Behavior based pricing is the future: it means leveraging what you know, and only you know, to compete against the big guys. It's simpler than you might think, and can impact your top and bottom line within weeks. But, most people don't know what it is or where to start.
This excerpt from our book explains how to use behavior based pricing to drive growth and margin.
Step 1: Understanding Existing Behaviors
For most retailers and brands selling direct, studying the performance of existing price points, promotions, assortment and other variables can lead to insights as to where opportunities are to improve–with concrete targets. For example, for one client we saw that products with 6 versions converted 300% better than products with only 2 versions–with- out changing a thing.
Step 2:Test Different Base Prices
The best way to discover value is to test it, because people’s actions are the most valuable and most accurate measure of what motivates purchase. Amazon tests hero products, that is ones driving traf c to a category, multiple times per day. The right amount of testing with proper measure- ment (that is, with difference-in-difference analysis) can lead to de nitive, statistically signi cant outcomes. Each new insight leads to more tests, and increased gains–in knowledge and prof- itability.
Step 3: Experiment With Promotions
Some businesses cannot change their base prices, or promotions drive most of their business. Here, use the same methods of study of current patterns, experimentation with difference-in-difference analysis, to discover opportunities to improve.
You don't, in fact, need to know why you're doing something different–though it helps. But they key is trying something new, get out of your comfort zone, and experiment in small enough increments that your team will be ok with trying.
Most people we talk to are doing across-the-board promotions, but find they have to offer bigger and bigger discounts every time to drive the same sales. Macy's suffers from this, as the New York Times recently revealed. Some concrete things to try:
- Targeted promotions. Instead of 20% off everything, target bigger discounts to slow sellers, and one or two popular items, to get people in. Then watch if they build larger carts, and the discount momentum carries through to higher conversion rates.
- Targeted consumer promotions. Your most loyal customers may not need 20% off every two weeks to come back. Consider segmenting your list, and focusing your bigger offers on marginal customers who are unlikely to come back without a reason.
- Different promotional levels. Just because you've always done 20% off doesn't mean that $40 off or 25% off would be worse options. You will never know until you try. And–even if you're using machine learning to predict what would happen–until you try, you're just not going to know.
- Different offers. One offer a Perfect Price customer found to be incredibly powerful was giving its customers a credit, with an expiration. That $20 goes away if you don't use it by New Years Day. They saw a 400% spike on New Years Eve, not traditionally a good day for retail, because the credit was about to expire.
Step 4: Find Opportunities to Create Desired Behaviors
Once you understand the value your customers ascribe to your products, begin to explore ways to create additional value using anchoring and extremeness aversion.
- Pick several, similar products, and add a higher end version (or lower, or both) and test whether the additional product impacts con- version and implicitly, the value customers ascribe.
- Remove products from your mix that may confuse customers; for example on a high converting page with a very, very cheap product–what would happen if you removed that cheap product?
- Trending products with high demand might convert worse than products you've had longer because there are more variations. As soon as something becomes popular, give the customer what she wants–so she does that behavior you like the most, and buys!
Step 5: Know Your Competition
While depending on competitor pricing to set your own pricing can be risky, competitors offer many indicators of the value customers ascribe to your products–and may also create external anchors and values. Track what competitors are doing, every day, so that you can learn from them, outsmart them, and eventually add even account for this unpredictable vari- able in your own experiments.
- One growth company reported losing $10 million in revenue–20%–and shrinking instead of growing because they did not know what competitors were doing
- Emailing an offer on a product where your competitors have a better offer, or even a lower base price, can just send price-sensitive customers to your competitor, via Google.
- Pricing power is important–but so is trust, and if you are consistently overpriced, or overpriced on heavily shopped items, customers will stop visiting your ecommerce store at all. This is less of an issue for companies who own their own brands.
Step 6: Beware of Surveys
Surveys give you answers — but not necessarily the right answers. People tell you what they think you want to hear, or respond according to how they see themselves, which may or may not match their buying behavior. If you ask someone, “Would you pay $100,000 for a Porsche?” many might say “yes” because they don’t have to reach for their checkbook, and want you to think they are rich and successful and have good taste in automobiles. Or they might say “no” because they don’t want to appear affluent. But what they actually do is a different story — and that’s all that matters.
Surveys can be very useful for totally new prodcuts. There is no way to anticipate with accuracy how the market will receive an entirely new product, so for new to market products surveys may be all you've got.
Behavior based pricing is the future, and core to it is trying new things–and measuring their success. Each new thing, whether it's a new base price, a new promotion or a new mix of assortment, should be aimed at creating the behaviors you want–within the context of competitors selling against you, if that's a factor in your business. If you want a deeper understanding, with more specifics on strategies to try and more examples, there's a short and easy to read book on behavioral pricing for that.
Congratulations! You're now ready to go throw rocks at Amazon.