Six Effective Pricing Strategies for Online Businesses

Posted on September 14, 2015 by in Tips & Tricks | 27 comments

Six Effective Pricing Strategies for Online Businesses

Very few things have a bigger impact on a business’s bottom line than its prices.

One of the four Ps of the marketing mix, the price tag you attach to your products will directly impact the demand for your products as well as margin per unit. In other words, changing your prices is a quick way to sell more products or to earn more for each item sold.

Despite its overwhelming importance, few business owners pay enough attention to price. Many will set their price almost arbitrarily, plucking a number out of thin air or simply copying the competition. From a branding perspective, this is a missed opportunity, and poorly priced products can also restrict your profit potential.

There is no golden rule when it comes to pricing, though. Some business will make more profit by reducing prices, others by raising prices – as determined by your product’s price elasticity of demand.

My advice: just like everything else on your website, you should be testing different price points and pricing strategies to see how your customers respond. You might be surprised by what you learn.

To get you started, today I want to take a look at some of the best-known pricing strategies. These strategies have been tested countless times by experts in the pricing field, and time and time again customers respond positively to them. If you want to increase your business’s profits, give some of these strategies a try.

Psychological Pricing

Let’s start things off with the oldest trick in the pricing strategists’ guidebook, psychological pricing. Incredibly, historical records show widespread use of psychological pricing as far back as the late 1800s.

But what is psychological pricing? Essentially, it’s the strategic pricing of goods and services just below a nice, round number. For example, rather than pricing a product at $100, you would price it at $99 or $99.99. If you plan on selling for $25, round down to $24.99. This practice is now so commonly used that it’s unusual to see round numbered prices.

If every seller is using psychological pricing then, and all customers are aware of the trick, what’s the point?

Simple answer: it still works. Even though the difference in price is negligible, irrational customers don’t round up the price. As a result, they perceive the price to be cheaper than it really is and are more inclined to buy – the perfect outcome for you.

Want a real-world case study demonstrating the power of psychological pricing? A team of researchers at the University of South Brittany asked a pizzeria to reduce the price of one of its pizzas from €8 to €7.99. As a result, that pizza’s market share increased from around 33% to approximately 50%. In other words, small changes can have a big impact.

Psychological pricing isn’t for everyone, though. If you’re branding yourself as premium and prestigious, the perception of a lower price can actually hurt sales. If you’re deliberately competing on price, however, it’s a very effective strategy.

Key takeaway: decide a price for your product, then knock a small amount off it.

Relative Pricing

Although I’ve already slated businesses for copying a competitor’s prices, you should certainly take the time to research what your competitors are charging.

Why? Two reasons:

  • By pricing your products above/below your competitors’ price points, you communicate to customers that you are the more premium/affordable brand.
  • There’s a chance that your competitors have extensively researched and tested what prices your market responds to. By pricing in the same ballpark, you can take advantage of their research.

Now, in my opinion, simply undercutting a competitor is the wrong way to go. Sure, price-sensitive consumers will be attracted to your products, but the reduced price will squeeze margins to potentially unsustainable levels. If you manage to find a competitive advantage to justify the lower prices, however – for example, you produce in significant bulk – then this is a viable option.

The other option is to consciously price your products above competitor rates. This might seem counterintuitive, but big brands have been doing this for decades. Remember: a higher price communicates quality, luxury, and prestige – three qualities you definitely want your business to be associated with.

When you compete only on price, you become interchangeable – the moment an even cheaper competitor comes along, you’ll lose most of your customer base. When you compete on something other than price, however, you’ll find customers become loyal to your brand – they will consciously and deliberately seek you out.

Remember: if you build a premium-looking brand, most customers will be willing to pay a premium price, even if the products you’re selling are comparable with your competition.

Key takeaway: decide if you want to be a premium/economic brand relative to your competitors and price accordingly.

The Power of Nine

This point just goes to show the absurdity and irrationality of human psychology.

