Is there such a thing as too much honesty? In business, and in pricing, opinions differ. The concept of transparent pricing refers to having pricing information readily available and accessible to customers, benefiting both sides:
- Buyers can make informed decisions, compare prices and avoid overpaying
- Businesses can improve trust and loyalty from consumers, win more business and avoid angry reviews
However, transparent pricing can also have downsides. What if you’re too honest about how you set prices, and customers decide you’re overcharging them? What if competitors use the information to undercut you?
In this article, we’ll explore the role of pricing in the overall marketing strategy and how price transparency specifically is used as a messaging signal to build trust.
The role of pricing in the marketing mix
The original iterations of the Marketing Mix consisted of four P’s: Product, Place, Promotion and Price. Eventually, this expanded to the 7 P’s and added Physical Evidence, People and Process.
While each of these areas is important to build a well-rounded marketing strategy, we want to focus today on the role of pricing and how it can be used as a marketing strategy in and of itself.
In past articles, we have laid out two main ways in which pricing strategy influences marketing performance:
- It determines the volume of the marketing budget
- It influences how effective marketing strategies can be
Both of these are certainly true. The price of a product, and its margin, determines how much revenue the company will bring in and how much funding will be allocated to marketing. The price also impacts how customers view a product in comparison to others in the same category, and the price elasticity of that product should be considered when setting a strategy.
However, we would argue that we can build upon the second point to see a third way a pricing strategy can impact marketing: as a messaging signal. What if a brand or retailer chooses to be transparent with customers about its own pricing strategy? Regardless of the specific price levels and strategy chosen, what does the act of transparency signal to customers?
The question of whether transparent pricing is the right strategy for e-commerce businesses is not black and white, but it is an interesting option to consider.
Talk to one of our consultants about dynamic pricing.
What is price transparency in e-commerce?
First, let’s go over how price transparency actually plays out for e-commerce brands and retailers. Transparent pricing can be utilised in a variety of ways:
- Telling customers about all the factors that determine the final price they pay. This can include the cost of manufacturing, distribution, labour and other costs, as well as things like shipping, import duties and VAT.
- Showing price history. Historical price transparency typically involves showing customers how the price has changed over time, whether through one-time discounts and offers or increases and decreases of the RRP (Recommended Retail Price).
- Comparing prices across the market. Some brands and retailers show a live view of the price across other channels, so customers can make an informed decision about where to buy.
- Avoiding surprise costs. Companies ensure there aren’t any hidden costs that appear at checkout. The customer is aware throughout the process of the price they will pay.
- Explaining price changes. If the brand or retailer decides to increase or decrease the price on a product, or across their entire product line, they might explain the reason and data behind this price change. This may serve inadvertently as a marketing tactic, as shoppers may think highly of a brand that is open about their price changes, which could increase loyalty and sales.
- Following price regulations. In May 2022, the EU implemented a new directive aimed at bolstering consumer protection and their overall knowledge of a product’s pricing. The Price Indication Directive (PID) (part of the updated Omnibus Directive) stipulates that when a trader intends on implementing a price reduction on an item, they must also show the item’s previous price. The original price, prior to the reduction, is presented as the most recent and lowest price at least 30 days prior to the newly introduced reduction.
Omnia Retail offers the only Dynamic Pricing tool with the ability to use and display the lowest price over the past 30 days, enabling e-commerce sellers to stay in line with the Omnibus Price. Learn more here.
Transparent pricing case study: KoRo Drogerie
One well-known example of transparent pricing is KoRo Drogerie, a Germany-based online shop selling a variety of long-life, natural and processed foods, plus kitchen utensils and cooking accessories. One of KoRo’s five basic principles is Fair Prices:
The KoRo concept can and will only work if we pass on our cost savings resulting from the above principles directly to you. Quality must be affordable.
Especially in this day and age, we are aware that it is easy to compare similar products from different suppliers. That is why it is KoRo's goal to be able to offer a fair price-performance ratio for all our products. Every consumer must be able to rely on KoRo to take care of the price comparison process so that customers can be sure that they have chosen the best shopping option.
KoRo has had multiple versions of price transparency over the years. In the past, the company actually displayed price development history directly on the website, but this has since stopped – perhaps an example of too much transparency or not enough pay-off to make the labour worth it.
Now, KoRo is using price transparency as part of their marketing strategy. The company announces via blogs when prices change for their product lines – whether prices are increasing or decreasing.
For example, this blog from February 2021 (in German) announced an average price decrease of 5.34% due to changes in the market and a new calculation basis. Two years later, they announced prices would increase by an average of 8.5% in February 2023 as a result of high food inflation in Germany.
This transparency is an effective messaging strategy, showing customers that the company can be trusted to communicate honestly and price fairly. This is consistent with the general perception of KoRo, which is famous in the German market for their fair and sustainable approach. The company receives a 4,78 rating on consumer trust website TrustedShops.de.
Transparent pricing case study: Everlane
US-based fashion retailer Everlane illustrates another version of price transparency. At the bottom of every product page, the company breaks down the true cost of the production process. The Madison Dress, for example, has the following cost breakdown:
Past iterations of Everlane’s Transparent Pricing infographics actually included the “True Cost”, as well as Everlane’s final price and the traditional retail price. The brand typically uses a markup of 2-3x, whereas traditional retail is closer to 5-6x. It appears that this part of the infographic is no longer included on product pages, indicating that perhaps the brand decided it was too much transparency.
Past Everlane pricing infographic - the bottom section is no longer included
Putting pricing transparency into practice
Any e-commerce business that wishes to utilise transparent pricing needs to have a solid data foundation from which to build its pricing strategy. Those insights can then enable marketers to make smart marketing choices and build the right messaging around pricing transparency – so the business can use it to increase consumer trust.
Whether you should use pricing transparency for your business, and which type to choose, depends on your specific situation. It’s a fine balance: You want to increase customer trust, but you also need to earn a profit. And with some consumer protection laws requiring certain levels of transparency, like the PID and others, it isn’t only a commercial question, but a legal one, too. Transparent pricing has to be managed properly, with the right messaging and data, in order to be effective.
