Penetration pricing is a competitive pricing strategy, particularly effective in attracting new customers and increasing ecommerce sales.
The simple aim of a penetration pricing strategy is to set a very low initial entry price in order to tempt potential customers into switching from the competition’s services. This is a particularly useful pricing strategy for new ecommerce products entering a saturated and competitive market. If a product has minimal differentiation from your competition, then offering a substantially lower price can be your best strategy for standing out.
One of the most common examples of penetration pricing is when you see special ‘introductory’ offers. This competitive method of pricing is great for increasing your market share and pulling in a large amount of new customers for brand awareness. Once you have made an impact in the market, the price can be raised to a more profitable amount.
Pros and Cons
Penetration pricing is brilliant for catching the competition by surprise. Offering such low prices to begin with will also encourage good product promotion through customer word-of-mouth.
However, while ecommerce sales may greatly increase, profits are likely to be negatively affected in the short-term. In addition, the low initial pricing may simply attract ‘bargain hunter’ customers as opposed to loyal long-term customers.
Introducing a loyalty program to your e-commerce store is a great way to attract repeat customers and stay ahead of your competition. In fact, a massive 55% of the world’s top retailers have a loyalty scheme in place and it has proved to be a perfect strategy for increasing e-commerce sales.
Benefits of introducing a loyalty programme in ecommerce
On average, retailers that have a loyalty program earn around an 88% higher profit, with customers visiting twice as often and spending 4 times as much money than normal. Attracting a new customer to your website is only the first step to running a successful ecommerce store, as 48% of consumers surveyed have revealed that their first-time shopping experience is the most crucial time for deciding their loyalty.
How to set up a loyalty programme
A loyalty scheme could be anything from a physical card to an online store account. Most e-commerce software includes a loyalty program feature – if they don’t already have one, then you are sure to find an e-commerce extension for it.
- Make sure to link customer accounts with a phone number or email address. This will make it easier for your customers to shop both online and in-store.
- To help increase brand awareness and website traffic, introduce rewards not only for purchases, but for non-purchases such as shares on Facebook and retweets.
- Use your loyalty program to collect and analyse customer data. You can use this information to offer targeted discounts and rewards, unique to your customers.
- Having a tiered system will give customers incentives to spend more money and reach the next level for even better rewards.
Is a loyalty programme right for my shop?
Remember, it costs retailers up to 10 times more money to get new customers in comparison to keeping old customers. However, certain e-commerce stores with narrow profit margins may not be able to afford to be so flexible with their prices. In this case – although a great way to increase ecommerce sales – you may find this strategy too damaging for your profits.
As our main focus at the Repricing Co is dynamic pricing and tracking, we do tend to bang on about the importance of developing a dynamic pricing strategy. Our no.1 tip for staying ahead of your competition is to monitor your competitor’s prices and make sure that you are always on top in Google Products. If you can undercut your competitors, consumers are much more likely to find your products online in search results.
However, we understand that that’s not all there is to e-commerce competition, and furthermore, not all businesses can afford to take this approach…
Here’s our top tips for staying ahead of competition:
- Step up your marketing and differentiate yourself from the competition. This doesn’t have to be expensive – this can be as simple as window posters and leaflet drops, all the way to advertising campaigns in mainstream media. If you can’t rival your competitor’s prices, step it up and make sure it’s clear what makes you different, whether it’s your ethical business conduct or your first class customer service.
- Don’t let your competitive fight for new customers distract you. Take care of your existing customers and listen to their feedback – value their feedback! Remember, 1 in 4 potential buyers rely on customer reviews before they buy a product, and furthermore, it takes 12 positive customer reviews to make up for 1 negative review! By keeping your existing customers happy, you already have a great advantage for attracting new ones.
- Don’t be a one trick pony. Make sure that you and your staff are continuously learning and improving with the times. Times change and consumers change with it, so you will need to make sure you have all the necessary skills to keep up with the latest changes and customer needs.
- One important thing to remember when you’re trying to stay ahead of the competition, is not to obsess! Obsessing over your competition can be bad practice and divert your attention from your own success – the things that make your business unique. Studying your competitors can be a great way not only to stand out, but to learn what works and what doesn’t. Just go easy!
