Friday, December 28, 2012

Pricing hacks of online retailers

1. Free stuff

When retailers offer products and services for "free" there's usually an ulterior motive. For online shops, "free" provides the initial incentive for buyers to use their web site, and may be effective in retaining customer loyalty. One of the most common uses of "free" is free delivery.

UK-based The Book Depository is without doubt using the power of free. The title of their home page is "Free delivery worldwide on all books from The Book Depository". This title shows up in google when searching for "book depository", along with the site's description, which is "The Book Depository offers over 8 million books with free delivery worldwide". The site's byline is "The Book Depository. Free delivery worldwide on all our books". Also in a prominent position on the home page is: "Free worldwide delivery" which links to a page listing all of the countries where they offer free delivery.

2. Per customer limits and the perception of product scarcity

Per customer limits leads buyers to think that a product is scarce, and increases their incentive to buy now. It also entices people to buy more than they originally intended. The legitimate reason for doing this - to avoid products getting sold on the gray market - is hardly ever a real concern. Retailers will also impose a time limit during which the product is available, along with a ceiling on the number of products that can be sold, after which the deal will end.

Living Social Deal - Laser Nail Therapy Clinic - 70% Off Laser Nail Fungus Removal for Feet ($450)
This group buying deal shows a "Limit 4 per customer" in the fine print. Most group buying sites have per customer limits for all their deals. In additon to the per customer limit, there is an absolute limit on how many deals can be sold, as well as the deal only being available for a limited amount of time, in this case, 7 days.

3. The 9 factor - prices ending in 9, 99 or 95

Using prices that end in 9, 99, or 95 is called 'Charm Pricing' or 'Psychological Pricing'. We've been culturally conditioned to associate these prices with discounts. And because we read numbers from left to right, we mentally encode a price like $7.99 as $7, especially when we quickly glance at the price. That's called the "left-digit effect" - it's encoded in our minds before we have finished reading all of the digits.

Pricing of the Amazon Kindle family of products - $499, $199, $119.
As opposed to $500, $200, $120.

4. Easy math

Most sites, when putting a product on sale, will show you what price it was marked down from. It might be "was $20, now $15". You will rarely see something like, "was $20, now $14.22." The reason is that if the difference is easy to calculate, we tend to think it's a better deal. It's called "computation fluency". Another method employed by many sites is to display the amount of the total saving along with the percentage saved.

The Body Shop USA - 50% off Sitewide - After Christmas Sale. Everything is 50% off, making the amount you are saving obvious; you don't need to check any prices or fineprint. Anything you buy on their site will include a significant saving.

5. Sale price font size and color

A common practice in online sales is to display the sale price in a different font size and/or color to the original list price. Typically, the original list price will be shown in strike-though.

Amazon uses red text to denote a sale price, shown below the original list price, which is struck out and shown in light gray. However, products which are not on sale and are being sold at the original list price continue to use this red (sale price) font. One theory says that customers will become accustomed to seeing red text as a saving, and will be more inclined to buy, even when the product is actually not on sale.

6. Dynamic Pricing (also known as Time-Based Pricing)

The airline industry is often cited as a dynamic pricing success story. It employs the technique so well that most of the passengers on any given airplane have paid different ticket prices for the same flight. By responding to market fluctuations or large amounts of data gathered from customers - ranging from where they live to what they buy to how much they have spent on past purchases - dynamic pricing allows companies to adjust the prices of identical goods to correspond to a customer’s willingness to pay.

Example 1
During Thanksgiving week, The New York Times tracked the price of Dance Central 3, a popular Xbox game, as it dropped on Amazon from $49.96 to $24.99 to $15.
Example 2
Coca-Cola tested dynamic pricing in automated vending machines where prices would fluctuate based on the surrounding temperature. Their theory was a soft drink would be worth more when it is hotter outside, and correspondingly, demand for soft drinks would decrease if it were cold outside. It was an unpopular idea and luckily, Coca-Cola abandoned it.
Oren Etzioni, a computer science professor at the University of Washington, became incensed when he found out that the traveller sitting next to him on a flight got a much better price for his ticket than he did. Etzioni started collecting online price data from all US airlines, then he created his own formula that could predict when the airlines would raise or lower their prices. His company was bought by Microsoft. And today, when you search for flights on Microsoft's Bing Travel site, you'll see colour coded arrows (called the "price predictor") letting you know you if the price of that ticket is likely to head up or down.

7. Pay what you want

Pay what you want is a pricing system where buyers pay any desired amount for a given product or service, sometimes including paying nothing (i.e. free). Sometimes a minimum (floor) price may be set, or a suggested price may be indicated to the buyer. The buyer can also pay an amount higher than the standard price.

It has the benefit of reducing buyer's remorse, which is what happens when you decide afterwards that you've paid too much for a product. It also can result in a viral increase in popularity or visibility for a product when used in highly competitive markets.

It is often used for products which use digital delivery, such as software and music. There is usually no additional cost per download to the seller anyway, since the site's bandwidth would usually be paid for on a capped, monthly basis.

Example 1
Freeware software is often distributed under this model. For example, on the home page of is the message "Show your appreciation for Paint.NET and support future development by donating!". Typically, a PayPal donate button is used.
Example 2
In October 2007, Radiohead released their seventh album, In Rainbows, through the band's website as a digital download and requested fans just pay whatever amount they thought it was worth.
Example 3
Introduced during May 2010, the Humble Bundle was a set of six downloadable indie games which were distributed using a pay what you want system (with inclusion of a buyer-controllable charitable contribution).

8. Freemium

Freemium is a business model that works by offering a base product or service free of charge (typically digital offerings such as software, games or online software - software as a service). A premium is then charged for advanced features, functionality, or for related products and services.

Example 1
LinkedIn - Basic features of the social network are available for free. For the ability to see the profile of members outside your network, and to access advanced features, you'll need to pay.

Example 2
The New York Times paywall. A limited number of news articles can be read for free per month. To get full access to the site, you'll need to pay.
Example 3
Zynga publishes games for Facebook and the major smartphone/tablet app stores. Typically there are in-game actions (e.g. farming) which result in being rewarded with an in-game currency (e.g. loot/coins/points). The in-game currency can then be used to buy additional game features, or to progress further in the game. The in-game currency can be topped up, via a payment to Zynga in real dollars via an in-app-purchase.

9. No dollar signs

A 2009 Cornell University study found that diners in upscale restaurants spent significantly less when menus contained the word "dollars" or the symbol "$". Restaurants use the technique of omitting dollar signs to get you to focus on the product being sold (the food) rather than the price. They may also mention or profile the chef who is cooking the food. Apart from the websites of restaurants, its difficult to see this being used much in general online retailing.

Gramercy Tavern, New York City
According to Urbanspoon this is the most popular fine dining restaurant in New York City.There's no dollar signs at all on their website, and their a la carte lunch menu (pdf) doesn't feature any dollar signs either, only numbers.

10. "X for $X"

Buyers will often buy more of a product than they originally intended, if it means they will secure a bargain.

Bath and Body Works - 5 for $5 sale
In this case you need to buy 5 products to realise a saving of 33% off the original list price.

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