Implementing a price increase has never been easy. Especially if you’re in a competitive market. But now more than ever, it’s risky because shoppers are becoming more price sensitive and an unusual number of businesses move online every day.
Before planning a price increase, you need to make sure you won’t get left behind or alienate your customers. We’ll go through how to guarantee both, then we’ll look for alternative ways to improve profitability.
But before all that, we’ll try to have a better understanding of how to approach ecommerce pricing if you want to improve profitability and grow faster.
We have a lot to talk about, so let’s dive in.
Rule number one: Adopt an agile approach
Making quick and effective pricing decisions is the key to success in ecommerce. Why is agility a valuable asset in online selling?
Well, first of all, online prices change frequently. Harvard Business School Professor Alberto F. Cavallo’s study on retail prices show that between 2008 and 2017, monthly frequency of price changes has doubled.
One factor behind this trend is retail giants’ pricing policies. Cavallo suggests that Amazon’s—and other big retailers’—pricing policies contributed greatly to this shift, and it’s a natural result of selling so many products:
“… for a large online retailer like Amazon, which sold an estimated 12 million individual products on its website in 2016, using some kind of algorithmic pricing may be the only effective way to make pricing decisions.”
Walmart and Target also contributed to this trend by offering price matching policies, bringing about a new kind of pricing behavior to the retail industry. Increasing use of dynamic pricing algorithms allowed retailers to make quick and effective pricing decisions.
That’s why you need to aim for an agile approach. What does this mean?
To keep up with the pace of the ecommerce market, you need to be able to
- Track customer data
- Utilize customer behavior analysis and predictive analytics in better understanding your customers and target audience
- Track competitor prices and analyze historical pricing data to understand competitor behavior
- Make quick and data-driven pricing decisions
The reason I stress this is that if you adopt agility as a part of your business culture and equip yourself and your team with the necessary training and the right tools, you’ll be able to implement price increases or any other pricing decision without risking your competitiveness, bleeding money or losing customers.
So let’s take a look at what you should consider before increasing prices.
Factors to consider before implementing a price increase
A global cross-industry study found that two thirds of the companies achieved only half of their planned price increase in 2018.
Why are the executives of these companies so hesitant to put their plans into action?
A global Statista survey found that competitive pricing is still the most popular reason (70%) why people shop online, followed by free shipping (62%).
These numbers prove that even though the shoppers’ expectations have skyrocketed regarding every aspect of the digital experience, price is still top priority.
One event that changed consumer behavior for good is the development of web scraping engines that help buyers find the cheapest deals on the web. Although not all of them list stores from around the world like Google Shopping does, these websites are a very important traffic source for online stores.
PriceRunner, for example, is a comparison shopping engine that lists the retailers that deliver to the UK. Look at its traffic rank:
This shouldn’t come as a surprise, considering that 79% of consumers say they consider themselves as bargain shoppers.
For all these reasons, if you’re in a competitive market, see where you stand among competitors before planning a price increase. If you’re already charging more than their average, shoppers might not be willing to pay you more (And make sure you’re listed on CSEs—usually, there’s contact information on their websites.).
Too high prices can alienate existing customers, and make it tough to acquire new ones.
Willingness to pay
Willingness to pay is the maximum amount of money a buyer is ready to give up in exchange for a product or service.
In a smaller market, you could simply ask every potential buyer what they are willing to pay for a product you sell.
In real life, surveys, market data analysis and experiments help you measure willingness to pay.
Willingness to pay surveys are multi-purpose. Simply put, these surveys allow you to ask shoppers how much they would pay for an item, as well as what they value most in using the product, or about their experience on your website.
Especially if you’re selling your own products, conducting WTP surveys regularly is really beneficial.
When to increase prices
There are some situations where you need to hike up prices.
When competitors increase their prices
When COVID-19 disrupted supply chains and social distancing measures raised production and transportation costs, some sectors chose to hike up prices.
When market prices increase, there is no reason you shouldn’t. Online prices are transparent. Shoppers will see that there is a general increase in prices and won’t stop shopping from your store.
Sadly, some retailers don’t monitor competitors and aren’t even aware of the increase in market prices.
It’s more than okay to raise prices when there’s a major increase in costs. Otherwise, you’re bleeding money.
But don’t take advantage of a crisis or unfortunate circumstances.
When a product runs out of stock on other stores
When there’s a chance to improve profit margins, you must take it.
Take this store:
They could charge $70 more and it would still be $30 cheaper than the closest competitor.
If you’re not taking this opportunity, you’re leaving money on the table. Ecommerce is all about small profit margins and pricing optimization. Don’t expect to boost sales in one day. Adjust prices whenever there’s room for improvement.
Just keep in mind that if shoppers get the impression that you’re taking advantage of the situation, it’ll push them away.
So how to find a balance between improving profit margins and avoiding alienating customers?
Unfortunately, there is no one-size-fits-all solution for all products. The best approach is to be cautious. Test different price points and measure the change in demand. If you don’t see an unusual drop in demand, you’re on the right track.
When you enter the market with a below-average price
When a new player enters a market with a below-average price—which is called penetration pricing strategy—the main objective is capturing the largest audience possible from early on.
Price goes up gradually, making sure they’re not losing customers.
This strategy works perfectly when you have a good deal from a supplier. All you have to do is make sure you’re not selling below cost.
There are other ways to improve profitability
Increasing prices is not the only way to improve profitability.
Offer packages of different sizes
Research says changes in consumer behavior after COVID-19 may be here to stay. For example, some are looking for economy packs and cheaper alternatives to their repeat purchases.
Economy and bonus packs may help you attract price sensitive shoppers.
This is important because if you’re looking for expanding your customer base, it is the right time to read studies on changing consumer behavior. You can also talk to your customers—via surveys—and try to understand the changes in their preferences, needs and interests.
It’ll help you build a better relationship with your existing customers and get more people with different spending habits to buy from you.
Try adding new products to your website
Research shows that the young consumer is turning to home-consumption products like essentials, health and fitness while they cut non-mandatory spending.
We can’t say for sure these changes will stay, but if for some reason you feel like they will be detrimental to your long-term growth, you might want to find new products to sell.
You can find fresh product ideas from Google Shopping Insights or by following industry trends from industry blogs. You can also check best-sellers on comparison shopping websites, which will give you a good idea of what’s popular today. Just don’t invest too much money because you need good cash flow and their popularity may fade in near future.
Implementing a price increase has never been easy. Since competitive pricing is a top priority for the modern consumer, you don’t want to scare them off with an unfair price increase.
First, you need to make sure your offers are attractive. If you’re already charging more than other stores and can’t reach your sales goal, consider other ways of improving profitability.
Observe the changing consumer behavior, try to add more products to your store or sell on a new channel.
But whenever you can increase profit margins without losing your competitiveness, just go for it.