by Nina Scharwenka
Price is the most important profit lever. If a price is set smartly, it has the potential to achieve much higher profits than other factors such as variable costs or purchased volumes. Taking this into consideration, it’s surprising that online retailers often neglect to utilise prices effectively – lower margins frequently are a reflection of this. Instead, online retailers focus on optimising their homepage, automatising cross and upselling, streamlining newsletters, and many other typical activities important to online retail.
Interestingly enough, it’s the premium price segment of online fashion retail that is making the biggest mistakes in pricing. Is it because retailers in this segment see prices as less important than those in low-price segments, where low prices are the most important purchase criteria? Maybe. In reality, though, prices play a critical role in the premium segment.
Premium online fashion retailers are notorious for making the following three mistakes in pricing:
Where is the consumer orientation?
Consumers are generally speaking prepared to pay more for higher-value products. The emotional value of a brand or product-brand combination has a particularly strong impact on the willingness to pay in the luxury goods industry. At the same time, this value is also quite constant internationally. That means that a certain price premium for a product-brand combination has equal chances of being accepted across all countries and cultures. This level of internationality is actually quite common in online retail for luxury fashion. It’s not unusual for a website to have 50+ country/language versions – each with its own currency. It’s interesting to note that each currency price is often converted using a simple currency factor on the main page. This often leads to prices that are not only sub-optimal for earnings, but also are totally inappropriate for the price segment. For example, prices above £1,000 may end up being listed as £1,000.34. That’s why it’s crucial to heed the following two rules:
• Concentrate on setting the optimal target price; don’t simply make a mechanical conversion
• Tap the willingness to pay; don’t use a cost-plus approach to set prices
Where are your price points?
Price points are sub-optimal when the prices that are chosen do not fully exploit the profit potential because important price thresholds either are just barely or not at all exceeded. Case in point: it would be folly to offer a product for £1,010, as the critical price-psychological threshold of £1,000 is crossed. As a consequence it doesn’t actually matter for the buyer whether he could afford the extra £10 or not. Consumers in the high-price segment want to see ‘fair’ prices as much as any other consumer.
On the other hand, it’s important to harness the total profit potential up to the next threshold. In other words, retailers should more often be asking for £990 than for £970. The following rules can help luxury goods retailers to set their price points profitably:
• Identify the important price thresholds
• Make it your goal to harness the total price potential up to the next threshold
• Prices slightly above a threshold lead to significant revenue losses
Where’s the price consistency?
The prices of product lines need to be set up in a logical way. To put it another way: Products with additional benefits that are relevant to the price should be more expensive than products with attributes that are less relevant to the price. Luxury fashion retailers often neglect to clearly communicate product attributes that affect the price. They also fail to differentiate these price-relevant attributes from similar products. For instance, if you see two seemingly identical variants of a product (e.g. color variants) for different prices, you may not understand that the price difference is based on the color. That’s why the following rules are so critical:
• Product attributes have to be shown to customers in a clear and distinguishable manner (e.g. trend colors, material)
• Check if your customers really are willing to pay more for these attributes
In the premium segment of online fashion retail, price is a critical factor that should be given more attention. It has an immense impact on contribution margins and, consequently, on the achievable profits. If premium online retailers pay attention to the rules presented here, they will be able to turn high fashion into higher profits.
Nina Scharwenka is director at global strategy consultancy Simon-Kucher & Partners