Adjusting your product pricing is an aspect of business that can make many business owners uneasy because of the unknown, specifically, how customers will take the changes and by extension, how that will affect the bottom line.
Many entrepreneurs find it easier to continue with the prices that they have historically sold their products and services. It can be tempting to assume this is the safest approach but, is that a long-term solution? Between Amazon, a rapidly growing competitor base and an ever-increasing number of online marketplaces, eCommerce is changing rapidly. Most of these changes can have an impact on the price of products either through the introduction of new products, new production costs, additional industry regulations, or any number of other factors.
Pricing is one of the most significant influencers on the success of a business and impacts everything from profit to brand reputation. It is imperative to understand when and how to conduct price adjustments.
What Factors Influence a Pricing Adjustment?
While there is no one universal truth to this, below are three aspects of any business that will drive adjustments to product pricing.
1. Increasing Costs
Increasing product and operating costs are a natural part of the evolution of any business. While there are varying causes of rising costs, one of the most common are new tools either for front end business management or product production. For instance, over time, often, businesses want to supplement their offerings with additional products. While this is a logical next step, it will increase the operating costs of the business.
Another cause of increasing costs is the introduction of “value-added” items designed to drive sales. This might include products or services that a business might bundle in to increase sales. One example of this common approach would be to include a free drill bit with the purchase of every drill.
Inflation is inescapable and impacts every business in every country in the world. One example that everyone is familiar with is that sudden jump at the pumps. While this won’t directly influence the price of a product, the increased transportation costs to get the product to the warehouse and from the warehouse to a customer will impact margins. Furthermore, the purchasing power of people will decrease which has a compounding effect on sales. These factors have a significant impact on pricing and also on what the market will bear.
It is often a far better idea to keep prices the same or raise them slowly while waiting to see what is going to happen in the market. Surrendering profit is only a wise business decision if it guarantees that customers won’t be lost.
3. Matching Competitive Pricing
Adjusting prices to bring them in line with the competition is a widespread reason why businesses decide to adjust their product pricing. For example, if a direct competitor is offering similar or identical products at a lower price, this can harm sales. For larger, well-established companies, it can be okay to maintain higher price points but for smaller companies and start-ups, it is essential to adjust to the current market situation. Consumers are often not willing to pay more for products and services offered by relatively unknown businesses (even if they are identical).
How to Successfully Conduct a Product Pricing Test?
Timing is only one factor when establishing a successful price point test. The most significant factor is having a plan. It’s important to understand the approach that will be taken. Below are a few steps that should be followed to maximize results.
1) Determine Your Goals
The logical starting point for any pricing adjustment is a clear understanding of the “why” behind it. What events triggered the need to alter the pricing of the products? It might be as simple as the business looking to increase their margins or as complex as one of the source materials increasing in mining costs. While increasing margins strictly for the sake of profit is a perfectly acceptable goal, it can’t be the only reason for a price increase, especially not in a highly competitive space.
For a good example, let’s say the goal of the business is to improve the delivery time of their products. Currently, customers are waiting an average of seven days before they get their orders, and this needs to be reduced to three days to increase customer satisfaction. When looking for logistics companies that can meet this reduced delivery timeline, it becomes apparent that the current profit margin can’t support the increased transport costs. This is a situation that lends itself well to a pricing increase and testing the market to ensure it will support it.
Raising prices strictly to increase profit without adding value or providing valid rational, won’t deliver the intended result.
2) Identify Similar Product Groups for Testing
With a clear understanding of the timeline and the expected outcome, now is the time to identify which products will be tested for price-point.
Many business owners believe a simple “A/B testing strategy” will work. This method can be risky and has the potential to deliver skewed results. Instead, testing should always be conducted using similar products in a small group.
For example, let’s assume a business needs to raise the price of its best-selling product. Logically, this can be a risky proposition because it can reduce the number of purchasers. To overcome this, businesses will have to think strategically. Choosing a product from the same product “group” that is not as popular will allow you to identify how customers will react to the changes. If the adjustment results in an influx of negative feedback, that usually means a price change is not in the cards at the moment.
