Understanding the Price Sensitivity of the Online Buyer

Okay, so there’s no such thing as perfect online product. But considering what would be perfect might spark ideas of what products are close to perfect. Here, then, is the perfect online product:

• It’s valuable, with high margins. You’re not making a dollar or two per sale; you’re making dozens, perhaps hundreds of dollars.
• It’s in demand. It’s a product people want and are willing to pay for.
• It’s not widely available. Buying online may be the only way to find the product, or the particular variety of the product.
• It’s a “research” product. People are looking online for this product right now. (Most products are not research products. At this very moment, out of hundreds of millions of Internet users, probably only one or two are trying to find out how to buy sugar online.)
• It’s light and non-fragile, so it’s cheap and easy to ship.
• There’s little or no competition online.
• People love the product so much they’re going to tell their friends about you.
• There’s no smell or texture, or anything else that makes the product one that “just has to be seen.”
• You are intimately connected to the product in some way. The product is related to your hobby or passion.
• Oh, and it’s legal! While a number of illegal substances match the perfect-product criteria, we’re assuming the risk outweighs the benefits.

Online buyers are far more price sensitive than offline buyers. That is, the price of the product is much more important for the online buyer than for someone walking into an offline store. When someone buys a product and has to select a particular merchant, they are “sensitive” to various factors, such as these:

• The price of the product from that merchant
• The convenience of purchasing from the merchant
• The confidence they have in the merchant (whether the merchant “backs” the sale, for instance, if anything goes wrong)
• The additional costs, such as sales tax and delivery

Price is only one aspect in the decision to buy. But on the Internet, the weight given to price is much greater. This is a perfectly natural, and much predicted, state of affairs. Consider the buyer walking into a brick-and-mortar store who finds a product he’s interested in:

• Many buyers don’t care about pricing much at all. They are more interested in convenience, selection, location, and sales environment.
• Many buyers want the product now and don’t care too much about price, as long as it’s “in the ballpark.” If the buyer finds the product, there’s a good chance the sale is made.
• Even if buyers are shopping for price, there’s a limit to how much driving around they’re willing to do. Again, if the price is “in the ballpark,” price may be trumped by convenience.
• Buyers don’t think too much about how much confidence they have in the merchant; if the business can afford a storefront and take credit cards, they’ve already reached a certain level.

We know all this is true, because offline prices are often higher than online prices. And haven’t we all been in stores and thought, “How do they sell at that ridiculous price?” The online sales environment is very different, though:

• Buyers can jump from store to store very quickly. It’s very easy to find a low-priced product extremely quickly.
• There are many sites that will even do the price comparison for you. There are the shopping directories (see Chapter 25) and the merchant sites (Chapter 28), where buyers, more and more, are beginning their shopping.
• Many buyers are used to, and now expect, a low price. Price is a much more important factor for them than for most offline shoppers . . . they are much more price sensitive. In fact getting a low price is why many online buyers are willing to delay gratification (to wait for delivery).
• Many buyers now do a little research to settle on the exact product they want, then use a shopping-directory comparison tool to search for the product. Then they’ll ask for the system to show the products sorted lowest-price first and work their way through the merchants one by one. They often won’t even go past the first few low-price merchants before buying.

Understanding these concepts naturally leads to a couple of conclusions:

• If you have a really good price, you’re in a good competitive position.
• If you don’t have a good price, many of the marketing techniques won’t be open to you; you’ll find it very difficult to sell through eBay, shopping directories, and merchant sites, for instance.

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