As a seller, you have probably struggled with setting prices for your products. Lowering prices is easy, but raising prices seems scary because it has the potential to drive customers away.
For this training, we will show you how to use your ecommerce data, good testing methodology and to arrive at the perfect price for every item in your online store.
Calculating Your Demand Curve
As any student of Economic knows, there is an implicit trade-off between price and quantity. Charge more for a product and you’ll make more money on each unit sold, but you’ll also reduce the number of people willing to buy it. You might find 200 people willing to buy a pair of shoes for N15000 but only 50 of those people would still agree to buy that same pair of shoes for N16000.
This is called a demand curve. The graph below is the most basic demand curve possible—as prices increase, fewer willing buyers can be found, and the decay happens at a consistent linear rate.
Here’s what’s so hard about setting effective prices: you don’t know your demand curve. Most likely you’ve only ever charged one price for a particular product, and so you can’t answer the question “How many people will buy if I increase the price?” Your demand curve contains the answer to that question.
Setting prices process is straightforward:
- Get the right tools in place (ensuring you have enough product quantities for the price testing)
- Set your baseline price (sell at a very competitive price) - The first price you set should be based on some basic information. How much do you really need to charge to be profitable? How much are your competitors on the market place selling these same products? Don’t get hung up on getting this right. Set something reasonable based on information you have at hand, and get ready to do some testing!
- Make small pricing changes (Increase price slightly) - iii.) The strategic word here is small. While there’s no exact right answer to how much you should experiment with on every iteration, a good place to start with is like 1-2.5%. So if you’re selling a pair of shoes for N15000, try charging N15300. The smaller the change, the better your data will be but the more experiments you’ll have to run. You’ll have to make the decision about what’s right for you at the end of the day putting in mind that the marketplace is very competitive hence your prices have to be customer friendly..
- Collect Data and Measure Results (Watch your sales conversion) - So you’ve made a small pricing change. Now it’s time to sit back and let the results come in. Items that sell in high quantity, known as fast-moving or high velocity items, usually work best for this process. That’s because the more observations you have for this sales experiment, the more confident you can be in your results.The holiday season and other occasions cause surges in shopper traffic. You have to ensure that your store can withstand the surge and so also your fulfillment to our drop off locations. You have to ensure you don’t deliver your buyer’s Christmas order after Christmas.
- Reiterate (If sales conversion turns high, increase price slightly again and measure results) - Now that you’ve conducted your sales experiment and the results are in, it’s time to decide what to do next. We recommend continuing to increase and decrease prices incrementally for some time, even if you start seeing a drop-off in quantity sold.
- Compile (Compare your sales performance which would let you know whether to increase the price or revert to the old price your buyers are willing to buy) - After you’ve collected all your sales experimental data, it’s time to plot your demand curve. Dump all of the experiments into a big spreadsheet and create a basic line chart. That way, you’d able to have an idea what price to set that wouldn’t be too overwhelming for your buyers while also enabling you record some profits.
You’re conducting sales data-gathering experiments: the goal is to gather data on quantity sold at a range of prices, not just to increase your prices by 2% and call it a day. We’d recommend testing at least to a 10% increase and a 10% decrease in your baseline price especially if the value of the products is viable and guaranteed. It is critical that you stand firmly behind products you are looking at increasing prices and this can be done by offering some days/months warranty to your buyers. That way, your buyers are convinced you are selling valuable qualitative products and you did not just increase your price to make quick profit.