Some eCommerce businesses aim to speed up the testing process by making one or more landing pages and driving a high volume of traffic towards them until what is perceived as a relevant sample has been collected. This strategy requires a great deal of care as the landing page designs must be as similar as possible. As the goal is to test the pricing, everything else must be identical, or it might be something other than the price that impacts the conversion rate.
Choosing the right pricing strategy will set the tone for the success or failure of pricing changes. Below is a quick summary of the most common pricing strategies businesses use to calculate new prices.
1) Cost “plus”
Long the standard of pricing calculations, cost “plus” pricing offers the most direct way of calculating the right price for a product.
For example, a business that is selling handmade products will likely have a few different products made up of different material and packaging costs. On top of those, there are transportation costs and taxes that also need to be factored into the price. Finally, a margin or profit amount will be added to the product to reach the final price.
Remember that some factors can indirectly affect a cost “plus” strategy. It’s a good idea to not include indirect costs such as shipping to the customer in your pricing for this reason and instead charge those separately.
2) Competitor Focused Strategy
Identifying and following trends is crucial in the eCommerce space. One of the core elements to track are the prices of the main competitors. Having a clear picture of the prices that competitors are offering products for will help determine the floor and ceiling price for the product.
Actively tracking prices from multiple competitors for various items can be easier said than done. The team at Shop Style Design can automate this process.
Pricing based on value is only possible when both internal and external data are combined. This strategy requires analyzing the needs of the customer, their mindset, and purchasing power.
Without clear customer feedback, value-based pricing is not possible. Identifying where to start collecting this data can present its own challenges, but social media is an excellent place to start researching how customers view products. Beyond social media, customer reviews and surveys are another effective way to collect relevant info. The feedback collected can let a business know if the products are too expensive or if the perceived value of the products is high enough that the price can be raised without any repercussions.
4) Measured Results
Businesses need to track the analytics that Shopify and other platforms in use are providing. By monitoring sales volume both before and after the pricing is changed, businesses can assess the real impact of the adjustments. Digging into the data will allow a business to asses if the changes had a positive effect by increasing the previous sales average.
Being data-informed should be an everyday activity for businesses regardless of size.
Common Mistakes When Making Pricing Changes
Even small mistakes in the eCommerce space can be very costly. Below is a brief summary of some of the more common mistakes businesses make when adjusting their prices.
Dropping the Price to the Minimum
Understanding a product’s sales break evens is critical. While lowering the price will potentially lead to a significant number of sales, it will not always lead to higher profits.
For businesses looking to drive a sudden rush of traffic and sales, limited-time price reductions through discounts are a better option than a permanent pricing adjustment. Discounts offer another benefit as well. For example, assume a business offers a 20% discount until the end of the month on a popular product. This will not only entice customers to buy the core product but also check out the business’s other products. By using a discount instead of dropping the price to the minimum can potentially raise profits as well as the number of sales.
Straight A/B Testing
While this type of testing is suitable for web designers and developers, it doesn’t lend itself well to eCommerce sales. A/B testing introduces the risk of misidentifying the factor impacting conversion rates and can justifiably be perceived as discriminatory due to different consumers being presented with different prices.
Flat Margin Markup
The perceived value of the product a business sells determines the margin that can be charged. Not every product is equally valuable from a customer perspective, and that perceived value can change over time which makes this a limited pricing strategy. As an example, a jacket will be more valuable in the winter than a swimsuit and as a result, the margin the coat can support might be twice the amount as the swimsuit.
There is a strong correlation between value and price. If a product carries enough value, either real or perceived, it’s wise to increase the price to match. If the perception of value is not as strong, it might be better to reduce the price to drive a higher volume of sales.
Whichever approach is taken, it can’t be done on a whim. There must be a reason, plan, and pricing strategy in place.