Retailers and brand manufacturers find enormous creative opportunities for the marketing mix in eCommerce. Besides product design, communication and sales, the challenge lies in developing and implementing a customer-oriented pricing strategy. In the following, we will be devoting ourselves to the specifics, determinants and strategies of pricing on the Internet, drawing on the essay from Alexander Pohl & Ben Kluge (Simon-Kucher & Partners) “Pricing on the Internet: Profit-optimal pricing is no accident“.
What is the difference between pricing in traditional markets and in eCommerce?
In general terms, price setting on the Internet works on the same principles as traditional markets: Perceived benefits, price elasticity and price/sales relations, as well as cost and competitor information, determine the optimal price. Online and offline markets, however, do differ in their complexity of pricing. In Figure 1 you see five key factors in the complexity of pricing on the Internet and implications for their practical usage.
For the success of your entire business model, it is important to recognise key factors and to act accordingly. Follow, for example, low-price strategies in a downward spiral, inevitable due to high transparency, upon which retailers mutually destroy margins.
Steps in developing a pricing strategy
The starting place in every pricing strategy is the item for pricing – the product – as well as the relevant market conditions. From this point onwards, a clearly defined pricing strategy can be developed. The following steps are involved here:
- Defining the goal of ePricing
- Clarifying the determinants of ePricing
- Deciding for a cost or value-based approach to pricing strategy
- Selecting a suitable pricing method
Determinants of ePricing
The field of pricing online is quite complex and confusing, but nevertheless, the following price-determining factors, amongst others, can be named:
Type of product
The characteristics of the product primarily determine how broad the design options of ePricing actually extend. The suitability of a product for price differentiation can be determined on the basis of three features:
- Fixed cost ratio of the product: Goods of high fixed cost and low variable costs are especially suited to price differentiation on the Internet. With lower variable costs, a positive marginal return can be achieved, even in the face of low customer preparedness to pay or low prices.
- Perishability/storability of the product: In this case, a time-based price differentiation is appropriate to avoid an unused deterioration of the product. By this method, different degrees of payment willingness among purchasers based on a timeline can be strategically exploited.
- Differentiation prospects of product characteristics: The acceptance of variable pricing structures is all the greater the more prominent the product differentiation seems.
Customer price preparedness
The willingness of customers to pay always reflects the perceived value of a product and often differs from the objective value from the company viewpoint. How many customers are prepared to pay can be determined in various ways, such as customer surveys, for example. The price sensitivity of customers in eCommerce is mostly higher then in stationary retail.
Pricing levels and structures of competitors
Particularly important: Insight into the current pricing level of the market and encountered pricing structures. The prices of your competitors have a direct influence on pricing. Because of the dynamic character of online prices, market and price observation is indispensible. Technological applications like blackbee assist here in gaining and recognising important insights into the market, and where margins and sales can be increased.
The degree of reliance of your own pricing strategy upon competitors is influenced by the innovative level of your product. The more innovative the product the earlier retailers can set their own price on the market. Among standard products, the benchmarking of prices increases in significance on the market.
In-house cost situation
- Determine pricing floors
- Set budgets
- Make company success measurable
- Estimate the effects of price alterations on company success
- Determine prices optimised for marginal return
Drivers behind customer price preparedness
Findings about willingness to pay amongst customers should be integrated into the relevant pricing strategy when retailers wish to orientate themselves towards value-based pricing. The perceived value of a product by customers has to be in accord with the price. Among others, the following drivers can be identified, which can be influenced during the development of a pricing strategy:
- Convenience of the offering (worthy of the time): Any option that eases the customer finding a particular product and assessing it in a suitable way influences customer convenience of purchase. Included here, for example, are better search methods, recommendations to indecisive/inexperienced customers, product reviews and product comparisons, through all of which purchasing willingness of the customer is raised and higher prices achieved.
- Awareness (value of perception) Because of the immense spectrum of offerings on the Internet, the optimal placing of the online shop becomes an important competitive factor. Firms, for this reason, invest millions in the correct perception of portals, search engines and digital media.
- Brands on the Internet (value of trust) Because of the regional and time separations between buyer and seller, brands are particularly relevant in eCommerce, since a purchase often reuiqres a large measure of trust from the customer. Measures that play an important role in the development of brand trust include, for example, establishing online communities, truthful and objective product information or the use of existing brand names.
In summary, further requirements in pricing methods and strategies apply in eCommerce than in classic retail. Apart from product characteristics and purchase preparedness of customers, market monitoring, above all, is the essential point for retailers in securing a long term competitive capacity. You can discover more on this in our blog article, “Price observation on the Internet – Online prices forever in sight“.
Are you still seeking the fitting solution for implementing your pricing strategy? With blackbee, you always have an eye on your competitors and can generate unique market insights.