Can I Raise My Prices?
In highly competitive segments — including low-priced consumer goods — pricing can be THE
determining factor in whether or not a customer chooses to do business with you over your
competitors. Believing this, many competitors compete on price only. It is common to see
resellers on Amazon selling goods for one penny less than another.
The truth is that all products in every market have what is called "price
elasticity." Think of it this way … the fact that one coffee shop charges $1.95 and
another charges $2 is not likely to materially alter your behavior. You will make your
coffee-purchase decision based upon one or more other factors — the quality of the coffee,
the convenience of the location, the friendliness of the staff, the insulated cup ... things
like that. The coffee at one shop is definitely a substitute good for the coffee at the
other and the going rate is within a reasonable range so as not to alter behavior.
This is Price Elasticity of Demand.
Importantly, price elasticity varies by target market and industry. But that economic
principle means that you do not necessarily have to be the lowest priced option If there is
a set of conditions or circumstances that would encourage a customer to not consider price
as a material factor.
The Effect of Technology on eCommerce Prices
During a recent panel discussion that was streaming online I heard an VC investor say,
"Technology is relentlessly deflationary." I wish could give the guy credit, but I
was listening to the event as a podcast and do not know which panelist was speaking at the
time. But the point really stuck with me and rings true. Technology makes all kinds of
businesses more efficient and drives down costs. Technology also allows consumers to be
better educated about product differentiation and to compare pricing on the fly from their
smartphones. This forces businesses to pass on the value of gained efficiencies to the
consumer.
The Big Question: "How Do I Make More Money Selling Online?”"
As we stated in Part 1 of this article series, in a competitive market, comparable goods
tend to drive towards a similar price over time. But you can generate a better profit margin
— and thus a better Return on Capital (ROC) — using modern eCommerce techniques and a little
psychology. In this article, we are going to provide a high-level overview of some of the
ways you can do that. This will not be a comprehensive list, but it will be a great
jumping-off place to get you thinking differently about price and sales.
Complimentary vs Substitute Goods: Two Terms We Need to Know
Before we get into the list of techniques, there are two terms that we need to become
familiar with: Complimentary Goods and Substitute Goods.
Complimentary Goods are products that work together to create more perceived value for the
consumer. An example of this would be how a phone case and earbuds might be complementary to
a cell phone purchase.
Substitute Goods are — generally speaking — products where if a consumer purchases one they
do not necessarily need to purchase the other. These can be products that compete directly
or that compete indirectly. An example of directly competing products might be an Apple
MacBook and a Microsoft Surface. Both are modern laptop computers and a consumer who chooses
one will most likely not also purchase the other. An example of indirectly competing
products might be if a customer is choosing between a truck or an SUV for their next
vehicle. Even though they do not compete directly, a customer purchasing one will not likely
purchase the other.
Most of the businesses that you might consider to be your competition provide substitute
goods of some kind.
Product Differentiation
There are two kinds of eCommerce sites: those that manufacture their own products and those
that resell products made by others. Both kinds can be very successful. If you are
manufacturing your own products, then it is a bit easier to create Product Differentiation.
Product Differentiation is simply the way that one product is different from or better than
a competing product. If you can make the case that your product is objectively better, then
a few dollars of pricing difference will not be a factor one way or the other.
This differentiation is communicated via the quality of the content on your product pages.
And this is where a lot of eCommerce sites fall down.
One of the most common errors we see with eCommerce sites that sell products manufactured by
others is that they tend to use the product names, photos, and the description provided by
the manufacturers. Not only does this hurt search rankings (SEO), but customers who read the
same descriptions and see the same photos time and time again as they are comparing websites
only have the price left to compare.
Brand
As we mentioned in Part 1 of this series, brand has significant power. When a brand is well
established, the brand itself becomes the differentiator. Louis Vuitton handbags enjoy such
a position. No matter how good the quality and style of competing handbags, Louis Vuitton
products can charge more in the current market because of the power of their brand. Although
some may argue, at least a part of the reason that Apple can charge more for their computers
is because of the brand value.
If your brand is viewed by the market as aspirational, desirable, or simply better, then you
can (and should) charge more for it.
Service is a Differentiator
As you are thinking about how to differentiate your products in the market, remember that a
product can be more valuable to a consumer because of better-perceived service. For example,
if you can communicate a better return and exchange policy and/or extended warranty this can
be valuable to your customers. And one of the biggest trends in eCommerce right now if
installment payment financing for more expensive consumer goods — sometimes referred to by
the acronym BNPL (Buy Now Pay Later). These can be provided by third-party services that
assume the payment risk. These options have been shown to positively impact conversions and
increase average order value.
The same is true when companies accept Express Payment options — things like PayPal,
ApplePay, and AmazonPay. The convenience and sense of security that consumers feel when they
have these kinds of options can increase conversions.
Importantly, it’s not enough to simply have all these service options available. They need
to be clearly communicated on your site and easy to access — and that requires good
development.
Add Complementary Products and Services Through Upselling
As we discussed in Part 1, part of the calculation in setting your pricing is your Cost of
Customer Acquisition (CCA). It’s part of the pricing model we detailed. Your results may
vary substantially, but industry averages for CCA range from $7 in the travel sector to more
than $300 for cell phone carriers.
