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The concept of pricing plays a vital role in e-commerce. Finding a balance between customer satisfaction and profitability is the driving force behind the company’s strategy. In this article, we examine the different pricing strategies used by e-commerce brands and discuss why they work in specific situations. By studying real-world examples, we can gain valuable insights and figure out how to implement these strategies ourselves.
Multiple items grouped together and sold at a discounted price relative to their individual prices may appear to be worth the money. The key to making this strategy work: get more value for less money. This is exactly what the Nintendo experiment conducted by Vineet Kumar of Harvard Business School demonstrated. Sales jumped to 100,000 units when customers could choose between stand-alone and bundled games. However, when the option was removed and customers were forced to choose only from bundles, sales dropped 20%.
Price Discrimination Strategies
Price discrimination strategies are commonly used by companies to adjust prices for different customer groups and maximize profits. Here are some examples of companies that utilize various price discrimination strategies:
- Airlines such as Ryanair and easyJet employ a time-based price discrimination strategy. They offer lower ticket prices for travelers during off-peak seasons, on weekdays with lower demand, or during late-night hours.
- Hotels often utilize market segment-based price discrimination. They offer different prices for business and leisure travelers, with higher prices for business customers due to their higher willingness to pay.
- Retail stores like Zara and H&M frequently employ demand elasticity-based price discrimination. They offer sales and price reductions during periods of lower demand, such as after a season or during clearance sales.
- Telecommunication companies like AT&T and Verizon implement usage-based price discrimination strategies. They offer different service packages where customers pay different prices based on data usage, call time, or the number of devices connected to the network.
It is worth noting that these examples represent only a small fraction of the applications of price discrimination strategies. There are many other companies in various industries that utilize different price discrimination strategies to adjust prices according to the needs and preferences of their customers.
“Loss pricing” is a strategy used by e-commerce stores to attract customers by offering products at prices well below their cost range. The purpose of the strategy is to capture significant market share or win new customers. By offering attractive prices, e-commerce stores can achieve two goals: encourage customers to buy and build anticipation of future deals and discounts. For example, Tesco is offering a 50% discount on select products for a limited time. This encourages customers to make a purchase and possibly entice them to explore other products. Another common example of loss pricing is offering holiday sales or special offers on special calendar days.
Premium pricing is a strategy where brands position their products at a higher price than their competitors. This approach is based on the brand’s ability to offer exceptional quality, luxury or exclusivity. To succeed at premium prices, brands must consistently meet or exceed customer expectations for product value.
For example, Louis Vuitton sells designer handbags for a higher price than their counterparts at H&M. Despite the higher prices, the high-end positioning attracts buyers looking for premium and unique products. In addition, Louis Vuitton also offers financing options, so that customers who cannot pay a one-time payment can also purchase this bag. This further strengthens the value proposition and broadens the target audience.
When implementing premium pricing, it is essential to communicate the unique benefits and value that the product offers. Highlight the advantages of using the product, the long-lasting effects, and how it differs from competitors. Seek endorsements from industry experts to enhance customer perceptions and build trust.
Psychological pricing tactics take advantage of how the human mind perceives and interprets prices. By strategically setting prices, brands can influence customers’ buying decisions. Some psychological pricing strategies include:
- Charm Pricing: This tactic involves pricing products just below a round number, such as $9.99 instead of $10.00. Customers perceive prices ending in 9 as lower and more affordable.
- Price Anchoring: By displaying a higher original price alongside a discounted price, brands create a perception of significant savings. This prompts customers to take advantage of the discount and make a purchase.
- Subscription Pricing: Offering subscription-based pricing with added benefits convinces customers to choose a recurring payment plan. Highlight the savings and flexibility of canceling or editing the subscription at any time to increase the perceived value.
Brands can also use limited-time discounts or sweepstakes to create a sense of urgency and excitement. This encourages customers to make purchases or enter sweepstakes for extra rewards before the offer expires. Furthermore, social proof plays a crucial role in influencing customer behavior. Displaying the number of 5-star ratings or the number of people currently viewing a product can create a sense of trust and security. Use email marketing to offer exclusive discounts to new or returning customers, effectively segmenting them based on their values and preferences. Take advantage of the center stage effect of product recommendations by placing the most valuable recommendations in the middle. This capitalizes on customers‘ natural tendency to focus on intermediate options and increases the perceived value of recommendations.
Value-based pricing sets prices based on the perceived value of a product rather than the cost of production. By understanding customers‘ perception of product value, brands can optimize their pricing strategies.
A good example of value-based pricing is La Roche-Posay, which sells premium skincare products at higher prices than other areas of their website. This pricing strategy is in line with people’s perception of luxury and high quality of new products. In addition, La Roche-Posay emphasizes the strict quality management of its products, which also justifies its higher prices.
To implement value-based pricing, survey your current customers to gather insights about their experience and preferences. Use the feedback to make improvements and determine the price increase that your target audience will accept. Avoid marketing through third-party sites that frequently reduce prices, as this can have a negative impact on your profit margin. Instead, focus on social commerce and direct interactions with interested buyers to maintain control over pricing.
Penetration pricing is a strategy by which a company enters a market by offering a product or service at a lower price than its competitors. The goal is to gain a significant market share and gain a large customer base. By setting prices below the average market price, companies hope to lure customers with cheaper options and encourage them to forego the competition.
A well-known example of penetration pricing is the Chinese electronics company Xiaomi. When Xiaomi entered the smartphone market, the company offered feature-rich smartphones at a much lower price than established brands. Through competitive product pricing, Xiaomi has been able to capture significant market share and build a strong customer base, especially in emerging markets.
This pricing strategy allows the company to gain a foothold in the market and generate the initial impulse to sell. While short-term profitability may be limited due to lower prices, our goal is to build brand awareness and customer loyalty, which can lead to long-term success.
To implement penetration pricing effectively, companies must carefully evaluate the market and competition, determine the best pricing strategy, and communicate the value proposition to customers. Finding the balance between attractive pricing and maintaining long-term profitability is critical.
In conclusion, pricing strategies play an important role in the success of e-commerce. By implementing strategies such as bundling, price discrimination, loss pricing, skimming pricing, premium pricing, psychographic pricing, value-based pricing, and penetration pricing, brands can optimize their pricing strategies and increase customer retention and sales. It’s important to understand your target audience, manage perceived value, and adjust prices to market dynamics. By following proven strategies and constantly analyzing and adjusting pricing strategies, e-commerce brands can achieve long-term success and profitability.