The most effective way to increase eCommerce profits is to optimize your pricing strategy.
The truth is, personalization and behavioral segmentation can create enormours value for your store.
This post outlines how to successfully increase profits with a value based pricing strategy. Let's begin!
Why You Need to Improve Your eCommerce Pricing Strategy
Improving your pricing is a fantastic way to multiply profits.
The most often cited study comes form the Harvard Business Review . It shows a 1% improvement in pricing yields an average 11.1% increase in profits!
That study was performed in 1992. Since, pricing has become a field of study, with a number of research projects validating pricing's effect on profitability.
One example comes from Austin Startups, which examined a portfolio of 75 companies across industries. They found that "a 1% pricing improvement delivered > 15% potential increase in operating profit."
In 2010, McKinsey & Company released The Price Advantage which showed improvements in price outperformed similar improvements in any other aspect of the business, from reducing fixed costs, variable costs, or even increasing sales.
A.T. Kearny Study
Reducing fixed costs
Reducing variable costs
Value Pricing Strategy: The Best Pricing Strategy for eCommerce
However, in today's world of direct relationships with consumers and brand, value based pricing is the best pricing strategy for eCommerce.
To successfully implement a value pricing strategy, we need to establish a few frameworks.
Optimize your pricing strategy: Barilliance allows you to identify price sensitive customers and enables you to bring customers back for repeat purchase. Request a demo here.
Pricing Strategy Framework 1: Value Creation and Capture
Value creation and capture is the first pricing strategy framework to understand.
According to this theory:
A customer will only buy if the value they receive is greater than the price. This is called consumer surplus.
A business will only produce goods and services if it can sell for more than it costs to produce the item. This is called profit.
Adding both the consumer surplus and profit together yields the total amount of value created by the company (in this case, your eCommerce store).
This framework is important because it a) reenforces the idea that customers buy value and b) gives companies a choice in how much value they capture.
The image above does an excellent job laying out these different components.
Pricing Strategy Framework 2: Value is Subjective
Value is subjective.
Each individual customer assigns a different value to your products. This valuation can be based on many things (needs, desires, pain, jobs to be done).
This ideas is encapsulated in the Law of Demand, as shown above.
The implication for us is that we can set any number of price points. If we increase prices, we may lose price sensitive customers, but there will be some portion of your client base that finds enough value in your product to want to purchase at the higher prices.
In other words, customers are willing to pay a variety of prices for you to solve their problems. You can develop various products that fit the different price points.
“Customers are willing to pay a variety of prices for you to solve their problems. You can develop various products that fit the different price points..."
Together, these insights are the basis for maximizing profits through pricing strategy.
Separate Customers Based on How they Value your Products (What to Do)
To increase eCommerce conversion rates, we first need to be able to separate customers based on how much value they get from our products.
We don't want to lose price sensative customers by only presenting offers that are too expensive.
Likewise, we don't want to lose out on profits by getting high value customers to purchase inexpensive, low profit offers.
“We first need to be able to separate customers based on how much value they get from our products.”
While you may have many different customer segments, for the purposes of this article we will imagine two.
In the likely case that you want to focus on more than two segments, this analysis will extend to any number. Just keep in mind: the most important thing is to create a clear break in value between your product offerings to maximize pricing between customer segments.
Imagine two customer segments. The first we will call the high type. High type customers find a high amount of value in your product.
The second we call low type because they value your product lower.
We want to create the conditions so that
Pricing strategy works alongside product development to ensure these conditions across your product suite.
You want to make sure high type customers prefer buying more expensive product (they perceive it as more valuable) than buying less expensive alternative.
You want to maintain or grow market share for low type customers.
“You want to make sure high type customers prefer buying more expensive product (they perceive it as more valuable) than buying less expensive alternative.”
4 Variables to Separate Customers
There are four essential variables we can change to successfully separate customers. They are:
How should we manipulate these variables to maximize profit?
Remember, our goal in pricing strategy is to ensure that the high customers prefer spending more on the high quality items than spending less on the low quality items.
To do this, we must minimize their consumer surpose for buying the low quality products.
Step 1: Increase the Price of Low Quality Items
The most straightforward way to reduce consumer surplus for the low quality product is to increase the price.
Recall the first framework: value creation and capture.
Increasing the price of the low quality item will reduce the value captured by the buyer.
