How to get your online pricing strategy right in 2019
More than 70 per cent of e-commerce retailers are leaving money on the table – and it all comes down to a single digit in their online pricing strategy.
‘Left-digit bias’, or the economic behavior where consumers use the leftmost-digit of a price tag in guiding their decision making, is an age-old observation in the brick-and-mortar world. (For example, $5 is perceived as significantly more expensive than $4.99, while $4.99 is perceived as just one cent more than $4.98.)
While this concept isn’t new – research was conducted as early as 1936 – with consumer spending increasingly moving online, the more pressing question now is whether the same principle can be applied to online businesses.
It turns out the answer is “yes.” In looking at more than six years of anonymised data from 100,000+ online businesses operating on Stripe, we discovered that the left-digit bias holds the same sway over consumers online, as it does offline. And this is especially acute across subscription businesses models, such as media streaming services and even software-as-a-service.
Today, more than 70 per cent of online businesses worldwide are not taking advantage of this pricing model, potentially costing their businesses millions of dollars. Meanwhile, online merchants that have made the switch to an optimal pricing model stand to gain a potential revenue uptick of several percentage points or more.
Here are some key takeaways for online businesses looking to tune up their pricing strategies in 2019 and take advantage of left-digit bias:
0 is the most popular pricing strategy:
Despite the popularity of prices ending in 9 offline, the most popular pricing strategy for online merchants is actually 0. The only exception here were items priced in euros.
Pricing ending in 9 are only second-most popular, with 27 per cent of subscription prices ending in 9.
Prices ending in 5 are also popular, perhaps because the number is an optically pleasing midpoint.
While these are the patterns for pricing among merchants, it does not mean that they are optimal for consumers, as we’ll see below.
It’s time to bring back 9:
Cross referencing merchant pricing with merchants that received the most website traffic and those that are VC-funded revealed that more sophisticated businesses are more likely to set prices ending in 9 compared to other online businesses.
While correlation doesn’t equal causation, it is reasonable to assume that these more ‘popular’ businesses are likely larger, more well-funded, or have made it a priority for them to analyse a different online pricing strategy.
This could be an opportunity for smaller firms that do not have the same resources to analyse pricing strategies to take advantage of the left-digit bias identified by their larger or better funded counterparts.
Left-digit bias applies to luxury items too:
There is a widely-held opinion that only sale items should end in 9. However, this misconception may actually be causing merchants to miss out on significant gains.
According to the study, left-digit pricing was found to be influential with both luxury ($700, $800, $900 and greater in cost) and non-luxury items. In fact, new customers cluster at these higher-priced cutoff points, buying products whose prices end in 9.
Implementing your pricing strategy:
For online businesses looking to test the 9-digit pricing in the new year, there are a few considerations to keep in mind:
- Larger online merchants with the benefit of higher volumes should consider testing 9-digit pricing on a portion of their offerings. The evidence shows that pricing items and subscriptions in such a way stimulates consumer buying behaviour for items as inexpensive as $0.99, all the way up to the hundreds of dollars.
- Smaller, high-growth merchants should simply consider 9-digit pricing as a smart default. At lower volumes, running pricing experiments can take a much longer time and are prone to data ‘noise’. Instead, these businesses ought to consider 9-digit pricing as standard practice, helping to potentially level the playing field against larger competitors.
Pricing is key in today’s competitive market, especially for lean online businesses. It can set a business apart from competitors and close a transaction with a fickle consumer. This is especially crucial in an industry where revenue gains of even a few percentage points can go a long way to ensuring long-term growth and success.