Price Relativity: The Secret to Ecommerce Success You Can’t Afford to Ignore
Brian Russell, Managing Director | July 11 2023
One crucial factor that often goes overlooked when establishing an Ecommerce brand is price relativity. Price relativity is a simple concept to understand. Yet, it can be a difficult truth to confront for entrepreneurs and founders who have invested significant amounts of time, money, and energy into developing and launching their products.
In a technology-driven world, shoppers can access more information than ever. With a few clicks of a button, they can compare product features and prices within minutes to find the product that fits their needs. Price is often the most influential factor in a consumer’s buying decision , making it extremely important for brands to do their homework and explore benchmarks within their industry.
Price relativity is a critical component to ensuring your product is priced right in the marketplace in comparison to the price of your competitors.
It is crucial for Ecommerce brands to understand and apply price relativity strategies. By studying the price strategies of competitors and alternatives, brands can ensure that their products are priced competitively and offer enough perceived value to attract customers and maximize profitability. It’s the secret to winning and achieving significant growth.
Here’s why you should pay attention to price relativity and how you can apply actionable pricing strategies to ensure continued profitability over time.
Competitive Pricing: Why Price Relativity Matters for Ecommerce Brands
So, why is price relativity so important? There are several reasons:
Gain a competitive edge: Pricing is often the number one factor in determining whether or not shoppers will buy your product. If your price point is too high compared to competitors or alternative solutions, customers are less likely to purchase. The price is too low, and customers can perceive your product as low quality. Striking a balance is key.
Maximize profitability: Ecommerce brands can apply price relativity to gain significant market share and maximize profitability. By understanding price relativity and studying competitors, you can find a sweet spot for setting a competitive price that generates maximum profit.
Build a strong brand reputation: Properly pricing your products and optimizing your unique selling proposition can help you stand out in a crowded marketplace and signal quality and value to customers, helping to build a strong brand reputation and increase customer loyalty.
Adapt to consumer demand: Ecommerce brands can apply price relativity strategies to adapt to the ever-changing market and consumer behaviors. Regularly revisiting your pricing strategies can help you adjust to customer preferences and demand, allowing you to stay competitive and profitable over time.
Four Strategies for Applying Price Relativity
Now that you understand the importance of price relativity, what strategies can you apply to maximize profitability, attract and retain customers, and gain market share? Here are four ways to take advantage of price relativity efficiently and effectively.
1. Focus on customer’s perceived value
Competitive pricing is directly related to your customers’ perceived value. In other words, it’s striking a balance between price and value. And finding that balance can be tricky.
If you set your price too high, shoppers will abandon their carts for a product offered for less. Aim too low, and another brand might come out on top as the winner.
When a product is priced higher than its competitors, it can signal a higher perceived value, indicating that the product is of superior quality or offers unique features. Additionally, a higher price can contribute to an Ecommerce brand’s reputation. For example, customers may associate high prices with exclusivity, quality, and prestige (think: high-end, luxury goods), leading to increased loyalty and trust in the brand.
On the other hand, if the product is priced significantly higher than a competitor’s, customers may feel like they are not getting their money’s worth and switch to an alternative product with a lower price.
Ecommerce brands must focus on creating a higher perceived value for their products or services to set prices that align with customer perceptions of value.
Think about it this way:
If you sell a luxury handbag made from high-quality leather, you can charge more than an alternative brand selling faux leather handbags. Customers are willing to pay more for a product they perceive as higher quality.
We also see this in the bottled water industry. Some bottled water companies have differentiated themselves by offering premium bottled water with features like enhanced minerals, alkaline pH levels, or a unique source. As a result, customers are able to justify the higher price point, as they perceive the product as offering better quality or specific health benefits.
Your unique selling point (USP) will show what value you can bring to your customer, and you can price your product accordingly. Focus on product quality, customer experience, and brand reputation to give shoppers a higher perceived value. For example, you can offer a lifetime product warranty, free shipping, a money-back guarantee, premium packaging, or offering exclusive availability. These factors can signal confidence in the quality of your product, justify a higher price point relative to your competitors, and motivate customers to purchase.
2. Conduct a thorough analysis of competitors and alternatives
To set prices that are competitive and aligned with customers' expectations, conducting a thorough competitor analysis is a must.
To set prices that are competitive and aligned with customer expectations, it’s important to assess the competitive landscape and ensure your product’s price is less than or equal to a customer’s perceived value. A thorough competitive analysis will help you understand how your product stacks up against the competition and ensure you price your product relative to theirs.
Striking a balance is key to maximizing customer loyalty and revenue. By pricing your products within the same ballpark as similar products, you will attract and retain customers and establish your brand’s credibility of delivering high-quality products and services.
