Maximize the Benefits of Pricing Flexibility

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Contrary to the accepted myth of the fickle online shopper, a recent study by Mc-Kinsey & Co. found that most online buyers shop around very little. Here's how many buyers in certain categories purchase from the first site they visit: books, 89 percent; toys, 84 percent; music, 81 percent; and electronics, 76 percent.


Fewer than 10 percent of Internet users are considered "aggressive bargain hunters." This speaks not only to the psychology of online shoppers, but also to the power of Internet brands. It also alleviates the fear of marketers that unless they offer bargain-basement pricing, customers are likely to attrite.


The fundamental value of the Net lies not in lowering prices, but in optimizing them. All products have what economists call a pricing indifference band, a range of possible prices within which price changes have little effect on a customer's decision to buy. These vary considerably by industry sector. The range is 17 percent for health and beauty products, for example, and 2 percent for financial products.


Determining the boundaries of these indifference bands is difficult offline. Imagine a single store relabeling prices on a given product to test pricing elasticity. Now imagine a store trying such an exercise on a national basis. The manual labor alone would be daunting. When you factor in the need to aggregate the results of the test, to leverage the appropriate decision sciences, plus the legal exposure inherent in pricing products at different levels to similar customers in the same or similar markets, you can see why few traditional offline marketers conduct such exercises with any frequency.


When they do modulate prices, offline retailers do so based on a variety of factors - from shifts in manufacturer pricing practices to aggregate increases in demand - but generally not because of this kind of experimentation. That's unfortunate because any increase in price is pure margin and falls right to the bottom line.


However, defining the boundaries of indifference bands is relatively straightforward and inexpensive to do online. Here are two techniques that you may wish to consider.


Random price testing. One basic technique to determine the indifference band for a product is to quote a higher price, such as $110 for a $100 widget for every 20th visitor to your site, and then compare purchase rates. If you find an increasing tolerance at the high end of the indifference band, you should consider raising the price.


However, the purpose of this exercise is to gather information, not revenue. To avoid possible negative publicity (such as what happened to Victoria's Secret when it priced products differently to the same audience), consider refunding the difference as soon as the purchase order is completed by adjusting the invoice or by sending a follow-up e-mail. "As a special customer, the $110 widget you just purchased is now only $100. It's our way of thanking you for your business."


Once the pricing tolerance has been identified, the widget's price should be adjusted to $110 across the board.


Book-to-look ratio. Abandonment or shopping cart attrition is a challenge for Internet protocol marketers. The most successful strategies to counter abandonment combine a quantitative view identifying where, when and how often users are abandoning the site(s), plus qualitative and optional attitudinal analyses designed to reveal why, and what site changes or other IP marketing techniques are most appropriate to address the problem.


At the heart of this analysis is the "book-to-look" ratio, which measures how many people gather information about a product, drop it into their shopping basket, but then fail to complete the transaction. There are multiple reasons for this behavior. In most cases, the culprit is poor site information architecture. It takes too many steps to get through the process, or the steps are difficult to navigate. Another common cause is that consumers cannot factor in all the relevant costs associated with the purchase until they've virtually concluded the shopping process. Once identified, these problems are easily corrected.


Another reason is "aspirational" or "vicarious" shopping. It's similar to the psychology of offline window-shopping. Some individuals who would love to buy that fancy new computer or car or flat-screen gas plasma TV get a perverse pleasure by running through the shopping process all the way to the Confirm purchase button, and then attrite. Those who exhibit this behavior are generally capable of making the purchase, just not immediately. Marketers can do little to prevent vicarious buying, but spotting this trend is important because an outbound e-mail offer may be just the prompt to get them to click.


The book-to-look ratio also is a key metric in determining whether there is play in the pricing indifference band. For example, when we noticed a gradual but significant drop in the ratio for one of our client's key products, we surmised that the price was becoming less of a barrier to purchase. We tested a new price, uncovered the outer boundaries of the band and discovered that consumers were willing to pay the higher price without significant sales erosion.


Not all brands may be suitable for this e-pricing elasticity. Premium brands especially must be handled with care. It's important to understand your latitudes of freedom; they must be consistent with your overarching marketing strategy and brand.


But assuming you're selling online and your brands grant you the degrees of freedom you require, fundamental to any e-pricing optimization is sound tracking, content management and online messaging. This does not require hugely burdensome investments.


Assuming you already have robust Web publishing and e-commerce systems in place, defining the business rules and driving the relevant messaging are not overly complex tasks.


Finally, never neglect to leverage more traditional research techniques to uncover the pricing tolerance of consumers, even against specific SKUs. Focus groups, Web forms, online attitudinal research systems and Web communities can be helpful in determining trends in consumer thinking long before they reveal themselves in shifting book-to-look ratios.


Internet-only retailers as innovative as Amazon.com still require customers to remain loyal for more than two years before they become profitable. As the meltdown in the dot-com industry has shown, it's not easy to make money from e-commerce.


If you follow these basic techniques, you can leverage e-pricing optimization to your advantage. But you first have to stretch the boundaries of your imagination, to take a risk and try something new.


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