Navigating pricing in a crisis is harder than usual. COVID-19 disrupted supply chains, changed consumer behavior for good, increased price sensitivity among shoppers. In times of uncertainty, the best course of action is to make choices based on data.
When you’re looking for pricing tactics and strategies to help you get through the crisis, keep in mind that there is no one-size-fits-all solution. The best approach to any given strategy these days is to test them first, observe the impact on demand and profitability, and decide on adopting one.
In this article, we’ll look at three smart pricing strategies that’ll enhance your ability to adapt to a fast-paced environment without risking time or money, or business performance in general.
Consumer behavior will continue to change, and whether these changes are here to stay is another question. So how do we adjust prices to ever-changing conditions in the market?
By making it flexible. That’s why dynamic pricing is even more important today. It gives you the ability to set rules based on market conditions like competitor prices, stock information, your costs, and target profit margins.
So, the first benefit is that it ensures your positioning in the market. For example, if you want to be the cheapest in the market, dynamic pricing software will automatically adjust prices based on the changes in market prices. Or, if you think the least risky option is to stick with the average price, the software will match the market average.
Your price positioning should be in line with—or determined by—your competitive positioning (it’s customers’ perception of your brand in comparison to other players in the market).
For example, luxury brands don’t get much out of low pricing. Luxury consumers don’t have pricing concerns. While on the other hand, we tend to attribute cheap prices to low quality. So low pricing actually hurts luxury sellers. Note that even in the middle of a global pandemic, Chanel has increased prices (also, Louis Vuitton and Tiffany & Co have hiked prices in the South Korean market).
The second benefit of using dynamic pricing software is that it guarantees target profit margins and makes sure you’re not bleeding money. You might feel an urge to cut prices to increase demand, but deep price cuts may not result in an increase in demand but can destroy value. More importantly, it may alter consumers’ perception of your prices permanently. When you need to increase prices again, it might alienate your customers.
So, how can you implement dynamic pricing? Inherently, this strategy requires automation.
If you want to build your own dynamic pricing engine, which gives you the freedom to include features that your business needs, you must have the technical knowledge to build and maintain it. Alternatively, you can use dynamic pricing software, which is a more affordable option for SMBs, especially if you don’t have developers in your team.
Loss leader pricing
Loss leaders products are items that are sold below cost.
If you’re a new e-commerce owner, you’re likely to struggle with getting traffic to your website and increasing brand awareness. Did you know that popular products can be a source of traffic?
79% of shoppers took part in a survey said they are considering themselves as bargain shoppers. Online shoppers know that a quick search on the web can save a lot of money. On top of that, comparison shopping engines (CSEs) like Google Shopping show shoppers where the best offer is.
Offering competitive pricing on these products will attract a high volume of shoppers and increase your store’s visibility. But perhaps more importantly, it’ll impact consumers’ perception of your prices. After they see competitive pricing on popular products for a while, it’s likely that they’ll assume your store has competitive offers.
In fact, according to a former Amazon Business Leader Guru Hariharan, Amazon uses this strategy to build such perception.
Alongside its long-term payoff, it has one immediate benefit. The logic behind loss leader pricing is that once you attract customers with a deep price cut, they’ll make additional purchases from your store.
If you want to try this strategy, stick with the plan we’ve talked about, testing. Start with one product, see how many visitors are coming from Google Shopping, PriceGrabber, Shopping.com or any other CSE. If you’re not analyzing your website traffic yet, start today. You can use Google Analytics or any real-time data provider to get your website traffic data organized and meaningful.
Then, look at shoppers’ purchasing history to see if the ones that the loss leader brought in purchased any other item. Following these metrics on a regular basis shouldn’t be a problem for you because they are crucial to any online business.
COVID19’s impact on retail categories varied. While some categories (staples, fitness equipment, shelf-stable food, etc.) experienced a tremendous surge in demand, others (auto parts retailers for example) struggled to sell their stock.
Some retailers use deep discounts to get rid of dead stock, but this strategy has two repercussions.
First, deep discounts may not result in an increase in demand. In fact, the crisis left more people in financial difficulty, and shoppers are reluctant to increase discretionary spending. So if your product is not an essential part of their everyday lives, it’s likely that deep discounts won’t create the hype you’d expect them to. You’ll end up with diminishing profit margins but no significant increase in demand, reducing profitability.
Second, increasing prices without alienating customers is a struggle. Deep discounts alter consumers’ perception of price fairness. Getting used to low pricing, it’s likely that shoppers will look for alternatives when you increase prices again. The worst scenario happens when competitors follow your track, driving you all in a price war.
Instead, consider getting to know your customers’ interests and needs better. Basket based discounting is the perfect way to increase basket size and boost sales, while building a strong relationship with your customers.
Basket based discounts offer shoppers the type and amount of discounts they need on the products they’ve shown interest. Showing customers you’re paying attention to their preferences is a significant step toward building strong relationships. So how do you get to know your customers better?
By tracking and analyzing their behavior. The metrics that make up customer behavior analytics include:
- The campaign and channel that originally brought them in
- Order information, including purchased products and order dates
- Average order value
- Abandoned cart information, including total number of abandoned carts, products abandoned and total value of abandoned carts
- Discount information – how many discounts have they used, and at what value?
Although there are many more, these will give you the information you need. You can collate the data from several resources like Google Analytics, built-ins provided by Shopify, Magento, Big Commerce and other platforms, or with the help of an analytics tool.
In a fast-paced environment, agility is the key to survival. You must equip yourself with the education and the tools that will enable you to make fast, effective pricing decisions and quickly adapt to the changing conditions.