How to Restore Profits Lost to Matching Your Own Online Pricing

October 7, 2021
Average Read Time: 5 minutes

You’ve opened a webstore to complement your brick-and-mortar women’s clothing shop. A customer comes in and chooses a shirt to buy. But when she steps up to pay, she mentions that the shirt cost less on your own website and asks to purchase it for the online price.

What’s your answer? If you don’t know, you’ll want to think about it, because the question is bound to come up. Smartphone-wielding consumers are increasingly savvy about scoping online pricing and asking for such discounts at the checkout counter. That means you need to strategize pricing to optimize profits: understand the costs involved in selling online versus in-store and price merchandise accordingly. And then you need to decide whether to self-match pricing as a strategy to boost sales – or forgo it because it cuts too deeply into profits.

And if you want to self-match, be aware that attention to elements of your payment processing services can save you money and make up for some of the profit lost to informed customers who request the price match.

Self-Matching Prices: Good, Bad, or Somewhere Between?

Today, it’s common knowledge that online pricing often is less than in-store pricing due not only to the competitive online commerce playing field, but to the cost of maintaining physical locations. In addition to rent or mortgage, maintenance and improvement, fixtures, and employees to serve customers, expenses include a point-of-sale system to process payments in person. Even with website development and hosting and inventory storage for an online shop, brick-and-mortar locations generally are more expensive to operate.

And that can leave retailers with physical locations at a competitive disadvantage. If they set in-store prices to compete with online rivals, they’ll lose money on those purchases. Because of that, many retailers selling through both channels have a two-pronged pricing strategy that accounts for the difference in overhead. As a result, online goods often cost less than those in-store. And that leads to the dilemma described above and the need for a price-matching strategy for their own goods.

As with in-store versus online pricing, different retailers have different policies concerning self-matching. According to research conducted by Harvard Business School Professor Elie Ofek, 55% to 60% of the retailers studied self-match prices, and the rest said they don’t self-match or didn’t respond when asked about a policy. Certain retailers, such as consumer electronics and home improvement stores, are inclined to match their online pricing, while low-end department stores and clothing retailers are less likely to do so, his research showed.

Some consultants suggest that retailers look at self-matching prices as a type of discount or coupon strategy if it can be held to a reasonable percentage of a store’s sales (say, 10% to 15%). This can satisfy customers and lead them to make additional in-store purchases, which actually can increase profits. “We found that price-matching is not just a necessary evil; it can be a competitive tool and boost a company’s bottom line,” Ofek says.

Finally, consider that some of your customers might not be sensitive to pricing differences. After all, many of us have come to accept cost differentials in such purchases as airline tickets (booked online versus on the phone), gas stations (self-service versus full-service), and even retail (regular stores as compared to outlet stores). And those who have grown up with omni-channel purchasing think little of pricing differences, according to Ofek’s research. “When you talk to millennials in particular, you find out they accept that prices don’t have to be the same across channels. That gives the retailer more freedom with pricing,” he says.

Using Payment Processing Best Practices to Close the Gap

Knowing that you might have to cut into your margins with price-matching across your sales channels, it is even more important to manage your costs in the areas you can exert some level of control. Looking at practices to prevent card fraud and reduce interchange fees can restore some of the incremental profit you might lose.

Reports of online credit card fraud jumped by 107% from the beginning of 2019 to the end of 2020, according to government statistics reported by Credit Card Insider. All told, online sellers will lose $130 billion to payment fraud between 2018 and 2023. And while large companies may be better able to absorb such losses, small and mid-size retailers aren’t in such a position. To help reduce card fraud:

  • Maintain PCI compliance. PCI compliance means following the Payment Card Industry Security Standards Council rules to protect customer payment card data. You might think PCI compliance is a pain, but if it helps secure your business from a breach, that can save thousands of dollars, not to mention non=compliance fees and loss of customer trust.
  • Use the Address Verification Service (AVS). AVS checks addresses provided at the time of sale against those that cardholders have on file with their issuing banks to rule out suspicious transactions.
  • Require a CVV for online transactions. The Card Verification Code (CVV) is that 3- or 4-digit code on every credit card that acts as an added security measure when cardholders pay online.
  • Flag large transactions. If you allow a fraudulent transaction, you may bear the cost. You can limit the risk of large transactions by specifying a ceiling for the amount you’ll allow any one customer to charge without extra layers of verification.

Learn more about eliminating credit card fraud in this blog post.

Of course, it will depend on your payment processing cost structure, but many merchants have multiple ways to optimize and reduce interchange fees, the fee they pay on every credit card sale they make. Along with using AVS, which plays a role in reducing interchange fees in addition to fighting fraud, they include:

  • Swiping, inserting, or scanning cards in point-of-sale transactions. It’s one of the most basic steps you can take to reduce interchange fees. You receive a higher interchange rate if you key in a card number by hand. As for cards that do not go through at the first attempt, train employees to try to swipe or scan them again before assuming that they need to enter numbers manually. Some businesses even ask for a different card, rather than trying manual input of a card that was not read by the device.
  • Settling card transactions every day. For most U.S. cards and transactions, the capture (clearing call) must happen within one day of the authorization to qualify for the lowest interchange rates. The longer you wait, the higher the rates. So, batching out your payment card transactions each night will reduce your fees.
  • Providing more data when accepting and processing card payments for purchasing using corporate or purchase cards and large value transactions. When it comes to interchange rates, there are three levels of data a merchant can provide. The higher the level of data you include with eligible transactions, the lower the risk. To acknowledge that fact, Visa and Mastercard offer programs that can reduce interchange fees for transactions that include Level 2 and 3 data for B2B or B2G transactions using a corporate or purchase card.

For more on reducing interchange fees, read this post.

Focus on How You Sell

In the end, a Harvard Business Review article suggests, “Retailers should view their online and in-store channels as unique services . . . Relatively higher prices can capture the premium that some customers place on purchasing in-store. Web prices can be lower to compete against aggressive e-tailers.”

That means focusing more on effective selling and managing the factors you can control to keep costs in check, and less on issues with comparative pricing. Payment processing can play a role both in providing the means to complete sales in any channel – online, in-store, and, for that matter, off-site, too – and ways to support your business to make the kind of profit you need.

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