The Pricing Blog by Omnia Retail

Download the whitepaper to learn: How you're wasting 25% of your week on manual price checking. Why Omnia customers love Pricewatch What the benefits of pricing insights are for your company.

Download the whitepaper to learn: How you're wasting 25% of your week on manual price checking. Why Omnia customers love Pricewatch What the benefits of pricing insights are for your company.

When it comes to online shopping, bundle pricing is ubiquitous. This pricing method is extremely popular amongst Internet retailers, and for good reason. Competitive bundling is an excellent way for you to push more...

When it comes to online shopping, bundle pricing is ubiquitous. This pricing method is extremely popular amongst Internet retailers, and for good reason. Competitive bundling is an excellent way for you to push more product, stand out from the crowd, and connect with your audience in an intriguing way. So what are the benefits of bundling? Keep reading to learn more about this strategy. Bundle pricing definition Price bundling, also product bundle pricing, is a strategy that retailers use to sell lots of items at higher margins while providing consumers a discount at the same time. With bundle pricing, retailers offer several different products as a package deal, then offer that package to consumers at a lower price than it would cost to purchase those items separately. In the example below, which shows a Fujifilm Instax camera bundle and which sells for $99, consumers get a camera, a case, batteries, two film packs, a camera case and strap, a photo album, a self lens, colored filters, hanging frames, a clips and string to hang photos from, sticker frames, a cleaning cloth, and standing frames. That’s a lot of product, especially when you consider that the camera itself costs somewhere in the realm of $60. Bundle pricing is a great way to move products quickly, sell off less-successful SKUs, and offer more value to your loyal customers. Bundling is extremely common in e-commerce and retail, and you’ll often see product bundles on cheap goods or discount items. However, it isn’t the only application for price bundling, and companies in all sectors from software to utilities (like Comcast) use bundles to sell their products. Bundling works because price is the most important “p” in the marketing mix. Price is often the most important differentiator for consumers, and when they can get a bundle price on products they love, they will feel like they’ve gotten the best deal possible. Product bundle pricing has advantages and disadvantages. On the one hand it’s a great tactic to use if you want to move product quickly or give your customers a great value. However, product bundling pricing may weaken your brand if done incorrectly. It’s ultimately up to you to build a great strategy that delivers value without hurting your image. Set up your pricing strategies with ease in Omnia's Pricing Platform Request a free demo What is an example of bundling? Bundles are everywhere in retail and e-commerce. They are most common in discount stores or amongst cheap goods, but luxury brands may also run promotional bundles on occasion. However, bundles are especially important to Amazon’s strategy, and the online marketplace makes great use of bundles (which you can learn about in our guide to selling on Amazon). There are countless Amazon bundle examples, so it’s easy to dive in and look at what works. In general, there are two types of bundles on Amazon. The first is a Seller-created bundle, like the one in the photo below. This bundle is built around one high runner — the Nikon camera — which is then sold with 22 other “accessory” items like camera straps, memory cards, lenses, tripods, flash devices, and more. It’s the perfect kit for someone who enjoys photography enough that they’re willing to invest in equipment, but who doesn’t already have everything a professional may want. An Amazon bundle example built around one major high-runner item: a Nikon camera. The key to this bundle is that it is a great deal for consumers. It would take countless hours to find all of these items separately, and it would likely be more expensive to purchase each accessory individually. With this bundle, which costs $619, a consumer can be ready with their complete camera kit within two days. It’s the kind of bundle that will leave an amateur photographer with sweaty palms and a thumping heart as they click “Add to Cart”. The second type of product bundling strategy on Amazon is the kind suggested by the marketplace itself. In the image below you see an Amazon listing for a Magic Bullet blender, which costs $38. In the bottom left hand corner of the image though, you’ll see a section on the page titled “Frequently bought together” which suggests two additional products to the consumer. This section is the Amazon-suggested bundle, which uses Amazon’s algorithm to determine similar products and suggest them in the same post. In one click, the shopper can easily add all three items to their cart and know they’re getting everything they could possibly need for this blender. This suggested bundling isn’t only for small electronics. In the screenshot below of a listing of a MacBook computer you can see that Amazon suggests a pink laptop protector and case as an additional item. Related: How the Coronavirus will Affect Retail Bundles are popular outside of Amazon as well. The below bundle is a great bundle pricing strategy example. It is from the company Alpkit, which makes outdoor gear in the United Kingdom. This bundle is built around the idea of a “mountain marathon”, which is, as you may have guessed, a marathon that takes place on mountain trails. An example of a bundle in the outdoor clothing category. This bundle includes two coats, gloves, socks, a shirt, and waterproof running pants. Mountain marathons require special technical gear because weather conditions can change so quickly out in the wild. Many races require that you bring things