Here are a few considerations for conducting your competitor analysis:
Identify your direct and indirect competitors who offer similar products and/or services
Analyze their pricing strategies and how they bundle pricing or communicate discounts
Look at the perceived value of their products. What features and benefits are they marketing and how are they communicating it to their customers?
Check their pricing history to see how your competitors have adjusted prices over time
These steps will provide you with valuable insights into your competitor’s pricing strategies so you can identify areas of opportunity and create a pricing strategy that works.
3. Test different price points
Although many Ecommerce brands understand the importance of building a solid brand and marketing plan, pricing is often overlooked and neglected after the initial launch. Unfortunately, this can be a costly mistake, as pricing plays a crucial role in product market fit and customer acquisition.
As mentioned, striking a balance between price and value can be tricky – and for this reason, pricing should not be a “set it and forget it” detail. Instead, brands should monitor, revisit, and test price points regularly to maintain competitiveness and profitability.
A great way to test pricing is through A/B testing on your website to see what resonates best with your customers. Remember, customer behaviors and market demand are changing rapidly, so it's to have an informed and data-driven pricing strategy. Regularly revisiting and testing pricing strategies can help you adjust pricing to ensure continued profitability over time.
4. Promotions and discounts
Consumers are trained to wait for a great deal in today’s market, making promotions and discounts an effective way to adjust pricing and enhance the perceived value of your products.
However, utilizing promotions and discounts requires careful consideration and planning to avoid devaluing your brand or product.
For example, a flash sale with a 20% discount for a week may motivate customers and drive sales in the short term. However, offering a 50% discount on a regular basis can create the perception that your product could be lower quality or not worth its original price. Plus, regularly offering a standing promotion will desensitize your customers to the coupon, causing you to lose consumer trust.
One approach to effectively using discounts and promo codes is to segment your customer base and offer targeted promotions to each segment based on their actions or where they are in their journey. For example, provide a limited-time offer to a first-time customer to encourage them to try your product. You can also create a loyalty or referral program to promote repeat purchases and encourage word-of-mouth marketing.
Promotions and discounts can be effective tools for adjusting prices and remaining competitive in the Ecommerce space but remember to use them strategically and thoughtfully throughout the customer journey.
Ecommerce Brands Doing It Well
Amazon is a great example of an Ecommerce conglomerate constantly adjusting its prices. Amazon’s algorithm filters through large amounts of data, including competitor pricing, consumer habits, and market trends, to price their products competitively and sell more products at the highest profit possible. The brand is constantly reevaluating and testing pricing across thousands of products to remain competitive and encourage customers to make a purchase. It’s pretty remarkable, and they remain the example of Ecommerce brands doing price relativity right.
Apple is a company that is well-known for its premium pricing strategy and ability to generate a higher perceived value. Customers are willing to pay a premium for the brand’s product due to the exclusivity, quality, and perceived value associated with the Apple brand.
Over the years, Apple has been a leader in technology, creating products that are not only aesthetically pleasing but highly functional and intuitive. As a result, Apple can justify a higher price point than its competitors. The brand’s focus on perceived value has created a dedicated and loyal fan base and helped them to gain significant market share in their industry.
Warby Parker, an industry disruptor, completely changed the game for the eyewear industry with its innovative and customer-centric approach. By offering affordable, high-quality glasses shipped directly to your door, the direct-to-consumer brand built a loyal customer base. Plus, by strategically positioning the glasses at a competitive price point, Warby Parker maximized their profitability and became a leader in the eyewear industry.
We’ve applied many price relativity strategies at Wellow, Function Growth’s very owned and operated compression sock brand. While our compression socks are priced competitively, we’ve highlighted our unique product features to help us stand out in the marketplace and increase perceived value.
For example, Wellow offers free shipping on orders over $50 and free returns and exchanges if customers are unhappy with their purchases. Plus, we created a sock that stands out from the crowd. While most compression socks come in a few standard sizes like 15-20 mmHg and 20-30mmHg, we found a sweet spot of 18-25 mmHg, making it the only sock at this compression level that gently wraps around feet, ankles, and legs to stimulate blood flow and still be comfortable to wear all day.
Tapping into Price Relativity and Consumer Behavior to Drive Growth
Understanding and applying price relativity is crucial for Ecommerce brands looking to grow. By studying competitors' price strategies, brands can ensure that their products are priced competitively and offer enough perceived value to attract customers and achieve maximum profitability.
Remember, pricing is not a one-time decision and should be regularly revisited and tested to maximize profitability, attract and retain customers, and increase market share.
Are you looking to grow your Ecommerce brand and learn more about pricing strategies relevant to your industry? At Function Growth, we scale direct-to-consumer brands quickly by applying proven behavioral science strategies. Get in touch with us today to see how applying price relativity strategies effectively can increase your bottom line and take your brand to the next level.