It isn't easy to price a product. It’s where a lot of business owners get stuck and put an arbitrary number on their product that just barely turns a profit.
But did you know you can build a pricing strategy for your business that not only increases profits and also helps you sell more?
That’s why we wrote this post. We’ll lay the foundation for an effective pricing strategy by using psychological pricing tactics—your golden ticket to selling more.
Pricing strategy starts with understanding psychology
Simply put, it's a strategic way to price your products or services to influence people when making a buying decision.
It isn’t clear how psychological pricing came into common use, but we do know that the practice arose sometime during the late 19th century with newspaper pricing competition.
Companies big and small sometimes have teams dedicated to pricing products—and in some cases, a psychological pricing strategy is built in from the ground floor as part of their brand marketing.
Here, we'll take a look at how Apple has used pricing as a part of their overall marketing and product strategy to land them in the high-end hardware market.
Psychological pricing the Apple way
Apple has maintained a price point that hovers around $1000 (and with the new Apple Watch some $20,000) for practically their entire product line.
And, even with that in mind, buyers will flock to every product release making them the first company ever to be worth $1 trillion.
So what gives? How do they get away with it? It's because Apple has always planned to be aggressive with their pricing strategies. It goes back to the psychological phenomenon that if something is expensive, it must be good—we'll get into that later.
This echoes the thoughts of Steve Jobs, whose strategy for Apple has four pillars:
- Offer a small number of products
- Focus on high end products and consumers
- Give priority to profits over market share
- Create a halo effect that makes people starve for new Apple products
In this case, depending on who you talk to, that holds true, but in reality they're just selling laptops, phones, and watches. By the way, I absolutely adore Apple products, so I’m not trying to downplay their quality.
Tim Cook (CEO) said in an interview in regards to iPhone “We never had an objective to sell a low-cost phone. Our primary objective is to sell a great phone and provide a great experience.” And, with that in mind—it has paid off for them, tremendously.
Apple rarely (if ever) offers discounts on their products. The most you’ll see is generally a student discount, and even still, it’s usually only $100 or so off a $1000+ product. That pricing strategy is applied across all retail locations, and even resellers. You just won’t find a brand new, unopened Apple product for anything less than what they sell it for at their stores.
Let’s take a closer look at some examples of Apple’s pricing strategy. See if there is anything you can learn from Apple and apply it to your business.
The left digit effect helps you sell more
There’s a reason why businesses like Apple will price a laptop at $1299.99 and not a flat $1300. That $0.01 actually makes a surprising difference in the amount of sales that can be made.
Instead of charging $1300, charging $1299 for the product makes the price appear to be in the “$1200” range rather than the “$1300” range. Thus, as a consumer—we perceive the price to be lower than it actually is. We think of it as a bargain at that price.
Many studies have shown that generally, consumers prefer to pay less for products and often associate prices ending in a nine with discounts and bargains. This works because of something called the left-digit-effect. The majority of people read left to right. Apple incorporates this into the entirety of their product line.
You won’t find an Apple product selling for a round number—they’ll always be priced with the “teen ranges” or "$999" model in mind.
Smart, strategic—and definitely on purpose. The takeaway is to try using odd pricing on a new product you’re launching. Consider using two different price points—one with odd pricing, and another with flat pricing to test which one works for you.
If a product is expensive, it must be good
If that doesn’t sum up the Apple pricing strategy, I don’t know what does. Think back a few years ago when you saw friends and family using Apple products. Chances are you thought they were crazy for spending so much money on something like a laptop or desktop computer—but now it seems like everyone is using a Macbook.
There's a reason behind that too, and it isn't just Apple's marketing strategies. When you are paying more for something, you appreciate it more. Now—when you compare a $20,000 Apple Watch to another smartwatch product like the $99 Pebble Smartwatch (I realize these products are vastly different in terms of design, but they serve the same purpose), the Apple Watch must be brilliant. Right?
Consumers equate price with quality. This was studied through diners at a New York restaurant. The group of people all ate the same food at an Italian buffet, but some were charged $4 and the others $8. Those who paid $8 found the meal to be much better, and enjoyed the food much more than those who paid $4.
The conclusion? Expensive = good. Be sure to read about how Kanye West APC's $120 plain white shirt sold out almost instantly to see how this strategy is applied to bigger clothing brands.
Key takeaway: Pricing strategies can be applied to almost any business. If you are selling a t-shirt for $100 it might sell just as much as one that’s the exact same selling for $20.
Now that we’ve taken a look at the fundamentals of how psychological pricing works, let’s examine a few tips you can use to develop a basic ecommerce pricing strategy.
Tips to develop an ecommerce pricing strategy
With the advent of highly competitive pricing tools, winning the online pricing war can be a lose-lose for ecommerce businesses. Large online retailers like Amazon have an advantage in competitive pricing, as they can set the price low enough to run smaller retailers out of business.
