Pricing can make or break an online business. When a consumer arrives on an e-commerce site for the first time, they bring with them a host of preconceptions and expectations. Among those is the conviction that because your business doesn’t have the overheads associated with a brick-and-mortar store, your prices should be dirt-cheap.
This particular expectation, along with the sizeable competition from megalithic international online stores and growing competition locally, can make the prospect of drawing up a sustainable pricing strategy a little daunting. Regardless, it’s something that every online startup must do. The following are some tips to help you through the process.
1. Market research
A good place to start, and something many businesses don’t spend enough time on, is to research competitors’ prices.
“When starting any business, you’ve got to do your research,” advises Lucas McEntee, managing director of online electronics store Ohki. “You need a good business plan and the ability to be able to stress test that.”
This research could potentially be as simple as a Google search. Regardless of the method, the important thing is to gather as much information as possible on how your competitors are pricing their products.
“We started by not really knowing what to price,” said Bryan West, managing director of online training company Fortress Learning. “So, we just went to the market and had a look around. We found the average price and went with that.”
Once you’ve established what seems to be a reasonable price point, it’s important to project associated costs, and factor these estimations into a final price. Fulfilment and returns policies, for example, are crucial to factor into price in a country as large as Australia.
“When it comes to pricing specifically, you’ve really got to make sure you do your mathematics,” says Ohki’s McEntee. “If you don’t, you can end up going backwards very, very quickly.”
2. Define your point of difference
The trickiest aspect of any pricing strategy is determining whether to use price or a unique value proposition to distinguish the business from its competitors.
Ruslan Kogan, CEO of online electronics store Kogan, insists that pricing is the best way for small startups to make their mark.
“Price is usually the easiest point at which to break into a new marketplace,” he says, adding that it allows new businesses to cut through their lack of reputation.
“If you start out being a quality leader, you might invest a lot of money in your product and services, and at the end of the day not be able to convince people about the quality of your product,” continues Kogan. “What you have to show people is that when you compare apples with apples, you’ve got the best prices. Low pricing is an easy value proposition to publicise: you can just show them two numbers.”
However, Ohki’s McEntee advises against pursuing the title of ‘cheapest’, as the risk involved means that it’s not a model that tends to last in the long-term for most businesses.
“Pricing is a bit of a double-edged sword,” says McEntee. “You don’t want to be in a race to the bottom, and you don’t always have to be the cheapest to get a customer.”
By targeting the median price offered by the industry for his main product, Fortress Learning’s West found that he had unwittingly set the company up to compete with over 3,000 online competitors on price.
“We realised from our students’ feedback that our product was somewhat different,” he said. “We had to make a decision of whether to increase the price to reflect the quality, or reduce the price to reflect our own values of making training accessible.”
West explains the business took the risk and opted for the latter option.
“That led to making a conscious decision to ignore what the market is doing and work out what our costs are, and what our necessary margin is, and then how we could reduce that.”
The risk in this decision is offset by the income from consulting work that Fortress Learning does for training organisations and industry skills councils. The auxiliary income generated from this side of the business allows it to remain more competitive with its pricing elsewhere.
Another issue that comes with pricing aggressively is that it’s important to be able to sustain the business’s price-based value proposition over an extended period of time.
“I like to use the daily coupon market as an example,” says Ohki’s McEntee. “There’s always going to be a percentage of people that will buy daily coupons purely because of the discounted price. If you want to chase that and just be purely about price, then you need to make sure you’ve got a substantial amount of volume to be able to absorb that model.”
A much more secure approach is to have something to offer the customer over and above the product, they’re purchasing. Superb customer service, for example, will more than justify a slightly higher price in the mind of the consumer.
“Service add-ons don’t tend to cost that much, and chasing the customer that will pay more will end up creating more value in your business, anyway,” says McEntee.
3. The credibility issue
One obstacle that many online startups face when trying to compete on price is the lack of customer familiarity. When presented with an alluring price from a previously unknown company, many consumers will simply assume that it’s too good to be true, and opt for the services of a more established competitor.
“The big thing with pricing with our online model is because we don’t have an investment in bricks and mortar, obviously we don’t need to have our fees as high to cover the costs of renting training rooms and the rest of it. That then led to issues of credibility,” says West. “There is an expectation that price does equate to quality. As a new kid on the block, there was quite a fair bit of scepticism about whether it would be possible to deliver the training that we do for this particular fee in a way that would actually uphold the standards of the national training framework.”
In an attempt to address this incredulity from prospective customers, Fortress Learning opted for total transparency with respect to the service it offered.
“We basically make very clear in the information that we provide people when they come to us and ask about our particular program, that we provide them with copies of what’s called our learner engagement surveys. It’s a mandatory component of being a training organisation that you report on these every year,” said West. “We stopped being defensive, and just started to say ‘This is what we have, these are the results that we are gaining with our students.’”
In addition to judicious use of transparency in how the business is marketed online, it’s worth making a point of inviting initial customers to contribute a testimonial. Publishing these on your site will provide sceptical visitors with the option of contacting previous customers of their own accord for reassurance.
4. Keep a finger on the pulse
Once established, a pricing system shouldn’t remain static; it should evolve in accordance with trends in the industry, and in proportion to the business’s own success.
“The way in which we determine our pricing hasn’t changed, other than we have gone one step further to make a commitment that our fees will never exceed 50% of the national average for a given course that we’re offering,” says West. “We check that every month. We start with the 50% of the national average, and then, if we have consulting income for that month, then we work out how many places we can offer at a reduced fee from that.”
Ohki reviews competitor prices much more frequently, and regularly devote a portion of their working week to ensuring they remain competitive.
“We do it every couple of weeks, but it’s something you do need to spend time on, make sure you do put some time aside to do it,” says McEntee.
Short of religiously scanning competitors’ sites, businesses can talk to suppliers to get an impression of what’s being ordered and shipped. It’s also advisable to set up Google Alerts for key products, as this provides a straightforward, time-efficient way of keeping abreast of pricing developments.
5. Don’t obsess over the competition
Although it’s wise to keep close tabs on how your business’s pricing compares to that of competitors, it’s important to not let market developments eclipse what it is that makes your business unique. Any business that has built its defining value proposition on market pricing trends is subject to abrupt and unpredictable changes.
Ohki’s McEntee advises businesses to be prepared for change regardless of how secure their pricing strategy might be.
“Go in with your eyes wide open, and be prepared for the market to move very quickly,” he says.
“My advice would be to not be limited by what’s happening in the market because the market can change,” says Fortress Learning’s West. “Our experience has shown that following the market led to an incredible amount of competition with more established players. Doing our own thing has actually led to us creating a new market. Three-quarters of our students wouldn’t actually be engaged in training if it wasn’t for our pricing model. We’ve essentially tapped into a group of people who weren’t in the market anyway. Pricing can create new markets.”