Most online retailers set pricing using the cost-plus or the value-based method. While these work well, there are several other ways to price products. Here I present five unusual and effective ways to price products on your ecommerce site.
1. Pay What You Want
The pay-what-you-want strategy — PWYW — has been around for a while but has not been used heavily in the online retail space. A well-publicized offline success is Panera Bread restaurants, which has used this pricing strategy in a few of its restaurants. In the online world, Humble Bundle is a music and game store that has been using this too. In almost all cases, this strategy did not result in a significant profit or loss but led to a lot of free marketing. That is one of the big reasons for adopting this strategy in retail. There are several types of online retailers that can benefit.
- Proper customers. If you believe that your customers are fair-minded and understand the value of your products, then PWYW might be effective.
- Link to charities. If your site shares revenue with charities, then PWYW can work, as customers often pay more to help the charity, increasing your share of the revenue in the process.
- Offer an incentive. You can also tie the PWYW strategy with an incentive — such as an additional product once the price exceeds a certain threshold, say $10. This threshold can be kept secret or made public on the site as a marketing tactic to encourage customers to pay more.
- Limited categories. Lastly, this strategy does not need to be implemented for your complete online store. It can be limited to a few products or a few categories that are the best fit.
Several software companies are using free pricing successfully where the software is given away for free and customer is charged either for support or for premium features. An example of this is Hortonworks, a development firm that offers the Apache Hadoop platform for free and then charges for support of that platform.
A free pricing strategy can be an effective strategy for ecommerce merchants to attract customers by following the following guidelines.
- Loss leader. Use this strategy to offer products for free using the loss leader model. Customers come to the site to get the free products and once they are on the site, you can up-sell or cross-sell them other products.
- Seasonal products. If your site sells seasonal products, then this strategy can drive traffic. For example, a retailer could give away free U.S. flags during the July 4th holiday to generate traffic, while also pushing other non-free July 4th merchandise.
- Emphasize consumables. Products that have durable and consumable components can benefit from a free pricing strategy, if customers can only buy both pieces from your site. For example, Gillette sometimes offers shaving razors for free since only Gillette shaving blades will work with its razors. On the other hand, it does not make sense to give away a laser printer for free because the printer paper and toner can be bought from anywhere
- Basic vs. premium versions. This strategy can be effective if the basic version is free and the customer pays for a premium version. The life insurance industry uses this approach, where a basic $10,000 insurance is often free. If even a small percentage of customers buy the premium offering, the insurer makes a profit.
3. Name your Price
This is a variation of the PWYW model, where the price has to exceed a threshold to get the product. This threshold price is not shown to shoppers to allow them to name their own price. This model has been successfully used in the travel industry by Priceline, among others, where availability of airlines, hotels, and travel dates is based on the named price. This strategy can also work well for online retailers that are selling the following types of products.
- Imprecise value. The products can be sold at a wide range of prices and still generate a profit. This could include one-of-a-kind products or art, where it is difficult to assess the value.
- High perceived value. The perceived value of the product is much higher than the cost of procuring it, prompting the consumers to name a higher price. This can apply to books, music, and food products.
- Defined price ranges. Gifts site where NYP can be a guide to show products that are within that price range. NYP can be used as a guided selling tool to show gifts within a defined price range. The retailers can use price discrimination in combination with this strategy to increase their profits.
4. Flat Pricing
Flat pricing is a strategy where a limited number of prices are used for all product offerings, such as in dollar stores where every product is priced at one dollar. This strategy works well in the following situations.
- Many similar products. Your site sells a wide variety of products that are priced nearly the same. In this scenario, flat pricing is simpler to manage, easier for consumers, and also results in greater profit
- Subscription pricing. A new trend in online retail is subscription pricing, where customers can sign up for a flat price of, say, $25, $49, or $99 to receive a set of products every month.
5. Personalized Pricing
This is a relatively new strategy where specialized yield management algorithms are used to personalize the price offered to each visitor. With the rise of Big Data, most of the personalized pricing is done in real-time by analyzing a variety of factors like customer loyalty, device used by the shopper, customer preferences, history of purchases, and so on. This strategy is best suited for the following types of online retailers.
- New products regularly. There are many products in the online store, with new products introduced regularly. This makes personalized pricing more effective as repeat customers see the new product and the new promotional pricing to reward their loyalty, or to encourage a first purchase for new ones.
- Wide profit margins. Products are sold with good margins, allowing the retailer to offer discounts at any time. For example if the product is sitting in a shopper’s cart for a few days, the retailer might offer a discount or drop the price to encourage the shopper to complete the purchase.
- Repeat customers. Customers know that they will be rewarded with personalized pricing and promotions based on the loyalty to your site.