If you can sell a second product — or even a third — to the same website visitor, you can
capture those additional sales without paying an additional CCA. The difference is pure
profitability. Adding additional offers of complementary products and services to your
product pages and the checkout process is a great way to accomplish that.
The Bundle
One of the most competitive businesses that sell online today is digital still and video
cameras. Not only is the market very price sensitive, but the major manufacturers control
the sale price by contract. Any retailer reselling cameras made by Canon or Olympus is
required to not sell the camera below a certain price. If they do, they can have their
distribution yanked. These cameras cannot be sold by competing on price and they are
absolutely undifferentiated from the competitors since they are selling the exact same model
of a camera from a global brand.
Independent camera retailers — especially those who sell on Amazon — get around this
restriction by selling camera bundles. Since they are precluded from selling on price, they
crate packages that include things like lenses, filters, lighting rigs, tripods, and memory
cards to make their offer stand out. You may have purchased one of these bundles yourself.
Here is an example for the Canon M50
camera.
Note that some vendors are selling the camera for a flat, competitive rate. Others have
created elaborate bundles that often cost more. But the perceived value of the bundle can be
quite high.
The point is that if you can create bundles of products around your core offer, the
one-click ability to get everything a customer wants or needs to maximize their utility has
a very powerful allure. The result can be better margins per sale and a better ROC.
The Shipping Game
In our pricing model from Part 1, Shipping is a major input to price. It has become a given
that eCommerce brands need to offer free shipping in order to be competitive. Many eCommerce
merchants have found that so long as the total offer is competitive, shipping does not
necessarily need to be "free" at least not for a single item.
Since the marginal costs of shipping a second item is small, you might be able to strike a
balance by offering free shipping with a minimum purchase. This is very common. The second
method is to offer a low, flat-rate shipping with every order — $5 is common among
retailers, $15 is common for the wine and spirits sector. In this model a portion of the
shipping is included in the price and a portion is paid separately by the consumer.
Repeat Purchases: Retargeting and Email Marketing for ALTV
The most common — and most effective — method for increasing eCommerce profitability is to
maximize the cost of customer acquisition. There are many channels for this, but the two
most successful are Retargeting Advertising and Email Marketing.
You’ve likely experienced Retargeting Ads yourself. You visit a site and look at a few
products. Whether you purchased or not, sometime later you are visiting another news or
information site and see an ad for the specific brand or product you had looked at before.
Those are Retargeting Ads.
Retargeting ads are significantly less expensive than Google Adwords or Facebook ads.
Retargeting advertising is a way to increase the conversions of previous site visitors.
Increasing the conversion rate is the same as lowering the CCA.
The same is true for email marketing. Getting second or third sales from the same customer
increases the value of that customer. If you take the total amount of sales and divide it by
the total number of customers you arrive at an important eCommerce metric: Average Life-Time
Value (ALTV). Since you have already paid the marketing cost to acquire that customer, every
additional sale to that customer increases the ALTV and reduces the impact of CCA.
Email marketing is relatively inexpensive when compared to other forms of marketing and is
the best way to maintain the relationship with existing customers. This is one of the
reasons that most successful eCommerce merchants work hard to get customers to subscribe to
marketing communications via email — even offering substantial discounts for the privilege.
It is our opinion that email marketing needs to not just be a part of your eCommerce
strategy, it needs to be a priority. It will not help you raise your prices, but it will
help you make each customer more profitable.
The Win-Win-Win: Cause Marketing
One of the most popular eCommerce strategies today is to differentiate your company and/or
product by associating it with a charity or cause. This can be a triple-win — benefitting
the customer, a noble cause, and your eCommerce business. This is because even if a product
is a few dollars more expensive, if a portion of the sale is legitimately donated to a
non-controversial charity or cause, the customer can feel good about making the purchase at
a marginally higher price point. Everyone wins.
Summary
This article I Part 2 in our series on pricing eCommerce products. In the internet age,
price and pricing are some of the most difficult challenges a business can face. In this
article, we have described several methods for maintaining a higher price point and/or
higher profitability on eCommerce sales. But this list is far from comprehensive.
Take me to — Pricing
Part 1: Selling Physical Products Online.
If you need help or have questions about selling your products
online reach out for a private consultation.
Links and References
A discussion on determining Cost of Customer Acquisition (CCA) and industry averages via
Entrepreneur Magazine: https://www.entrepreneur.com/article/225415
An overview of Complimentary Goods from Wikipedia: https://en.wikipedia.org/wiki/Complementary_good
An overview of Substitute Goods from Wikipedia: https://en.wikipedia.org/wiki/Substitute_good
An overview of Price Elasticity of Demand from Investorpedia: https://www.investopedia.com/terms/p/priceelasticity.asp
An article on the positive impact of installment payments/BNPL options on eCommerce: https://insights.digitalmediasolutions.com/articles/bnpl-growth-ecommerce
An article demonstrating that offering PayPal as an Express Payment option increases
conversions and lowers cart abandonment: https://www.braintreepayments.com/blog/a-new-study-shows-paypal-helps-improve-checkout-conversion/
Information from Stripe showing that offering ApplePay also increases conversions: https://stripe.com/apple-pay