Every retailer knows that odd-numbered pricing draws in more customers than even-numbered pricing. Why pay $500 for an iPad when you can pay $499?
Still, many retailers take a shot in the dark when they set their pricing strategies. In the end, retailers should approach pricing strategies just as deliberately as they approach acquisition and marketing strategies. Next time you’re preparing for a pricing meeting with your CFO, consider which method you are going to choose, and be prepared to explain why, based on both the product and the type of customer you serve.
Online retailers can choose to set prices high for early adopters who are less price-sensitive, or to set prices lower in an effort to penetrate the market. Higher-priced goods are often perceived to be of higher quality, and prices will naturally drop over time as the goods become less timely and as competition lowers prices overall.
On the other hand, pricing goods as loss-leaders makes capturing recurrent sales much easier since customers will remember being satisfied with their first shopping experience.
Retailers can choose to mark up their products at a certain percentage over cost. Retailers can also choose to decrease prices over time if they assume that they will become more efficient at obtaining and selling the products, thus lowering their costs. As the marginal revenue gets closer to marginal cost, profit maximization can occur and the price will be adjusted based on this “demand curve.”
With competition-oriented pricing, retailers decide to price goods below market value to increase sales and to capture add-on sales. Or, they price goods above market value in an attempt to capture prestigious buyers. To be more competitive, online retailers may offer quantity discounts, rebates or cash discounts.
In addition to considering costs, we online retailers must to know our customers. Are customers value shoppers or are they focused on paying for good customer service? Do they shop for bargains, or for a product’s perceived value?
Knowing your customers and considering the cost of the product based on their demographics and buying behavior will help you to develop the optimal pricing strategy.