This piece is the third and final article in our three-part series on raising prices for online stores. If you haven't already, be sure to read Part 1 on pricing control and economics, and Part 2 on building a great brand.
For the last installment in the series, we’ll get super tactical. While there’s a lot of research out there on pricing tactics, I’d like to curate a few of my favorite for you here. These tactics will help you gain more control over your pricing, allowing you to raise prices and make more profit without losing sales. So without further adieu, let’s get into it.
Charm Pricing Flipped
Most of us are familiar with charm pricing. It’s the idea that you should end prices with .99 or .95 because people pay more attention to the whole number figure than the fractions at the end of prices. This is true.
However, the tactic is most aptly used when the left-most digit changes for the customer’s benefit. (e.g., 10 becomes 9.99, 80 becomes 79.99). Makes sense, right?
When the left-most digit drops lower, the subconscious part of our brain associates a more significant price drop than is really there. Even though we know it’s a pricing tactic, it doesn’t stop the tactic from increasing conversion rates across the board.
However, this tactic is about increasing sales, not prices. And raising prices to increase profit is our ultimate goal. So we'll sort of flip the idea of charm pricing around.
Instead of using charm pricing to lower the leftmost digit of your price, use it to maximize your prices.
Are you selling a pair of yoga pants for 35.99? Why not raise the price to 39.99? Assuming you've followed the previous two articles, and are therefore selling your own products (not reselling), and have a brand, this tactic is a no-brainer. By raising the price a few bucks, you've done nothing to the leftmost digit, so the price feels subconsciously the same.
In the case above, the tactic won't work should you cross the 40 mark, of course. That would raise the leftmost digit and would, therefore, be too much.
The lesson here is this: if you’re planning to raise prices, always take the maximum you can get that doesn’t raise your leftmost digit. You’ll see a profit increase with minimal if any conversion rate reduction.
Partitioned Pricing Revised
This one is a two-parter. And we’re going to take the basic idea of partitioned pricing and do a little twist on it.
A 2006 study by Tanjim Hossain and John Morgan tells us a bit about how partitioned pricing works. They played around with opening bids and shipping costs on eBay for their test.
“Many firms divide the price a consumer pays for a good into two pieces—the price for the item itself and the price for shipping and handling. With fully rational customers, the exact division between the two prices is irrelevant—only the total price matters... Contrary to the theory, we find that charging a high shipping cost and starting the auction at a low opening price leads to higher numbers of bidders and higher revenues when the shipping charge is not excessive.”
That is interesting.
My thought for the reasoning behind this outcome is that most people have no idea what shipping should cost and that they recognize it as a necessary evil. After all, if you have ever used the FedEx website to estimate shipping a package, it feels a bit like throwing a roll at the craps table. Not to mention there are many shipping competitors with different rates and different names for various services. With all the headache that goes along with researching shipping, we're fine spending a few extra dollars or tens of dollars depending on the relative price of the goods being shipped.
What I think this shows is that people are somewhat inflexible when it comes to the higher prices of a known product, but much more flexible when it comes to higher rates for an unknown, but necessary or seemingly necessary good. This idea somewhat reflects the economic theory of necessity goods we spoke about in the first article in this series.
There are two exciting implications of this theory that relate to raising your prices and making more profit.
- You can raise your shipping fees relatively more than you can increase your prices
- You can separate components of your product to maximize add-on prices
Raising Shipping Fees
While we are indeed in the era of free shipping, this tactic is often lazily put in place by newbie shop owners without much thought. And it doesn't always make sense.
I almost never expect free shipping anymore. What's more, I often opt into premium shipping options like 2-day or next-day shipping. I have no idea why it's just how my brain works. Just like the money-back guarantee, free shipping isn't the selling point it once was because everybody is doing it.
While it can make sense for your online store to provide free shipping, it doesn’t make sense for all stores, nor is it right for all products.
As the study above states, raising shipping rates, but making your product price lower, increases revenue. As mentioned, I think this is likely due to shipping feeling a bit nebulous, but challenging to shop around for, and the product price feeling more important with a strict upper limit.
Separate Product Components
But there’s a more interesting implication of partitioned pricing, which isn’t as apparent.
