Setting the Price of your Online Product

One advantage that online consumers have over brick and mortar consumers, is the ability to easily and quickly compare the prices of a product as offered by various different online sellers. Commonly the online consumer’s attention will lean towards the lowest price on offer. 

The Drive to Show a Low Price

An online company, mindful of this comparative exercise undertaken by its consumers, has a tremendous interest in making sure its prices come out victorious on the other end of the consumer’s comparative quest. So companies embark on all sorts of creative ways to generate the impression of a price that is lower than the charges on the website will actually amount to. For instance, an online company may cut up the price in small pieces. It will show a relatively low initial price on the landing page and subsequently and incrementally keep adding charges to this price until we get to the checkout page. This is called price partitioning. The consumer is then forced to perform a mental calculation of the various partial prices he has been presented in order to assess the final payable amount. Studies have shown that consumers are terrible at such calculations and often underestimate the amount which will be deducted from their account upon purchase. 

Alternatively, in an effort to keep the presented price as low as possible, companies sometimes do not include various elements in the final payable figure, but instead show them separately either as amounts or simply as statements. For instance, they present a main price of EUR 50,- and say this does not include vat and shipping fees and leave all that out. Or they say something like this: “Price is EUR 50,- which does not include 21% VAT and EUR 15,- shipping fees”. This again burdens the consumer with the mental exercise to calculate the final payable figure. 

The Citroën Case

In a famous case on pricing held at the European Court of Justice, the French car producer Citroën presented consumers with an advertisement whereby the price of the car was listed on top and the bottom of the ad said that the price does not include X amount of transportation fees to transfer a purchased car from the manufacturer to the dealer. As a consumer, you have to pick up your car at the car dealer’s showroom. You of course don’t have the option to go to the car manufacturer directly to pick up your car but have to pick up your car at the dealer. Nevertheless, Citroën thought it is a great idea to present a lower price at first sight by separately mentioning the transportation costs incurred for transferring the car from the factory to the dealer and then placing these separate costs at the bottom of an ad where consumers likely don’t look anyway. 

The European Court did not like this. In essence, it ruled that a company must disclose to the consumer one total numerical amount as the ‘final’ price. So no price partitioning and burdening the consumer with the task of adding up the various price components. This final price amount must include all (i) foreseeable and (ii) (for the consumer) necessarily payable price components. For instance, if you know (i.e. you can foresee) that you have to transport your product from a Chinese port to an Amazon fulfillment center before you can ship the product to a consumer, and you plan on charging these costs on to your consumer, then you must include said costs of transportation to the fulfillment center as part of the initial price you communicate to your consumer. So a website which communicates the price of an air conditioning as “EUR 500,- plus EUR 100,- transportation fees to Amazon fulfillment center” would be breaching the law. This company can foresee that this EUR 100,- cost must be paid. Furthermore, assuming the company wants to charge this amount to the consumer, the consumer has no choice but to pay for it in order to obtain the product. For the consumer it is a necessarily payable amount. After all, there is no option for the consumer to go to the Chinese port to pick up his package. In short, the costs of transporting a product from China to Amazon’s fulfillment center is foreseeable for the company and it's necessarily payable by the consumer. Because of that, the seller must include this cost in the price and therefore show a price of EUR 600,- to the consumer as the final price for the airconditioning. 

An Example with Delivery / Shipping Fees 

Let's do an example with shipping fees. Say your landing page online presents shoes for sale for EUR 200,- and the shipping fees depend on the location or country where the consumer lives and the shoes must be shipped to. In such a case, at the moment when your consumer first lands on your website and is simply browsing your products, you will likely not know where the consumer lives yet. So you do not know what the shipping fee will be for this consumer if he places an order. Therefore you can show the consumer the price of a product and simply say “this price does not include the shipping fee”. At that moment the costs of shipping are not foreseeable yet for the company. But - and this is important - once your consumer has provided you with his address, then you will know where he or she lives and what the shipping fee will be. From that moment, the shipping fee has become ‘foreseeable’ for you. So the next price you show must include the amount of the shipping fee. You can add in the vicinity of the price that the price you have listed is inclusive of the shipping fee. So whether you have to include the shipping fee in the price or not also depends on the moment in the funnel at which you show the consumer the price. 

An Example with VAT

The same applies to VAT. As long as you do not (i.e. cannot) know the location of your consumer, you can communicate on your site that prices do not include potentially due VAT. But once the funnel reaches the moment after which you do know the location of your consumer (commonly after the consumers provides his address) and thus the due VAT rate, the price you show the consumer next must include the amount he or she has to pay in VAT. 

So every time you communicate a price to your consumer ask yourself two questions: (i) can I foresee the amount of a cost component (such as the shipping fee or VAT); and (ii) can the consumer select an option whereby this cost does not need to made (for instance the option for the consumer to personally pick up a product and thus prevent a shipping fee)? It goes without saying that VAT, if applicable, must always necessarily be paid by the consumer with no choice in the matter. 

If the answer is ‘yes’ to both the “foreseeability” and “necessity” questions, you then must include the cost component in the final price and you cannot communicate this amount separately. What you can always do of course, is to carry the cost yourself and not charge it to the consumer. For instance, the seller can simply carry the shipping fee himself and not charge this on to the consumer. You can then present a price without shipping fees and communicate compliantly that your company does not charge any shipping fee. This is up to you.