If you are a small start-up business on a budget or a larger business looking to save money, there are thankfully a huge range of free e-commerce tools available on the web. The list seems almost endless, however here are just a small selection of our personal favourite tools to help you develop a successful e-commerce business:
Top 5 Must-Have Free Ecommerce Tools
- OpenCart: You can’t have an online shop without an e-commerce platform! There are a surprisingly large number of free e-commerce platforms out there, however, in our opinion, OpenCart comes out on top. Not only does OpenCart’s format look nice and sleek, but you can also sell an unlimited amount of products in unlimited categories. There are numerous payment options, currencies, languages and shipping methods available too. It’s completely user-friendly and SEO friendly, helping you break your way into Google Products.
- Wave Apps: Helping manage your accounts, invoicing and payroll, Wave Apps has turned out to be a completely cost-effective and user-friendly service for small businesses. You will get 100% unlimited free invoicing; convenient, simple connection to your bank account or PayPal accounts; and professional reporting for either you, your accountant or your investors.
- Freshdesk: Of course, one of the key rules to a successful ecommerce business is good customer relations. In fact, 55% of consumers have revealed that they would be willing to pay more for a product just for a better customer service experience. Freshdesk helps you organise customer queries quickly and efficiently with a simple ticket system – it’s a perfect solution for small businesses that don’t have the budget for costly customer service over the phone.
- Google analytics: Analytics is a major ecommerce tool used in conjunction with most online businesses of today. Not only will it help you understand your users and their habits, it will also be fundamental in identifying exactly where your conversion process may be struggling and how to keep users engaged.
- Bronto: Keep your customers up to date with email marketing, a crucial part of a successful ecommerce business. Bronto is not only user-friendly, but it ‘s mailing list function is also a great way to keep consumers updated with customisable newsletters – it has actually been reported that 66% of consumers have previously made a purchase online as a direct result of a marketing email. On top of this, 74% of consumers have stated a preference for marketing communications via email over social platforms like Facebook or Twitter.
For a more comprehensive list of essential e-commerce tools, make sure to check out Ecommerce Fuel, a highly recommended read for small businesses and startups.
At the Repricing Co, we’re passionate about supporting small businesses. We offer a free account to users so that businesses of all budgets have the ability to track their competition. So, even if you don’t have the budget to beat your competition with dynamic pricing, at least you can have the opportunity to stay updated and strategize accordingly.
My competitors have such great buying power we just can’t compete when it comes to the price.
This is a common concerning for online and offline merchants alike, who consider using any price tracking software to reprice their products. Perhaps you can’t compete with all your competitors prices but you may well find that you can compete quite well with some competitors of similar size.
Forget about using Price to Compete with the Big Players
Research competitors that are smaller or of the same size as yourself. Competitors that currently offer the same products at similar prices. This type of competitor will more than likely run a similar type of operation as you do, This means it must be possible you can compete on price. Even if it means reducing your overheads by just 0.5% for example.
0.5% may not seem like a great number but if you apply that 0.5% as a reduction in price to some of the products your competitors are selling more of than you are may just mean you have matched your competitors price. Or even beaten your competitors price.
Compete on Service
Competing with competitors bigger than you can become difficult. Beating or matching prices of competitors that have better buying power than you may put a stop to repricing altogether. However, all is not lost. Compete on service instead.
There are some huge companies that offer outstanding customer service, incredible retail channels such as inviting high street stores and attention grabbing online shops and applications. There are also many big companies that fail in 1 if not all of the above types of service.
Being smaller than your competitor may mean that you can offer a more streamlined, personal customer service. It also means you can improve your online offering, such as your website, without needing to go through 3 months of meetings. You may not have the budget to allocate to your website that some companies do, but try and find a small amount such as 100 dollars a month and pin point one small improve you could make to your website to make the checkout process easier for customers or increase conversions. Continue to find the same small amount each month. 6 months later, your website is going to have 6 fewer issues that may have been holding back sales or impacting customer service.
We would love to hear how you compete with your competitors. If you use price tracking and repricing as part of your strategy or not. Please leave us a comment or tweet us at @repricingco.
