5 Steps to a Smarter Online Pricing Strategy

There are few things as important as your pricing strategy. Get it wrong and your business won’t survive. Get it mostly right and reaching your goals will be more difficult than necessary. Get it right and you'll pave a smooth path to success.

The internet and smartphones have enabled consumers to easily compare prices across dozens of retailers in mere seconds — even while in-store. But don’t despair! While it’s true the prices you advertise will be compared, you don’t always have to have the lowest price to win. You just have to have the smartest price.

Increasing price volatility in the marketplace and ever-more intricate online pricing policies from product manufacturers have made setting a digital pricing strategy a much more complex task. However, every challenging task your business faces is an opportunity to do it better than your competition. In the spirit of opportunity, here are my top five considerations to keep top-of-mind when devising your pricing strategy:

1. Commit to price as many products as possible. 

Our research found 85 percent of online shoppers will leave a durable home goods store’s website and go to another if pricing isn’t displayed. If you’re afraid to show a price on your website because it might be too high, you can put that worry to rest once and for all. Consumers report they automatically assume the price is too high when prices aren’t displayed.

While showing prices online is extremely important, it doesn’t have to be all or nothing. You can begin in increments — e.g., one brand at a time — knowing that showing some prices is better than none. You can earn returns on your efforts as you go.

2. Think about your cost last.

Many retailers begin thinking about their pricing strategy by looking at their cost and marking it up from there. I understand why this exercise is important, but I can assure you, it’s not interesting or important to your customers. They don’t care how much you paid for that washing machine or sofa. They only care how much you're charging for it, and what value they'll get in return for spending their hard-earned money.

Start with considering how the market is pricing each product. Track your competitors’ online prices. Know vendors’ online pricing policies to understand what variation in the market is allowed. Consider what unique value you can provide within, or separate from, each product’s price — e.g., delivery services, exclusive rebates, satisfaction guarantees, warranties, installation, etc. After all of that's done, then you can consider your cost. If you can’t confidently ask for a price that provides you with an acceptable margin, don’t sell it. Or go ahead and mark it up blindly above your cost — you won’t sell it anyway.

3. Price by brand, not by category.

Think about your online pricing strategy brand by brand. I can assure you there's no one formula that will work equally well for every brand you carry. Each brand has its own online pricing policies that can differ significantly. Sometimes you can discount 10 percent from MAP (minimum advertised price). Sometimes you can’t deviate from MAP by even one cent. Some brands will be unique to you in your marketplace; others will be found at every single competitor. These variations should be reflected in the strategy you choose for each.

If this sounds overwhelming, start by making a list of your top five brands ordered by importance to your business. Think about only one at a time and move down the list as you complete each. You'll likely be able to reuse your work and set the same formula for more than one brand, enabling significantly faster progress than trying to devise one formula that will work for everything at once.

4. Reference more than one type of guide price.

Just like there's no one silver bullet strategy that will work for every brand you sell, there often isn’t just one guide price — like MAP or what a competitor is advertising online — that works best for all items within an individual brand. Seek out opportunities to use more than one pricing guide whenever possible. Layering multiple sources of pricing information together results in more products displaying prices — and more intelligent prices to boot. Here’s an example of how layering formulas that reference more than one type of guide price can take your digital pricing strategy to a whole new level:

Let’s say you want to price a certain brand model at 10 percent below MAP. That sounds simple enough. However, not every model number in that brand has MAP at every moment in time. So, layer on another condition: If there’s no MAP, display something based off a different guide price, like perhaps the lowest online price from your three biggest competitors.

Now every model in this brand with a MAP displays a smart price, as do the models without a MAP. However, what if a model number doesn’t have a MAP and isn’t on the websites of your three biggest competitors? Layer on a third condition: If there's no MAP and this model has no online competitor price, then display a price of 30 percent above your cost.

At Retailer Web Services, we call this type of pricing a “cascade formula” because you begin with the first, but cascade down to the next until a valid price can be calculated.

5. Make a conscience decision about how you display rebates.

If you sell durable home goods such as appliances, you deal with mail-in rebates. They can be excellent tools to help close sales, differentiate your store from competitors and drive up ticket sizes. However, rebates can also be quite complex and difficult to understand. How your website displays rebates along with each product’s price will have a major impact on both your competitiveness and your profit margin.

Clearly identify products that qualify for mail-in rebates and make it easy for consumers to navigate to them by brand, category and specific rebate program. If you’re going to show a price after mail-in rebate on your site, make sure deducting that amount doesn’t violate any of your manufacturer’s online pricing policies or local laws.

Whenever modifying a price to show it after mail-in rebate, make sure your website passes the price before rebate through to the shopping cart. And while this can sound circular, it’s often best to add a rebate amount to your online price before you then subtract it. Look at this example to see why:

Let’s say you would normally sell a range for $899 because that’s what your online competitors are selling it for, and you can offer a $50 mail-in rebate for this item.

You could simply subtract the rebate amount from the price you’ve matched to your competitor. This is a very common strategy, and it looks like this:

• You pay:                          $899
• Mail-in rebate:                 -$50
• Price after rebate:          $849

Or you could make a subtle change that significantly affects your bottom line by first adding the mail-in rebate amount to the price you've matched to your competitor, and then subtracting it to show a price after rebate. That looks like this:

• You pay:                           $949
• Mail-in rebate:                  -$50
• Price after rebate:          $899

With the second example, your store still looks competitive (your price of $899 after rebate matches the price of $899 your competitor is advertising), but you’re not giving away the $50 rebate. Instead, that rebate goes straight to your bottom line.

No matter what pricing strategy you develop, make sure you have great tools that can help you automate it. Durable home goods pricing is volatile; promotional periods can last just a few days and your online competitors could be adjusting their prices many times throughout the day. There's no way to keep up by hand, but great software can keep your store stay one step ahead even while you’re sleeping.

When it comes to crafting a smart online pricing strategy, the options are only outnumbered by the opportunity.

Jennie Gilbert is the COO of Retailer Web Services, a company whose mission is to help independent retailers realize their dreams through technology.