like gloves, jackets, and trousers with you as you run, but this technical gear is often extremely expensive. Some runners will acquire these pieces over time, but some of the individual pieces can create a significant hurdle to investment (like the rain jacket in the above bundle, which costs €120). Alpkit solved this problem with a smart bundle that includes much of the gear you would need for a trail race. This kit not only moves products out of Alpkit’s warehouses — it also saves the consumer €98. How to create and use price bundles To create effective price bundles, you need to get into the mind of the consumer. What are they really looking for, and how can you give them more value with a bundle? So what can we learn about bundling from Alpkit and the other examples we’ve seen in this article? A couple of things: Understand what your users are looking for, whether that is a camera or mountain running clothes Use a high-runner item as a centerpiece Fill in the gaps with simple accessories Product popularity data (which you can get with Pricewatch) is a great resource for creating effective bundle packages because you can understand which products are flying off the shelves and which products are taking up space. If the slow-moving products complement the fast-moving ones, you can pair the two together to create a bundle that helps clear out your warehouses. This is an especially popular strategy with electronics like TVs and laptops, which will often come in bundles with charging cables, HDMI cords, and other items. You can also create bundles of popular products, which can make your high-runners even more attractive. If you see that the most popular products in the market could combine well together, you could create a “sale” bundle of these high-ticket items and sell it at a slightly higher price than you could if you discounted each product individually. You can still discount these products individually to drive people to your store with dynamic pricing (especially if they are highly elastic products), but offering the products together gives you some room to improve your margins. Finally, you can use bundles to give consumers more control. If you follow a “build your own package” model, you can give consumers the chance to create their own bundles from a selected assortment of products, then layer a discount percentage on top of their final choice. Final thoughts Bundle pricing is an awesome way to get creative with your assortment and delight consumers in unexpected ways. If you can create a bundle that meets your audience’s needs and satisfies your business goals, you’ll find a happy medium that pushes products off the shelf while keeping your store profitable. Curious to learn about some other pricing strategies? Check out some of our other articles below. What is Charm Pricing?: A short introduction to a fun pricing method What is Penetration Pricing?: A guide on how to get noticed when first entering a new market What is Cost Plus Pricing?: In this article, we’ll cover cost-plus pricing and show you when it makes sense to use this strategy. What is Price Skimming?: Learn how price skimming can help you facilitate a higher return on early investments. Here’s What You Need to Know About Psychological Pricing (Plus 3 Strategies to Help You Succeed): Modern day pricing is so much more than a numbers game. When thought about correctly, it’s a powerful way to build your brand and drive more profits. How to Build a Pricing Strategy: A complete guide on how to build a pricing strategy from Omnia partner Johan Maessen, owner of Commercieel Verbeteren.

When you produce a product, it costs your company a certain amount of money. When it comes to pricing, this “cost” serves as an anchor point for most pricing strategies. Because it costs money to produce a product,...

When you produce a product, it costs your company a certain amount of money. When it comes to pricing, this “cost” serves as an anchor point for most pricing strategies. Because it costs money to produce a product, retailers and brands, understandably, want to have an end price that is more than that cost. If the end purchase price is lower than it costs to produce a product, the retailer or brand will lose money every time they sell that product. This is where cost-oriented pricing comes into play, most notably a cost plus pricing strategy. In this article, we’ll cover cost-plus pricing and show you when it makes sense to use this strategy. What is cost plus pricing? Cost plus pricing is the most straightforward pricing strategy out there. Sometimes called a variable cost pricing strategy, variable cost pricing model, or even full cost pricing, this price method guarantees that you never lose money in a sale. Cost based pricing is the foundation for any smart pricing strategy, and is both easy to calculate and apply to your assortment. There are only three steps involved in the cost plus pricing formula: determine how much it costs to produce a product, determine how much margin you want to make (also called the “markup,” meaning how much you mark the price up above the costs), then calculate the final price by combining these two figures. “Markup” another word for the amount that you add onto the cost of a product in order to achieve your desired margin. Markups are expressed in percentages and currency amounts. How to calculate markup percentages Markup percentage is the percent amount that you add to the price for markup. To calculate a markup percentage, there is a markup percentage formula. All you need to do is subtract the cost of the product from the end price. Divide that number by the cost of the product, and multiply the result by 100 to find the markup percentage. The retail markup calculation, also called markup pricing formula Talk to one of our consultants about dynamic pricing. Contact us Pros and cons of a cost plus pricing strategy The biggest pro of a cost plus pricing strategy is that it’s simple: just calculate your costs per unit, decide how