Cost Plus Pricing Explained
Cost Plus Pricing is a basic repricing strategy and dynamic pricing formula used by businesses to cover costs and ensure a healthy cash flow. Cost plus pricing covers all outgoing expenditures from production costs to sales related costs. This method pretty much guarantees profits while still remaining competitive. Thankfully, the price optimisation formula used for cost plus repricing is really very simple, with little information required.
Cost Plus Pricing Formula
Basically, for dynamic price updating using the cost plus pricing method, you simply need to follow three simple steps:
- Work out your total costs involved for each individual product. This includes everything from production costs, fuel costs, marketing expenditures, packaging costs, marketing costs, staff salaries and raw materials. One you know your total expenditure on a batch of products, you can then divide this amount by the number of units. This gives your unit cost. (Total Costs / Number of Products = Unit Cost)
- Decide on your desired profit margin amount. This amount varies from business to business, but is usually around a 40% to 70% markup. Typically, you might want to reprice your products to allow wholesale customers a lower price with a 40% profit margin, and retail customers a higher price with a 70% profit margin to cover costs. Or, you may want to use our automatic price updating service to adjust your profit margin accordingly depending on competition prices. This is also know as percentage allocation.
- Optimise the price of your final product. Basically, you just need to take your unit cost value and add on your desired percentage allocation from step 1 and 2. For example, if the total costs per toaster that you sell is $10 and your profit margin is 50%, you will need to reprice your end product at $15. (Unit Cost + Profit Margin %)
Using the correct pricing strategy or method to price your product is one of the most crucial parts of starting a business. There are various price optimization methods to suit all different types of services. Additionally, there are a number of different repricing methods to keep your prices up to date after you’ve laid down a solid pricing foundation.
Which Pricing Strategy is Right for You?
This is the most common and basic way to price products. Cost plus pricing takes into account all of your costs (production, marketing, wages) and then adds a profit percentage on to this figure to give your final retail price. Cost Plus Pricing ensures that your product will set at a profit.
Value Based Pricing
This is mainly used for innovative or unique products and services. Prices are set according to the demand of your product. When used properly, this method can increase profits considerably without affecting sales. Setting high prices according to demand may even make your product appear more desirable to customers – Sometimes a low price gives the impression of low quality.
Target Based Pricing
This pricing method is used to make a target return on investment. It’s best to have a prediction of expected sales in mind first. Once you have an idea of expected sales, you can price your product accordingly to make back part or all of your investment.
Keep up to date with your pricing! Once you have a basic price figured out for your service, you can use automatic price updating and repricing to adapt to current affairs, changing demands or competition.
It’s important to know what your competition is doing. Maybe you want to follow their prices and copy them yourself, price higher for a stronger brand image or, most commonly, price lower to attract more customers. You can use automatic price updating and dynamic repricing with The Repricing Company price tracking service to stay on top of what’s going on with your competitors.
There are a couple of methods you can use to tempt customers that extra little bit more to tip them over the edge into buying. Setting prices fractionally lower – such as £5 to £4.99 – can make a product appear much better value at a glance. Obviously some customers love a cheap bargain, however other types of customers may actually find higher prices more appealing, perhaps more fashionable or more professional. Setting prices according to the type of customer you wish to attract is very important.
Increasing sales with free shipping
Let’s face it: Customers love free stuff. If you’re looking to increase sales online, offering free shipping is a great way to attract customers to spend more and abandon their shopping carts less. Free shipping takes away the guilt of shoppers wasting their money on delivery when they could just as easily go out and buy the same product from a high street shop themselves – for free.
Losing profit on free shipping
However, from a business point of view, sometimes free shipping can be costly and – despite increasing sales volume online – is it always worth the loss in revenue? Well, if you have a very small profit margin, then free shipping may not be the best of options. On this note, offering free profit only increases sales on a case by case basis, i.e. when the product is expensive and delivery costs low.