Does your product include accessories? Can it be broken into multiple parts; a core product and some nice-to-haves?
Separating your product into components is another way to take advantage of partitioned product pricing. Just like in the shipping example, people often associate an upper limit to the price of the core product but are more flexible when it comes to accessories.
Once upon a time, all electronic goods shipped with a wall charger. However, this has become more and more rare in recent years.
Two recent purchases come to mind: my Kindle Paperwhite and my Freefly Movi iPhone gimbal. Both shipped with cables, but no wall charger, which is weird because the Freefly Movi isn't able to charge correctly via computer-based USB ports. But I've come to expect it.
And that means the real miss on Freefly’s part was not offering a branded wall charger for $39.99. I would likely have bought it.
Apple is a famous example of this. Sure, your iPhone 8 comes with a wall charger and cable, but if you lose it you need to buy both components separately at exorbitant prices; prices that Apple customers pay, willingly or not.
But let's get out of the electronics arena and into textiles. Here are just a few examples of items that could be sold separately as premium add-ons, and therefore generate more profit for your online store:
- Detachable hoods for coats
- Removable mitten-style finger covers for gloves
- Various styles and colors of shoelaces to jazz up your kicks
- Easy sew-on or iron-on patches or extra pockets
We can see that pricing partitioning is generally a common practice with shipping and handling fees these days, but I think the significant win here is to use the theory all over the place and take our prices and profits to another level.
Offer Payment Installments
The tactic is in the title for this one, but it's one of my favorite because we see it a lot less than we did in the early 2000s. However, there are ups and downs to offering payment installations.
Here are the upsides as I see them:
- Decrease in payment friction due to customer’s ability to spread purchase over time, resulting in more sales
- Ability to offer higher-priced goods to new target audiences
- Ability to generally raise prices since people will anchor the lower, monthly price
- Delinquency is an issue as customers receive goods, but never finish paying for them
- Can increase accounting and cashflow projection complexity
- More chances for declined cards because of multiple transactions
If you're selling info products, the downside of delinquency is mostly nonexistent. The cost to you for each additional product sold is virtually zero. Which means you could sell an expensive course or audio series in several installments, and if the customer stops paying, you still made a sale you likely wouldn't have made in the first place — pure profit.
But if you are selling physical goods, one tactic you could use is requiring a credit check for customers to qualify for installment payments. This tactic will only work for higher priced products or large orders as doing credit checks requires additional labor, cost, and technological implementations.
All that said, offering installments as an option generally allows you to sell higher-priced goods for more money and increase sales, all due to the anchored, lower monthly price.
Sort Prices From High to Low
Price sorting is a topic of some debate.
I tend to order prices from low to high, only because it feels natural to me. Various SaaS companies I've worked with or use also price low to high. However, there's a compelling argument for doing the opposite.
In a study by Kwanho Suk, Jiheon Lee, and Donald R. Lichtenstein in 2012 at the University of Colorado, the researchers studied the effect of price ordering on average sales. Here’s an excerpt from their abstract:
"Using reference dependence theory as a framework, [the authors] find that when differing brand options are presented in descending price order, consumers tend to choose higher-priced options; when they are presented in ascending price order, consumers tend to choose lower-priced options (the price order effect). In addition, [the authors] show that consumers' price-quality perceptions are a necessary condition for this effect."
One of the most compelling reasons for this behavior has to do with loss aversion. When customers scan prices that are in ascending order, they tend to feel like they’re losing out on price. As the price goes higher, they’re getting a worse deal. Which means they’ll be anchored by the lower price.
But when the order is switched, the opposite may hold. When a customer scans prices in descending order, the customer feels a loss on product quality or features. Which means they'll be anchored by the higher price.
This research has more to do with increasing sales, but we can use a combination of this tactic along with a general price increase for higher-cost items to generate more profit for our online stores.
As I mentioned at the outset, there are countless pricing theories out there. It's a nearly inexhaustible topic, but one of great importance. The more you study pricing theory, run A/B tests on pricing, and experiment with different ways to raise prices, the sooner you'll be able to generate more profit for the goods you're already producing.
So get out there and try out some of these tactics, and start making more profit by raising your prices.