much margin you want to make and calculate a price based on this information. But this simplicity means that cost plus has a few major disadvantages in the world of variable pricing. To start, it only considers internal variables in calculating a price, but doesn’t account for larger market influences in the pricing equation. Imagine you are selling a hair dryer, which costs you €10 to make. Say you want to make a 50% margin, in which case you’d add a €5 markup to the item on the market. This is a great strategy, and you’re guaranteed to always make that €5 with every sale. But if you looked at other products on the market, you may discover that you can raise that price a little more. Below are the first two results that appear when searching for a hair dryer. The first is from Philips and is listed at €22.49 at MediaMarkt. The second is from Hema, and is listed at €20. Even if you want to be the lowest price out of these three hair dryers, you’re still missing out on margin by only pricing yourself at €15. Related: Price: The Most Important P in the Marketing Mix The second major disadvantage to cost-plus pricing is that it isn’t flexible enough to keep up with the current dynamic market (especially if you are selling on Amazon or other fast-paced market places). If you only use cost-plus, your prices will never change with market dynamics. So, if the two hair dryers in the above example drop price unexpectedly, you may accidentally end up as the highest-priced option on the market, which can damage your price perception and lead to a reduced number of sales. Cost plus pricing also makes digital investments in things like electronic shelf labels, dynamic pricing, and pricing data like Pricewatch useless. Finally, a cost plus pricing strategy doesn’t account for the times where you may WANT to sell items at a loss. Some examples of these kinds of strategies include end-of-season sales, clearance sales, Black Friday sales, penetration pricing strategies, or even times when global pandemic fundamentally alters retail. Related: How the Coronavirus will Affect Retail What to think about when using a cost plus pricing strategy When you consider the cons of a cost plus pricing strategy, it’s easy to see why we at Omnia don’t advise cost-plus as the only strategy you use. Determining markup varies from retailer to retailer and category to category. There’s no standard markup pricing, and there isn’t any sort of markup pricing “formula” that can fit every retailer’s needs. Instead, retailers and brands need to think about markup within the context of their market. There are two main considerations: stock rotation and strategic positioning. Stock rotation Let’s start with stock rotation. If you are in an industry that has fast stock rotation, you can get away with having lower margins on the products you sell. This is because you’ll sell a high volume of these products, meaning you’ll still make profit even if there isn’t a high margin. If you produce or sell a slow moving product though, you’ll need to think about your markup differently: because you won’t sell a high volume of products (and because your products will take up valuable shelf or warehouse space for longer periods of time), you need to recoup the loss with a high margin. This is why luxury goods — like a timeless Rolex — come with high prices. You’ll have to think about where your products sit on this spectrum when determining your markup. Strategic positioning Beyond thinking about stock rotation though, you also have to think about the product’s strategic positioning. In some cases, you may want to sell a product at a LOSS instead of a gain, in which case the cost-plus pricing strategy may not be relevant for you. “Diapers are a great example of this strategic loss,” says Sander Roose, CEO of Omnia. “It’s well known within retail that diapers are not a profitable product. But smart retailers use this knowledge strategically. In many cases, they may run a sort of high runner strategy and sell the diapers at a loss, but with the ultimate goal of pulling families into the online shop. These families have bigger budgets, so retailers can easily make up for the loss on the diaper with other products.” When to use a cost-plus pricing strategy “I think a cost-plus pricing strategy makes sense for non-comparable products or own-brand products,” comments Sander. “If you can’t compare your product to anything in the market, or don’t have price elasticity data, then you can use cost plus to arrive at sensible prices for your products.” A cost plus strategy may also be good as a fallback strategy or a “last resort” pricing strategy within your dynamic pricing engine. Cost oriented pricing can be an effective way to figure out the pricing floor for your dynamic pricing strategy. When you account for a certain amount of margin as your lowest price, you can still ensure that all sales will be profitable. Final thoughts The cost plus model pricing is easy to apply to your assortment, but it does have a few major disadvantages. That said, it’s a great starting point that you should use as your price floor in any dynamic pricing strategy you create. Curious about other pricing strategies? Check out our series of different strategies, all linked below. What is Value Based Pricing?: A full overview of how price and consumer perception work together. What is Charm Pricing?: A short introduction to a fun pricing method What is Penetration Pricing?: A guide on how to get noticed when first entering a new market What is Odd Even Pricing?: An explanation of the psychology behind different numbers in a price. Here’s What You Need to Know About Psychological Pricing (Plus 3 Strategies to Help You Succeed): Modern day pricing is so much more than a numbers game. When thought about correctly, it’s a powerful way to build your brand and drive more profits. How to Build a Pricing Strategy: A complete guide on how to build a pricing strategy from Omnia partner Johan Maessen, owner of Commercieel Verbeteren.

