How to increase margin without losing sales (1/3)
Research suggests that only 60% of online purchasing decisions are based on price.
How do you know if setting higher prices will lead to higher margins or lost sales volume? Many companies stick with simplistic models that mark up products by a specific percentage above their costs, but is this optimal? Are there cases where price optimization and experimentation make sense?
Make sure you understand demand and price elasticity
Consider surge pricing with Uber, for example. If there is high demand, the price of a ride could double or triple. The justification for this is that two things happen:
- Firstly, during a popular event or special night (for example, New Year's Eve), people are often willing to pay more to ensure they can get home.
- Secondly, increasing the rate encourages more potential drivers to work until supply meets demand.
In general, this works reasonably well, but in certain cases, the public can become disillusioned. People generally understand that they should pay a little more on a snowy day in winter, but price increases can be met with severe backlash if they are triggered during a natural disaster or crisis.
A better way to understand price elasticity and customers’ willingness to pay more for products is through measured experimentation. Optimus Price uses artificial intelligence to help you optimize the prices of your products, lowering prices in some cases to increase volume, and raising them when customers see more value.
Sunk costs can be your friend
Many people are taught and reminded of the sunk cost fallacy. Past investments should not affect future decisions. It is common for someone to buy a ticket to a movie, only to find out that they hate the movie. Halfway through, instead of leaving, they stay because they don't want to lose the money they spent. But more importantly, sunk costs can make products substantially more valuable.
Imagine that your car's tail light breaks. If you already own the car, getting rid of it and buying a new one is significantly more expensive than replacing the light, even if the price of the light is much higher than usual. Parts availability and convenience are often the most important factor.
Have a look and see for yourself!
This is part 1 of 3 on cognitive bias and pricing 101. Be sure to check back in a few days for more!
