By the big numbers, ecommerce has been flying high during the pandemic. Online sales have soared, as homebound and restless consumers shopped online in greater numbers than ever before.
Bill Ready, Google’s head of commerce, observed that six months of the pandemic had fueled a decade’s worth of growth in ecommerce.
But sellers may have also been noticing that increased sales don’t drive commensurate profits, because for many shops, costs have been creeping up.
The major shipping services announced significant surcharges to help handle volume ahead of an unprecedented holiday season shopping crush in 2020. Many retailers have been seeing the costs of material goods they need to run their businesses creep up as well.
Shikha Jain, a pricing expert and partner at 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 pricing pressures go back further, she says, citing the Trump administration’s tariff wars with China, among other catalysts. More recently, the disruption to shipping activity following the massive cargo ship Ever Given getting stuck in the Suez Canal highlighted vulnerabilities in the global supply chain, adding another stressor on prices, she said.
So if retailers are facing continued cost pressures, how should they respond in their pricing strategies?
At a high level, Jain champions what she calls value-based pricing or consumer-centric pricing. That means sellers recognizing what creates value for their customers, understanding how that value translates into a dollar amount, and setting prices accordingly.
“It’s not so much focusing on your costs, but more on what the consumer is gaining,” she said.
She strenuously disagrees with the idea of simply passing on rising costs to the consumer. Without diminishing the impact of shipping rate hikes or rising cost of goods, those cannot be the primary drivers of an online seller’s pricing strategy.
“All of these tend to have cost implications, and I think what happens is companies that really tie their pricing to either supply or demand or pure cost, they’re the ones that are going to end up losing out in the long run,” Jain said. “Their prices are basically going to be tied to whatever margin expectations they have.”
Sellers can’t look at their mix of products and expect more or less consistent margins, Jain argues. Instead, sellers need to understand which products carry added value for their customers, which items are differentiated enough to command higher prices than less distinct, more commodity goods in a seller’s portfolio.
“Understand what the willingness is to pay for those value-drivers when setting prices across your assortment,” Jain said. “You’re going to end up having a blend of margins.”
With that “differentiated approach to pricing,” sellers can untether themselves from a static cost basis for setting prices to maximize profits and keep inventory moving. When sellers are well attuned to their customers and can set prices according to what they know they will be willing to pay, they might find that an item they’d priced at 40 percent margin could actually command twice that, 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, versus just understanding what is my overall cost across the board,” she said. “I think this is where, if your pricing is anchored to your costs, that’s not a winning strategy.”
While that kind of value-based pricing might help sellers alleviate the strain of rising product costs, they have even more flexibility when they need to recoup increased shipping expenses. Jain sees shipping as an area neglected by too many sellers who don’t think creatively enough about the different “levers” they can pull concerning shipping costs and delivery windows.
“You also need to maybe address how pricing can have an impact on shipping, because there’s a lot of creativity that can be done there as well,” she said. “I think shipping is one of those things that is sort of an afterthought, and it could be a lot more intentional.”
Simon-Kucher surveyed shoppers about their views on shipping costs last year, homing in on which strategies that sellers use to defray or recoup their own expenses are the most palatable for consumers.
The survey asked shoppers: “Retailers may need to incorporate an increased shipping cost for this holiday season into something you are purchasing. Please select and rank the top 5 most preferred ways retailers can include this cost.”
Some of the simplest strategies polled the worst: consumers were most resistant to sellers simply folding shipping increases into higher retail prices for merchandise. Increasing shipping fees with no nuance or explanation didn’t poll much better.
Whether in shipping or simply in trying to factor in the rising cost of goods, sellers won’t win over their customers by explaining price increases with a formula that runs: “Our costs are going up by x, so our prices are going up by y,” Jain said. “That’s another pitfall that sellers tend to make,” she said.
With shipping, shoppers polled by Jain’s firm were much more receptive to tiered options, including the ability to pay less for shipping if they are willing to wait longer.
If curbside pickup or shipping to a store is an option, many consumers surveyed favored that option. Shoppers were also receptive to increased minimum purchases to qualify for free shipping, and many said they were comfortable with sellers setting earlier deadlines to qualify for free shipping.
“I think what we have found is shipping tends to be an afterthought when it comes to how sellers can start differentiating,” Jain said. “There’s different ways to play with that.”
Whether sellers are grappling with increased product or shipping costs, they need to consider how different price increases will play with their customers. With shipping costs, generally more easily understood with consumers (particularly after highly publicized surcharge announcements from FedEx, UPS and USPS last holiday season), sellers might find it easy enough to explain that rate increases are simply a reflection of the carriers’ shifting policies.
And some product increases might not warrant any note of explanation. But some might, Jain cautions, and when sellers decide that they need to notify their customers of a price hike, it’s crucial that they include in that messaging some mention of how the value for the shopper – not just the price – is increasing.
“You want to be very careful about how you communicate,” she said. “Sometimes how you communicate those price increases is just as important as the prices you set.”