But there are other ways to compete, and it all starts with developing (or at least thinking about) an ecommerce pricing strategy.
Here are 6 tips that will help you develop an ecommerce pricing strategy:
1. Know your margins
The reality of ecommerce pricing is that the lowest price doesn’t always win. In fact, pricing battles usually end with you pricing your products too low.
Even with enough customers, you still may not make a profit. If you are lowering your prices to a point where you are losing money, you should consider finding a better source, or adjust your product offerings to include more profitable items.
Getting your online store into a pricing battle can hurt you in the long term as well. When you consistently price too low, your customers will always expect the lower price, even when it is unsustainable to your business. As a result, you could lose those customers over time.
2. Know your unique selling proposition (USP)
What makes us different? Every company has to tackle this question to determine their unique selling proposition and target market.
For online retailers, a unique factor could be excellent customer service (i.e. Zappos), free or timely S&H (i.e. Amazon Prime), or product you can't find anywhere else (DODOcase). Of course, there are many more.
With pricing competition at an all-time high, retailers have to think outside of the box when crafting a marketing or promotional strategy for their online store. Some retailers have found success by appealing to a sense of charity, especially around the holidays.
For example, Shopify store owner, Ricky Padilla donates $1.00 to fund clean water projects every time someone purchases coffee from his ecommerce shop Brown Water Coffee. He also offers free shipping on orders over $20 - which is a great pricing strategy that encourages people to buy more than 1 lbs of coffee.
3. Loss-leader: Selling below market value
Highly discounted pricing can be advantageous if paired with the appropriate merchandising strategy. The loss-leader pricing strategy assumes that an item sold below market value will encourage customers to buy more overall.
Using this strategy, online store owners have the opportunity to upsell, cross sell and increase the total shopping cart value (average revenue per user).
Even if the profit is not impressive, this strategy stimulates client acquisition, opening the door for further marketing efforts. The value of customer acquisition outweighs the value of the transaction. A corollary strategy is to choose products that have a low CPA (cost per acquisition), to minimize loss.
The end goal is to sacrifice losing money on one item in order to make a profit on the rest of the products sold (i.e. cereal cheap, milk expensive).
4. Offer incentives
Once you know your margins, and price accordingly, then you can offer incentives to motivate your customers to buy. Even if you can’t sustain an ultra-low price in the long term, you can always offer limited time pricing to reach these customers. For example, “Purchase in the next hour and receive 20% off!”
Semantics are also important here, as the language you use can attract customers and minimally affect your bottom line. If you have a surplus of products, you can profitably offer a ‘twofer’ (2 for 1). Additionally, people perceive large percentages as big savings. For example, “Buy one, get one 50% off!” The customer sees the 50% off, but really they are only getting a 25% discount.
Shopify App Bold Discounts will let you run sales in your ecommerce store based on a variety of conditions: by product brand, type, collection, and more—so "buy one get one free" , "buy 3 get one 75% off" and similar sale situations are easy.
Being savvy with your incentives allows you the ability to garner attention to your products, and build a reputation for having good deals, without breaking the bank.
5. Diversify product offerings
To offer a diverse product offering that will sell, ecommerce store owners must first understand their market demand. Make sure that you are up to date with current trends by reading ecommerce news. Use products like “Google Trends” or “Google Insight” to check the popularity of a SKU and try to attend local Meetups with fellow online retailers.
Having a better idea of what your customers want gives you the opportunity to sell and generate profit from diversified products. When in doubt, give your customers multiple options to help them figure out what they want.
In the lecture "Are We In Control of Our Decisions," Dan Ariely recounts an MIT experiment he conducted to test the effects of product and pricing diversification. The entire video is worth a watch, but skip to 12:30 for the most applicable example.
Dan Ariely found that giving a customer more options influences their choice and their perception of a ‘good deal.’ Specifically, one unattractive option can emphasize the utility of other options, helping the consumer decide on an option that best suits them.
The end result of proper diversification is that online retailers will offer bad options to emphasize the good, driving customers to act based on perceived value.
6. Test your ecommerce pricing strategy
As with many things in ecommerce, one size does not fit all, so it is important to measure and test the success of changes you make to your online store's pricing strategy.
Ideally, every change should be tested and validated with an analytics tool (i.e. Mixpanel, Google Analytics, Shopify Sales Dashboard).
For example, find out if your ‘Summer Sale’ (where you implemented one of these strategies) increased your conversion as you expected, or if the new, trendy products in the store are generating more profit than older products.
Pricing your products on purpose
All of the research and strategies above are an entry point into the world of ecommerce pricing, but remember that, eventually, you just have to put a price on your product and see what happens.
Product validation and confirmation that you got your pricing “right” only happens when money changes hands. Use what’s covered above to inspire you, and then start selling!