Small items such as books, software, video games and CDs can be shipped very cheaply, and so offering free delivery on these sorts of products is a great way to make more sales without losing too much revenue. Free shipping may also be a great way of one-upping your competitors if they don’t offer it. Either way, if you’re unsure about the impact of offering free shipping on your business, then it doesn’t hurt to make a temporary trial of it – Advertise exclusive free shipping for a limited time and see how your profits and online sales fair.
How to increase sales online
- When increasing sales for online businesses with low profit margins, you need to be a little stingier with free shipping offers. Increasing your sales online in this instance, does not necessarily mean it’s going to be good for your revenue. The best way to tackle free shipping in this case, is to only offer it on a minimum order value, a value that will make the cost to you economically worthwhile. This method in itself can sometimes be a good way of increasing sales and tempting customers into spending more to save on shipping.
- When increasing sales for online businesses with high profit margins, free shipping is usually a highly feasible tactic that you should definitely take advantage of. Unless the product you sell is extremely heavy and costly to ship, the slight profit loss in postage is a small cost compared to the great savings customers will see themselves making. Free shipping has proven to reduce shopping cart abandonment markedly and increase online sales much more.
- When increasing sales for online businesses that sell rare and in-demand items, you can afford to be a little greedier in your tactics. With little competition to contend with, you can easily get away with increasing your prices to cover your losses on free shipping. This way, sales will increase as customers are enticed by the free shipping without knowing that the delivery cost is actually hidden in the product price.
Value-based repricing explained
Value based repricing is a pricing method formulated depending on how much an end product is worth to customers. This is based on the sheer value and worth of the end product to customers as opposed to to the costs involved. Obviously, this price optimisation method will only be feasible for certain types of business. Ultimately, the business will be able to sell their product with significantly increased profit than if they used a standard cost plus pricing method.
When do we use value based repricing?
Value based price optimisation is only used if it will increase profit without impacting on sales. In other words, we don’t want the higher price to deter customers from buying the product, only to maximize the potential profit increase that can be made on each individual product or service. When used for the right business, value based repricing is a highly efficient repricing method to increase profit.
A typical business that uses value based repricing might sell:
- An invaluable service that will, for example, save the user £1000′s in the future such as an invaluable software plugin
- In demand and highly sought after fashion accessories and clothing
- A rare, niche product or service
- Shortage items, for example food and drink at a closed off festival
- Fundamental add-ons such as camera lenses and printer cartridges
Increase profits with value based repricing
When considering using value based pricing for your business, it’s important to have a good understanding of your customer’s perception of your service – how highly they regard it and exactly how much it benefits them. One way to research this, is to carry out surveys on existing customers. If you have a product that you currently sell for £50, but it turns out to be saving customers £500 a year, you might increase profit by raising your price to £150.
Of course, it’s important to be careful not to get carried away and charge too much. If your prices are clearly considerably higher than your costs to customers, then you run the risk of losing sales and giving the impression of exploitation (see Psychological Repricing). If optimising prices at a balance though, you can drastically increase profits without affecting sales.
Combine value based pricing with automatic price tracking and dynamic price updating to stay one step ahead of competition with The Repricing Company.
Psychological Pricing Explained
Psychological Repricing is a dynamic price updating method typically used to adapt a pre-established ballpark figure for your final selling price. In other words, to adjust prices after you have worked out your costs and required profit margins (using cost plus pricing, for example). Psychological pricing goes a little deeper, delving further into customer habits and perceptions.
Price optimisation with psychological repricing
The most common, everyday use of psychological automatic price updating in business today, is the dropping of prices so that they end in 99 or 95 pence or cents. This gives customers the impression that the product is cheaper and so a little more guilt free and assuring to purchase. After all, £19.95 seems much more appealing to spend than £20.
Many customers have a tendency to notice the left most digits more so than the right digits. Therefore, £19.99 seems much closer to £19.00 than it does to £20. Furthermore, numbers in their twenties seem much larger than those in their tens, even if it is just by a few pennies. This is known as the left digit effect.
Benefits of psychological repricing
At just a small cost of literally pennies to your business, optimising prices using this method is a highly successful way to increase sales. You can continue price tracking competitors and use automatic price updating with the Repricing Company to keep your prices even more ‘psychologically’ desirable for customers. An easy way to increase sales!