How much can we increase the low quality item?
We should increase it until the low type customers are no longer willing to buy it.
By maximizing the price of the low quality items your eCommerce store gains two significant benefits. First, it increases profits from low type customers. And second, it makes it easier to separate high type customers from low type customers, preventing them from purchasing low type products and taking on low type offers.
Step 2: Maximize the quality of the high quality products
Again, we want to make sure high quality customers purchase higher quality items.
Maximizing their consumer surplus from the higher quality items is the next step.
Looking at our variables, we have two options. We can either lower the price of the higher quality products, or we can increase the quality of the higher quality items.
From a pricing and product standpoint, we want to maximize prices here by increasing the value customers receive from our products. We do this by increasing the quality.
Thus, your pricing strategy enables you to maximize value to your best customers, while safely serving additional customer types without cannibalizing sales.
To do so, I highly recommend focusing on other quality vectors beyond just product. These can include things such as
And any other number of strategies to create more value for your high type customers.
Step 3: Consider lowering the quality of low priced items
Lastly, you may need to lower the quality of low priced items to prevent high type customers from wanting them.
The truth is, most versioning is done in reverse. The higher quality product is built, and then modified to make it less valuable to lower type customers.
Examples abound in many industries. For instance, Apple and other smart phone manufactures manipulate the storage of devices to separate products and establish varying price points.
Video games like EVE restrict content and add speed upgrades for paid subscriptions.
Identifying a key feature high type customers demand and removing it form lower priced products helps ensure there isn't any crossover from your high type customers.
Using Data and Personalization to Implement eCommerce Pricing Strategy (How to do It)
Now that we've established what to do, it is helpful to explore how to actually implement an eCommrce pricing strategy.
Here we will go through creating detailed customer segments and personalized customer experiences that focus on presenting the right product mix and pricing to those segments.
Throughout, we'll be using Barilliance to enable our pricing strategy.
Barilliance is built for eCommerce stores to identify profitable customer segments quickly and enable personalized outreach and custom experiences for them.
However, this framework will be helpful even if you aren't yet a customer! Regardless of what software you use, you will need a way to gather and act on the data.
Step 1: Creating Customer Segments
The first step is to create your customer segments (the high type and low type customers)
To do so, ask yourself: what characteristics do your high type customers have that make them distinct from your low type customers?
As an eCommerce manager, it is likely that you have a good intuition on what typifies a high type customer.
It is also helpful to ask the inverse. What unique characteristics do your low type customers have?
Use that knowledge to formulate your first customer segments hypothesis.
Example Customer Segmentation Hypothesis:
High type customers are interested in X brand.
Hight type customers cart value is more than Y.
High type customers search for Z.
Easily Create Customer Segments: Barilliance combines offline and online data to create a complete 360 view of your customers - enabling you to easily create customre segments for pricing strategy. Request a demo here.
Step 2: Create Unique Experiences for Your Customer Segments with Personalization Technology
Now that you are able to identify your high and low type customers, it is time to implement your pricing strategy.
You need to be able to present high type customers with high type offers, and low type customers with low type offers.
There is no better way to do this than through personalization.
We've covered eCommerce personalization extensively on this site. I encourage you to check out some of these posts to understand what is possible with onsite personalization.
There are so many ways to enact your pricing strategy.
My personal favorite way to optimize a customer's experience is through personalized recommendations. Every successful eCommerce store uses recommendations - however the best implement personalized results.
You can see how to replicate Amazon's product recommendation strategy with Barlliance here.
You can create various welcome pop-ups that introduce segment specific offers.
This is one of the most common tactics for eCommerce stores to present different price points. By recognizing who is visiting their site, they can offer different levels of discounts.
Alternatively, you can use pop-ups to present unique items or bundles to your customer segments.
With Barilliance, you are able to design pop-ups with a live front-end editor to save time and engineering resources.
You have an outstanding number of choices to implement value based pricing.
From targeted FB Messenger or triggered email blasts, to dynamic in-page content, to message bars, to real time personalized product recommendations - the options to present personalized offers to your customer segments are endless.
If you'd like to learn more about how to select a personalization vendor, I highly recommend checking out this guide. It covers the most common pitfalls in many technologies.
And, if you're ready to see if Barilliance can help you, click here to request a demo.