As costs increase, should you increase your prices?
Basically, e-commerce has been flying high during the pandemic. Online sales have skyrocketed, with homebound and restless consumers shopping online more than ever.
Bill Ready, head of commerce at Google, observed that six months of the pandemic fueled a decade of growth in e-commerce.
But sellers may also have noticed that the increase in sales does not generate proportional profits, because for many stores the costs have skyrocketed.
Major shipping services have announced major surcharges to help manage volume ahead of an unprecedented holiday crush in 2020. Many retailers have also seen rising costs for the physical goods they need to buy. manage their businesses.
Shikha Jain, pricing expert and partner of the consulting firm Simon-Kucher, attributes much of the rising costs to the surge in online shopping and other conditions associated with the pandemic. But some of the price pressures go back further, she says, citing the Trump administration’s tariff wars with China, among other catalysts. More recently, the disruption of transportation activity following the blocking of the massive cargo ship Ever Given in the Suez Canal has highlighted vulnerabilities in the global supply chain, adding another price stressor, she declared.
So if retailers face continued cost pressures, how should they react in their pricing strategies?
At a high level, Jain advocates for what she calls value-based pricing or consumer-centric pricing. This means that sellers recognize what creates value for their customers, understand how that value translates into a dollar amount, and set prices accordingly.
“It’s not so much about focusing on your costs, but more on what the consumer earns,” she said.
She strongly disagrees with the idea of simply passing the increased costs on to the consumer. Without diminishing the impact of increases in shipping rates or rising cost of goods, these cannot be the primary the drivers of an online seller’s pricing strategy.
“All of these things tend to impact costs, and I think what happens is the companies that really tie their prices to supply or demand or pure cost, they’re the ones who will end up. by losing in the long run ”. Jain said. “Their prices will essentially be linked to their margin expectations.”
Salespeople can’t look at their product mix and expect more or less consistent margins, Jain argues. Instead, sellers need to understand which products add value to their customers, which items are differentiated enough to command higher prices than less distinct products and more commodities in a seller’s portfolio.
“Understand what you’re willing to pay for these value factors when pricing your assortment,” Jain said. “You are going to end up having a mixture of margins.”
With this “differentiated approach to pricing,” sellers can break free from a static cost base to set prices to maximize profits and keep inventory moving. When sellers listen well to their customers and can set prices based on what they know they’ll be willing to pay, they may find that an item that they’ve priced at 40% off margin could in fact command double, and that their old, static pricing strategy had “left money on the table,” according to Jain.
“You have to start managing your margin mix over time, rather than just figuring out what my overall cost is across the board,” she said. “I think this is where, if your pricing is anchored to your costs, it’s not a winning strategy.”
While this type of value-based pricing can help sellers ease the pressure of rising product costs, they have even more flexibility when they need to recoup increased shipping costs. Jain sees shipping as an area overlooked by too many salespeople who don’t think creatively enough about the different “levers” they can pull on shipping costs and delivery windows.
“You might also be wondering how pricing can impact shipping, because there is also a lot of creativity that can be done there,” she said. “I think expedition is one of those things that’s kind of an afterthought, and it could be a lot more intentional.”
Simon-Kucher asked buyers about their views on shipping costs last year, identifying which strategies sellers use to cover or recover their own expenses are the most acceptable to consumers.
The survey asked shoppers, “Retailers may need to factor an increase in shipping costs for this holiday season into something you buy. Please select and rank the five most preferred methods by retailers to include this cost. “
Some of the simpler strategies have been the worst: Consumers were the most reluctant to allow sellers to simply fold increases in shipping costs into higher retail prices for goods. The increase in shipping costs without qualification or explanation did not sound much better.
Whether it is for shipping or just trying to account for the increase in the cost of goods, sellers will not woo their customers by explaining price increases with a formula that runs: “Our costs are increasing by x , so our prices go up by y, ”Jain said. “This is another pitfall that salespeople tend to make,” she says.
With shipping, buyers surveyed by Jain’s business were much more receptive to options on several levels, including being able to pay less for shipping if they’re willing to wait longer.
While curbside pickup or shipping to a store is an option, many consumers surveyed preferred this option. Buyers were also receptive to increased minimum purchases to qualify for free shipping, and many said they were comfortable with sellers setting deadlines earlier to qualify for free shipping. .
“I think what we’ve found is that shipping tends to be an afterthought when it comes to how sellers can start to differentiate themselves,” Jain said. “There are different ways to play with this.”
Whether sellers are grappling with an increase in products or shipping costs, they need to think about how different price increases will play out with their customers. With shipping charges generally easier for consumers to understand (especially after the high-profile FedEx, UPS, and USPS supplement announcements last holiday season), sellers might find it easy enough to explain that the increases. of tariffs are only a reflection of the change policies of the carriers.
And some product increases might not warrant an explanatory note. But some might, Jain warns, and when sellers decide they need to notify their customers of a price increase, it’s critical that they include in that post a mention of how the value to the buyer – not only the price – increases.
“You want to be very careful about how you communicate,” she says. “Sometimes how you communicate these price increases is just as important as the prices you set.”