Have you ever asked “what is penetration pricing?” If so, you’re not alone. In this article (part of our continued pricing strategies series), we’ll break down penetration pricing and help you decide if it’s the right...

Have you ever asked “what is penetration pricing?” If so, you’re not alone. In this article (part of our continued pricing strategies series), we’ll break down penetration pricing and help you decide if it’s the right strategy for you. Penetration pricing definition So what is penetration pricing? To answer that question, you first have to understand market penetration. Market penetration occurs when a company launches a new product in a market where similar products already exist. Since there is already an alternative to the product, marketing and pricing teams need to be creative to figure out how to make their product stand out. One way to do this is through a penetration pricing strategy, or a price penetration strategy. A penetration pricing strategy lets businesses attract customers to a new product by offering a discounted price upon its initial offering. After generating enough interest and gaining market share, a company will then begin to raise the price again back to market levels. The goal of a penetration pricing strategy is to introduce consumers to a product at a low risk, gather interest in a product, and build brand loyalty — not necessarily to turn a profit. Instead, the major objectives associated with a market penetration pricing strategy are to: Hook in new users Introduce consumers to a product Undermine established market leaders Create market share These goals are achieved through low, low prices which are raised again after a certain period. Companies that employ this strategy will use a price monitoring software to track average market prices over a given period of time, then use that data to calculate their introductory price. Price skimming vs penetration pricing Penetration pricing is often confused with price skimming, but these two strategies are very different. A marketing penetration strategy is when companies forego margins for the sake of drawing users to their products. It’s mostly used when a company or a new product enters a market and when the main goal is to get as many users as possible. Because margins are so slim, penetration pricing is less flexible than price skimming. Price skimming, on the other hand, is a strategy used by luxury products or other high-ticket items in inelastic categories to maximize margin. Instead of offering a low price for a product, companies using a price skimming strategy will put a high price on their products and optimize for high margins. Price skimming is frequently used by companies with high brand recognition and loyalty or products that offer significant amounts of differentiation from competitors. That’s why companies like Apple can get away with charging a relatively high price for new and innovative products. Related: How the Coronavirus will Affect Retail Penetration pricing advantages and disadvantages When deciding whether to use a penetration pricing strategy, it’s important to weigh the pros and cons. While penetration pricing is considered to be a great approach to pricing for maximum visibility in the market, it also may harm your brand perception if you don’t execute the strategy well. Pros of penetration pricing There are a few key points that make penetration pricing so powerful. 1. Introduces new customers to your product offering at a low risk One major objective associated with a market-penetration pricing strategy is to connect consumers with a new product or service. It’s a great way to enter a new market, draw attention to your product, and get some sales traction right from the beginning. It’s also an opportunity to pull customers into your store and increase potential for cross and up sells. 2. Influences price perception Penetration is also a great way to influence your product’s price perception right from the start, regardless of whether you want to be seen as a high-end retailer or a value-for-money option. With careful marketing campaigns (and using tactics like odd even pricing, charm pricing, and others), you can build an image around your product value and tell a story that influences how the consumer sees your brand. 3. Shakes up the market Penetration pricing is also a way of overhauling a market if there is an established leader. In many cases, “underdog” companies may enter a new market and sell a new product at a low price to attract customers away from an established product or service. Cons of penetration pricing While penetration pricing is an awesome strategy, it can be risky. If you don’t proactively account for the hazards of the strategy, it could be devastating. 1. Lack of value Penetration pricing’s greatest strength — its ability to draw attention to your product amongst a sea of similar alternatives through aggressive pricing — is also its weakness. Dropping a price too low will leave consumers disgruntled when you begin to raise the price — they’ve anchored their value of the product on the low price, and may not return to purchase when you adjust your price to normal levels. 