Most people perceive a price ending in the number 9 as better value and more cost-effective – this is another reason psychological pricing is so effective.

When comparing, say, $30 to $29, this makes a lot of sense – after all, the latter is the cheaper of the two options. Incredibly, this perception of value even applies when an identical product is priced lower. This was proved in a 2003 study, conducted by the University of Chicago and MIT.

The researchers offered three identical dresses at a variety of different price points. One price ended in a 9; the second was $5 cheaper; the third $5 more expensive. For example:

  • $34, $39, and $44.
  • $44, $49, and $54.
  • Right the way through to $74, $79, and $84.

In every experiment, people bought more of the dress priced with a 9, despite one of the options being cheaper.

Key takeaway: sell more products by ending your prices with the number 9.

Avoid Identical Prices

Unless you’re making an impulse buy, quite a lot of consideration goes into making a purchase – do I like the product design? Is it high quality? Are there better options elsewhere? Is the price good value?

From personal experience, there have been countless times where I just couldn’t make my mind up. The result? I didn’t buy anything – also known as analysis paralysis.

Now, most parts of the decision-making process are subjective – for example, it’s down to my personal opinion if I like the design of one product more than another.

Of course, there’s one part of the buying process that’s entirely objective: price.

Price is instantly comparable and is often the determining factor in a purchase – if I can’t decide, I’ll just go with the cheapest option.

This is where you can run into problems: if you price your products identically – or even the same as competitors’ – then it complicates the decision for customers. In such a scenario, their decision is based entirely on subjective factors, which increases the risk of analysis paralysis, leading to no decision at all being made.

Price your products differently and you give your customers a simple tiebreaker if they like two products equally.

Key takeaway: reduce analysis paralysis by using different price points for your products.

Contextual Pricing

It’s Saturday night, and I’ve gone for drinks with friends. We start the evening at a moderately priced bar, where I buy a pint of my favorite beer, Beer A, for $4.

Later on, we head to the next bar, which is considerably more upmarket than the first one.

The question: How much should I expect to pay for Beer A in the more upmarket establishment? And, more specifically, how much will I be prepared to pay for Beer A?

I’m sure that most of us have been in this situation before. And, because of the nicer surroundings in the second bar, we decide that it’s perfectly reasonable to pay a premium for that identical pint of beer.

This shows the power of contextual pricing, demonstrating that a price tag is justified by lots of different factors – not just the product.

Online businesses can take advantage of this by making small tweaks to their sales copy and branding. For example, let’s say I run a typical, run-of-the-mill eCommerce store. If I update my website and branding to make it look more elegant, more luxurious, and more stylish, I instantly position myself as a premium brand. Going forward, my customers will be far more willing to accept higher prices for the same (or similar) products.

Key takeaway: have a think about non-product changes your business can make to justify a higher price point.

Three Pricing Options

In his book Priceless, author William Poundstone shares one of the most famous pricing experiments.

In the experiment, customers at a bar were offered two beers – Premium ($2.50) and Standard ($1.80). To drink a higher quality of beer (and avoid looking cheap), 80% of customers bought the $2.50 Premium option.

Next, researchers added a third beer – a Bargain beer available for $1.60. This time, 80% bought the Standard beer, while 20% bought the Premium beer, a reversal from the last experiment.

In the third and final experiment, the cheap Bargain beer was removed, and a Super Premium $3.40 beer added. In this experiment, 5% bought the cheapest option, Standard, 85% bought the middle option, Premium, and 10% bought the top-end Super Premium.

So, what does this experiment tell us?

  • People are reluctant to buy the cheapest option – perhaps due to a perceived lack of quality or due to fear of looking “cheap”.
  • Some people will always go for the most expensive option – again, perhaps down to a perception of quality, or just because they can afford it.
  • When presented with three options, most customers will go for the middle option – perceived to be a reasonable trade-off between price and quality.
  • It doesn’t matter what the three price points are; people will always conform to these behaviors.

Now, what does this mean for you?

