Price management presents challenges to every online shop retailer. On the one hand, the shop and its offerings to customers should be perceived as inexpensive and thus a strong position on the market achieved. On the other hand, however, the shop must also generate profit. Discount battles bring only disadvantages, as we show in our article “How you can win the price war“.
Ultimately, the customer decides which price they consider appropriate. The evaluation of a price by the customer proves to be a complex, cognitive process. Each customer notes pricing information in stationary as well as in digital retail, stores it in their long-term memory and, on the basis of this knowledge, forms a pricing perception. This is shown by shopping24’s owner Dr. Björn Schäfers in his book “Prices on the Internet”. According to this, the pricing perception is based on the experience of the individual and also takes place at the individual level.
This does not mean, however, that a customer evaluates a price the same way under all circumstances. Quite the opposite, in fact, because it is context that is decisive. A customer expects in the supermarket a different price for a beef steak than in an exclusive restaurant. If a special offer is only available for a short time, the customer is faster to act. Or, if an item is exclusive and limited to only a small quantity, customers are then willing to pay a higher sum. How you can make use of these circumstances as an online retailer we show you below.
Set out your charming prices charmingly
The number nine is predominant in almost all price quotes in retail. Products are usually priced at 2.99 or 29, but rarely with a round number like 30. This is for the simple reason that the price has a charming effect. The explanation for this is provided by the American best-selling author and columnist William Poundstone. In his book “Priceless – The Myth of Fair Value (and How to Take Advantage of It)”, Poundstone demonstrates through an experiment that sales increase by 24 percent among prices ending with the number nine.
To increase the effect of this charm, online retailers should also present their prices charmingly. This means that the price presentation should be displayed minimally. For example,
- 1,499.00 €
- 1,499 €
- 1499 €
The first two prices have a greater effect on the customer than the third. This is because longer numbers are processed in the brain as “larger”. The more commas a price presentation has, the larger the number appears to be. A customer reads the first price accordingly so: One thousand four hundred and ninety-nine euro. Whereas the third price here reads fourteen ninety-nine. The three marketing scientists Keith Coulter, Pilsik Choi and Keith Monroe discovered this in their essay “Comma N’ Cents in Pricing”. Their insight means for online retailers that they should present their prices as short and simply as possible.
Anchors aweigh: Price perception depends upon its reference values
When decisions take place in a vacuum space, the human brain looks for anchors or reference values. A customer rarely knows how much a product is actually worth. They can compare an offer only with the numbers they know. This is exactly the comparison you can suggest to the customer in your shop.
In an experiment, the psychologists Daniel Kahneman and Amos Tvasky had their test subjects spin a wheel of fortune. What none of those tested knew was that the wheel had been manipulated. Either it stopped at the number 10 or the number 65. After the volunteers had turned the wheel, they had to estimate in percentage terms how many African countries are also UN nations.
The result was that when the wheel stopped at the number 10, the volunteers estimated the share of African countries in the UN at an average of 25 percent. But when the wheel stopped at the number 65, the volunteers estimated the share at a higher average of 45 percent. If the individual has no reference value at all, they then make a reference to the numbers they do know. No matter whether that is logical or illogical.
Online shop operators should therefore ensure that they do not immediately confront the customer with the low-price product or the best seller. The customers will orientate themselves to this reference. All higher prices will then appear to them disproportionately expensive. Instead, shop visitors should first encounter higher-priced items so that their price perception for the remainder of the product range is then sensitised.
As explained at the beginning, the customer uses their experiences from other shops and purchases. Further factors then play a role in whether the customer ultimately decides to buy. Read also our blog articles on this: “Purchasing Impulses 1″ and “Purchasing Impulses 2”.
People invest more energy in avoiding losses than in earning profits
Behind this realisation are Kahneman and Tvarsky, who together developed the so-called Prospect Theory. With this theory, the two psychologists found out that, in the event of possible losses, people behave in a risk-mitigating manner. What they possess, they do not want to lose again.
This behavior can also be seen in shopping. If a special offer is made to a customer, they already sense this as a profit. If this offer is limited in time, however, the customer runs the risk of losing this special offer again. If the customer knows that they need to decide upon purchase within two hours, then they will make the purchase more quickly than if they had unlimited time to ponder this offer. The price perception of the individual customer plays a subordinate role in this situation and the so-called loss price aversion effect accelerates this purchasing decision.
Within your price management capabilities, you possess a larger scope than you perhaps might have thought. “Cheap” or “expensive” are purely subjective perceptions of the customer. The presentation of the price can have a decisive influence on these sentiments. As a retailer or manufacturer, you can opt for a simple presentation of the price, create the desired comparison values or apply effects such as price loss aversion.
If you follow the recommendations offered here, you will have created the basis for a lucrative price management. You should use this for intelligent pricing with which you will attain a profitable margin. With the blackbee Business Intelligence software you will have the ideal consultant at your side. blackbee offers you recommendations on pricing and helps you keep an eye on your competition.
Do you want to efficiently use your scope in price management? Test blackbee now and increase your margins!