)
You will get two charts as in figure 1 below:
Most of the times, as in Figure 1, the prices of items you offer on website are more expensive compared to the items that are frequently sold on the website (the horizontal difference btw red and blue curves). I rarely see cases where blue is on the left side and red on the right.
In these kind of cases what you need to do is to try to find a medium btw your curve and your customers’ curve, and try to make it in customers’ favor (customer is the king, remember 😉 )
It’s not rocket science as you see. Besides, it’s a good moment to start playing with your pricing strategies. In my next article, I will tell how the manipulation of customer perception can help you maximize your margins, with some easy tactical moves.
(P.S. Please note that I have excluded some factors in this exercise, such as market regulations, competitor prices (as mentioned above), the placement of products on the website and campaigns & vouchers.)