Well, by choosing three products to sell alongside each other, you subconsciously push customers towards the middle product. And, by strategically making the mid-priced product more expensive, you can increase your average order value.

You can see this strategy in action on many WordPress plugin developer websites. By listing the different licenses in a pricing table, the developer hopes to push you towards a more expensive license.

Key takeaway: list your products in a pricing table and drive the majority of customers towards the middle price point.

Final Thoughts

Very few factors affect a business’s profit potential quite like price. By adjusting your prices, you can send the demand for your products through the roof, or earn considerably more for each unit sold.

Even so, many business owners adopt a set-and-forget approach to pricing. Simply put, these people are leaving money on the table. Make sure that your business doesn’t fall into this trap. Continually test different pricing strategies, using the six in this post to get you started.

For now, though, it’s over to you: what pricing strategies does your business use? Share your thoughts and experiences in the comments section below!

Thumbnail image by La1n / shutterstock.com

27 Comments

  1. Your newsletters are becoming less flights

  2. One of the best “reminder” articles I’ve read in a long time. I’ve known this but forgot to practice it somewhere along the way. Great points!

    • Amrit,

      Great recommendation. Just lost myself in two hours of his videos.

  3. Fantastic article with well researched info – very helpful, thank you!

  4. Very thorough with cool insights (The Power of Nine).
    Thanks, Shaun!

  5. This is a great post, thanks for sharing! I have always struggled with pricing and apparently I belong to the “plucking a number out of thin air” tribe!

    I am gonna do some testing based on your suggestions! Thanks!

    • It’s easy to see why people do this. If your relatively new to an industry, you might not know how where to price your products/services so you base them on the competition.

      I don’t think there’s anything wrong with plucking your first price out of thin air, as long as you test it so you can narrow it down to a more effective price point.

      Good luck!

  6. I’ve been shying away from doing the non-round numbers just because it seems a little cheesy but it must work since nearly all major businesses are doing it. I guess it’s time for a change…

    • I know where you’re coming from. The non-round numbers can seem transparent (the major point in the “cons” column), but if it works, it’s worth a try!

  7. Great tips / Concisely written.

    ……and further confirmation that I need to change my business name!

  8. Great article! I love studies & experiments. Gives credibility to your points. A lot of good information here. I used to use 9s more often… lately I’ve been lazy and have been rounding up. I’m going to start rounding down again and use 9s more… $149 instead of $150.

    Thanks!

    • Or even better, $159 instead of $150.

    • nice post thanks for sharing with us. i want always find like that type of post.

  9. Pricing is on of the 4 P of Marketing Mix:
    Product/Service
    Price
    Promotion
    Place
    Every ingrdient have to be mixed to get the best results.

  10. Great points and tips. Thanks for the read and reiterating some points I knew about and explaining others I didn’t.

  11. Hmm. Nice article.

    Thé question is off course: is everything as valid in btb as it is in btc …

    • Very good question. All of these pricing experiments were based on BTC transactions. I imagine business owners are still susceptible to the same tendencies, but business owners are probably less bothered about haggling for small amounts and more interested in quality.

  12. Nice post , if one is buying 3 product for 4$ , 6$ and 9$ repectively. then i think People always go for middle option which they think is inexpensive of all. but they do not known that is just a pricing strategies

  13. Awsome post…. Thanx for sharing!!!

  14. My company sells websites to local businesses. We only have pricing 1 tier, but if a customer buys multiple websites, they get a discount on a discount.

    • Is this something you could try testing? A basic website package, a standard package, and an “all the bells and whistles” package. It could be worth an experiment!

  15. Great post. However prices are too dependent on industry, competition and the social environment. The pricing strategy must continue to be marked by many different variables. The challenge is to know what.

  16. Hey I love your themes… Keep doing good work..

  17. Wow, very useful information. And also very well written. Recalling my buying experiences I confess that I have surely fell prey to such tricks by sellers :-p

    Thanks a ton.

  18. Fantastic article!! very useful information.

    Thanks Shaun

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