Blueprints / Diary of a Startup / Getting Started

Diary of a Start Up Part 6: Pricing Strategy – Make or Break

In our next chapter of Diary of a Start Up, John Debrincat talks pricing strategies and how to find one that will suit your e-commerce business.

Objective: Choose a pricing model.

The cheapest price online is not always the most successful price, and buyers are often looking at more than just price when searching for products or services. There are many factors to consider but what you want to achieve is a Unique Selling Proposition (USP). Many factors influence the buyer including:

  • Availability
  • Location of seller
  • Access to service and support
  • Warranty
  • Terms & Condition; Returns and Refunds policy
  • Delivery time
  • Total price (unit price, tax, shipping and other costs)

Buyers will research based on the total price, and there is a high percentage of shopping cart abandonment as a result of customers researching product price and discovering the total or shipping price too high. Approximate rates of abandonment, measured in a recent customer experience study, showed that for all dropped baskets high shipping cost was the number one reason for abandonment:

  • Cost of shipping – over 70%
  • Comparing total price – over 60%
  • Total cost of items is too high – over 40%

So when developing a pricing strategy, ensure that the total cost is very visible to the prospective buyer and that shipping cost is shown clearly.

If you are an Australian business selling to consumers in Australia, then you must show the price including GST –  this is a legal requirement for all B2C situations and any shipping cost must also include GST.

Prerequisites:

Work out what the average sale price for each order will be, and then model it against what the cost of freight for an average order (based on either historical data or projections) will be. Once that information is in hand, complete a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis of competitors’ pricing models, and work out your best strategy.

Tasks:

Fully document and understand your average sale by revenue, average freight cost per order and competitors’ delivery pricing models.  Understand the different pricing models of e-commerce fulfillment to choose the appropriate one for your business:

  • Free Shipping
  • Fixed Price / Flat Rate
  • Variable Price
  • Confirm at Dispatch
  • Single Carrier Dynamic
  • Multiple Carrier Dynamic

Pros and Cons of Each Pricing Strategy

1. Free Shipping

  • Strategy requirements: multiple carrier options and/or multiple distribution locations, tendered rates or aggregator integration.
  • Use if selling: unique products, lightweight & cheap or heavy & high end – anything high margin.
  • Avoid if selling: generic, commonly compared low margin product.
  • Pros: very powerful sales driver.
  • Cons: without shipment data and prior knowledge of costs, or aggregation controls – very, very risky to profitability.
  • Conclusions: success is technology and delivery cost dependant.

2. Fixed Price / Flat Rate / Capped Rate

  • Strategy requirements: moderate volumes and knowledge of average delivery costs.
  • Use if selling: items that can be consolidated – i.e. 90% of orders fit in the same satchel or carton size when dispatched.
  • Avoid if selling: products where all your competitors offer free shipping, unless your margins are lower.
  • Pros: if inline with consumer price expectations, a good strategy.
  • Cons: competitor dependant.
  • Conclusions: easy to Implement, very stable if used in conjunction with aggregator controls.

3. Confirm at Dispatch

  • Strategy Requirements: none.
  • Use if selling: one of a kind unique, extreme high value products or high involvement purchases.
  • Avoid if selling: anything else.
  • Pros: none.
  • Cons: high Shopping cart abandonment rate.
  • Conclusions: not recommended unless no other option available.

4. Variable Price

  • Strategy requirements: an ecommerce solution that is capable of calculating price of products in the shopping basket based on weight (or dimensions) and location of delivery.
  • Use if selling: items with low degrees of variability.
  • Avoid if selling: products where all your competitors offer free shipping, unless your margins are lower.
  • Pros: good for all types of sellers if prices are inline with consumer price expectations.
  • Cons: inaccurate pricing, no logic controls, responsibility of maintaining data.
  • Conclusions: better to look at a dynamic pricing model.

5. Single Carrier Dynamic

  • Strategy requirements: directly with a limited number of carriers (only DHL, TNT etc.) or aggregator integration.
  • Use if selling: items with large degrees of variability.
  • Avoid if selling: products where all your competitors offer free shipping, unless your margins are lower.
  • Pros: good for all types of sellers if prices are inline with consumer price expectations.
  • Cons: sometimes better to offer fulfillment choices.
  • Conclusions: easy to Implement, can be set‐up with logic controls to use in conjunction with other strategies, condition dependant (i.e. free shipping or capped pricing).

6. Multi Carrier Dynamic

  • Strategy requirements: aggregator integration.
  • Use if selling: items with large degrees of variability.
  • Avoid if selling: N/A.
  • Pros: multiple options give perception of fair market‐centric pricing.  People often don’t opt for the cheapest option (might choose a quicker or more reliably option).
  • Cons: multiple options can confuse people.
  • Conclusions: easy to implement, can be set‐up with logic controls to use in conjunction with other strategies, condition dependant (i.e. free shipping or capped pricing).

Traps:

Ensure when data model freight pricing, all costs are considered – fuel levies, GST, redelivery fees and other potential surcharges.

Also be sure to cost out any system or stationary charges (boxes, labels etc).

Understand the variability spread – the % in which orders may vary from what the anticipated is (whether it is calculated dynamically or based on a modeled price).  It’s often a good idea to add a mark up or handling fee to ensure you’re always covered.

Summary:

Shipping is an important aspect of both buying and selling online. If the shipping price is not set and collected successfully then your online business may be unprofitable.

Where possible offer your customers choice in shipping options, and therefore costs. Use the services that are available with Australia Post, as an example, to calculate the shipping cost accurately. There is now many choices in shipping and logistic providers and services of an aggregator like Temando can improve buyer options and reduce your costs.

Free shipping always seems attractive but remember that customers will compare total price and are looking for your Unique Selling Proposition that makes you more attractive than your competitor.

If you are starting an e-commerce business for the very first time, be sure to check out entire Diary of a Start Up Series:

John Debrincat

Article by

John Debrincat is the CEO of eCorner, an Australian specialist e-commerce solutions provider he founded in 2004. He has almost 40 years of experience in business and the Information Technology Industry in the Asia Pacific. With a strong partner network including Netregistry and Commonwealth Bank; and over 1,000 customers including Getprice.com.au, Dick Smith Electronics, brandsExclusive, Aegon Direct Marketing Services and Weight Watchers eCorner has developed to be a key e-commerce provider.

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