2. Potential race to the bottom Another disadvantage of market penetration pricing is the potential reaction from other sellers when you introduce a low price on the market. If competitors or other market players also lower their prices in response to your introductory offer, it could spark a race to the bottom. One way to protect against this race to the bottom is to use a dynamic pricing software and set a price floor that still leaves you with some margin. Talk to one of our consultants about dynamic pricing. Contact us Penetration pricing example An excellent example of a marketing penetration pricing strategy occurred in the Netherlands just a few months ago when Amazon.nl officially launched. Amazon’s pricing strategy is notoriously aggressive and dynamic. The company is well-known for extremely frequent price changes and an ethos of providing the best customer experience in the world — which often coincides with rock-bottom prices. As a marketplace it carries almost any product you could want, but it delivers it at a price significantly lower than other retailers. Upon launch, Amazon didn’t differ too much on its prices compared to other major online retailers in the Netherlands. But over the last few months, Amazon has competed heavily on price to drive traffic to its shop. Since most of the products on Amazon are highly elastic and offer lots of alternatives, it’s a smart strategy; it drives the average price down for most products on the store and solidifies Amazon’s price perception as the cheapest place to shop on the internet. Amazon NL has also deployed the company’s most deadly weapon: Amazon Prime. Prime is one of the key drivers of Amazon’s webshop because of the brand loyalty it inspires. It’s so effective that 82% of US households have a Prime membership, according to a recent survey, and Prime members spend almost double the amount of non-Prime members every year. When consumers have a Prime account, their first thought when they need something is to go see if Amazon sells it. Amazon knows that once consumers become Prime members, they are unlikely to leave because of the convenience Amazon provides. Prime is so critical to Amazon’s success that it was a clear part of Amazon’s Day One strategy in the Netherlands. At the time of launch (and at the time of this writing still), Dutch shoppers could try Prime free for 30 days. After the 30 day trial period, they’d only be billed €2,99 per month. This is a stark contrast to most markets, where Amazon Prime costs around €8 per month. Amazon’s goal in the Netherlands is clear: they are coupling an aggressive market penetration pricing strategy with their exceptional loyalty program, all at a low risk for consumers. Related: The Complete Guide to Selling on Amazon in 2020 When to use a penetration pricing strategy A penetration pricing policy is most likely to be effective when the product is highly elastic and in markets where there is little difference between Product A and Product B. If consumers are both sensitive to price changes and if comparable products are virtually the same as yours, it’s the perfect breeding ground to make price the only differentiator. Why? Because, according to basic economic theory, demand will increase if you drop your price. And if your product offers a better value-for-money promise, consumers will quickly buy your offering over an alternative. Say you sell blenders, for example. The basic feature of all blenders is the same: they blend liquids. Some may have shaper blades. Some may have a nicer build quality. But for many consumers, these features don’t make much of a difference. What they want is something that will last a long time and do a great job blending up smoothies every morning — nothing more, nothing less. If you wanted to introduce a new blender to the market, a market penetration pricing strategy may be a great way to get your brand noticed. If you can craft a thoughtful marketing campaign around your pricing strategy, you may be able to keep that attention and build brand recognition and perception. If you’re successful, future consumers won’t bat an eye at increased prices: they’ll know the value of the product. Final thoughts Penetration pricing is a great way to take on a new market and get your product noticed. But make sure you’re careful in the execution. If done poorly, penetration pricing can harm your brand image rather than help it — and nobody wants that. Curious to learn about other pricing strategies or interested in our Amazon guide series? Check out some of our other articles below: What is Value Based Pricing?: A full overview of how price and consumer perception work together. What is Charm Pricing?: A short introduction to a fun pricing method. What is Odd Even Pricing?: An explanation of the psychology behind different numbers in a price. What is Bundle Pricing?: Learn more about the benefits of a bundle pricing strategy. What is Cost Plus Pricing?: In this article, we’ll cover cost-plus pricing and show you when it makes sense to use this strategy. What is Price Skimming?: Learn how price skimming can help you facilitate a higher return on early investments. What is Map Pricing?: Find out why MAP pricing is so important to many retailers. Here’s What You Need to Know About Psychological Pricing (Plus 3 Strategies to Help You Succeed): Modern day pricing is so much more than a numbers game. When thought about correctly, it’s a powerful way to build your brand and drive more profits. How to Build a Pricing Strategy: A complete guide on how to build a pricing strategy from Omnia partner Johan Maessen, owner of Commercieel Verbeteren. The Strategies Behind Amazon's Success: Learn how Amazon became 'the place' to buy products online. The Complete Guide To Selling on Amazon: In this guide we answer some of the top questions we hear about Amazon and give helpful hints on how to succeed on the platform. How Does Amazon's Search Algorithm Work: Find out how Amazon connects their shoppers with relevant products as quickly as possible. Price, The Most Important P in the Marketing Mix: In this article we'll look at the relevance of the 7 P’s in today’s online marketing context.