If you’re going to start a bottled water business, when is the best time to start? When will you make the most sales? When can you increase your prices significantly?
During the summer (on the beach) of course.
This is because of supply and demand. As the demand increases, so do your prices.
In this instance, the price of the water bottle you’re selling is non-sticky.
In that, prices of water adjust quickly based on the laws of supply and demand.
But where do you get your water from?
Perhaps a wholesaler?
Do the wholesale prices increase when the weather gets warmer, probably not.
So, in that case, the price is sticky.
In this post, we’re going to look into sticky pricing and how it can affect your e-commerce store.
Is sticky pricing good?
In an ideal world, the less sticky your prices are, the better.
But in order to make your prices less sticky, you need to come to a full understanding of what makes them sticky in the first place and some tactics you can take to ‘unstick’ them.
What is a sticky price?
Sticky prices refers to a situation where the price of a good does not change immediately or readily to the new market-clearing price when there are shifts in the demand and supply curve.
There are two types of sticky prices, downwards and upwards.
Downward sticky pricing
In downward sticky pricing, there is a certain resistance to prices adjusting downwards. Then, when “when the market-clearing price drops (due to an inward shift of the demand curve or an outward shift of the supply curve), the price remains artificially higher than the new market-clearing level, resulting in excess supply (surplus).”
Upward sticky pricing
In upward sticky pricing means that there is resistance to the prices adjusting upward. Therefore, when the market-clearing price rises (due to an outward shift of the demand curve or an inward shift of the supply curve), the price remains artificially lower than the new market-clearing level, resulting in excess demand (shortfall).
How does this relate to e-commerce?
Suppose you manufactured a leather jacket. Suddenly, the price of leather falls down significantly.
What do you do as an e-commerce owner?
Offer your customers a discount to accommodate for the lower price you’re paying to acquire the leather?
Probably not. In most cases, when your production costs decrease you take the extra money as increased profit.
In this situation, consumers aren’t affected by the supply price increase or decrease simply because to them, the price of the item hasn’t changed, even though you as a supplier is making more profit.
Does it work for everything?
Certain products work exceptionally well with sticky pricing, but others don’t. In fact, as you’ll read above, some specific products are sticky up or sticky down.
So like our leather example, if the cost of leather tripled it is likely the cost of the product would also have to increase. Simply to make it feasible for the e-commerce retailer to continue selling the product.
You also have to think about how often you change your prices and by how much.
It goes without saying we’re big advocates of changing your prices to help you find the optimal price your customers are willing to pay.
But increasing (or just changing your prices) is not without its own problems. If we take for example a fast food restaurant.
Suppose everytime you changed your prices, you needed to purchase new menus? That would very quickly become very expensive.
If you do this to account for the fact that the price of potatoes rose yesterday, who knows how many times per month/week you’d be changing your prices and buying new potatoes.
When should you change your prices?
You know as well as any how frustrating it is to buy something and the next day see it reduced in price.
Your customers are no different.
This doesn’t mean, however, that they’re completely against price changes. They understand for example, that the price of seasonal products may change throughout the year.
Often, too many e-commerce retailers are far too cautious when it comes to changing their products.
You see e-commerce vendors have an advantage over brick and mortar stores. In a physical store, you need to get new labels printed and add them to the system.
However, online, this entire process is much simpler. In fact, prices can be changed with the click of a button.
Because of this e-commerce retailers have a better advantage when it comes to changing prices to scoop up some of the profits generated.
How do you make your prices less sticky
There are a number of ways to make your prices less sticky so your customers are not turned off by your pricing changes.
1. Consolidate all your business costs.
You need to understand what your customers are willing to pay for your items and match that against what it costs you to run your business.
As an e-commerce owner, you’ll have a number of costs. You may need to pay staff, you’ll need to pay the company who organizes your shipping, you’ll need to think about your manufacturing costs, and you’ll also need to think about the cost of running your online store in terms of hosting and any plugins you use.
When you’re armed with all that information, you’ll have enough intelligence to understand how a change in your costs will affect a change in your prices.
If you understand where your costs are coming from, you can look at ways you can change the market to support your business, rather than work against it.
2. Understand your customers and their willingness to pay.
You might use a price tracking tool to understand what your competitors have set their prices for the same products historical to access this data.
You want to make sure that with every price change, you’re still allowing your business to be competitive, especially when it comes to prices.
Different types of products will have different levels of stickiness. Because of this, you need to gain a deeper understanding of your market, and your audience to gather when you can make a price increase and when they should be kept the same.
Pricing strategies are a tough-call for every e-commerce retailer. Get it right and you’ll see profits soar through the roof, get it wrong, and you’ll send all your potential customers right into the hands of your competitors.