Most ecommerce businesses realize the importance of pricing, but their capabilities are often at a different level, often driven by a lack of focus due to the team responsible for pricing often also having other responsibilities such as Buying, Vendor Negotiation, Promotion Planning and more.
The evolution of a pricing strategy within a retail business should happen as the business matures, and thanks to new technological developments within the ecommerce space, we can now launch data driven strategies that are able to maximize customer value perception and competitiveness, while also maximizing profit margins.
According to research by GE Capital Retail Bank, 80%+ of consumers do product research before they purchase a product. The new modern online consumer have plenty of tools at their fingertips that allow them to do price comparisons, read product reviews, compare alternatives, and this kind of educated consumer put additional pressure on us as ecommerce retailers.
Price comparisons is only one part of the type of research that a consumer may do ahead of their purchase, and by being aware of this we can turn it into a strength for our business by making sure that we are pricing our key products in a competitive manner that maximize the customer value perception of our business.
Due to the recent decade's development within cloud technology, the tools and compute that in the past was reserved for the largest retailers in the world has now been made accessible and affordable to Small and Medium Sized Businesses (SMB), which means that now every ecommerce store or business have the ability to implement a pricing strategy that is supported by data driven decisions and analysis, rather than gut feel and doing things by instinct.
With the help of tools such as the Grindbyte data platform, you can now automatically collect snapshots of your data over time to get a full view of your history, and to get a true understanding of your demand driven by price changes. Combining this with competitor price monitoring gives your business the ability to not only understand the price elasticity of your product in an accurate manner, but also the ability to outprice your competitors on the products where it really matters.
Amazon with their fast delivery, wide assortment and Amazon Prime membership makes it challenging for retailers and ecommerce businesses to compete on factors such customer convenience or range of assortment, and it instead forces us to look for new ways to distinguish ourselves and to provide new customer value.
Time and time again, we see that Amazon is unable to compete on price and their ability to offer higher convenience to customers comes with a trade off in higher prices. It is frequent that we see Amazon being +20 index points higher than the same product sold on retailers websites. For example, at the time of writing the RIEDEL EXTREME CABERNET wine glasses costs £42.50 on RIEDEL's website but £45.95 on Amazon.
Implementing a competitor based pricing strategy is one of the key ways where retailers can differentiate themselves from Amazon and find opportunities to compete.
Everyone understands that pricing is a very important part of the customer experience and the value you provide as a business, however the reality is that pricing is often implemented with some simple margin rule or soley based on the managers instict and experience, rather based on strategy or analytics.
For example, it is very common that retailers just implement margin rules such as ROUND(COST + 30%) across their full assortment with very little consideration put into if that is a price sensitive product, if consumers do any price comparison on those products, the products role within the category (is it supposed to drive traffic/volume or profit?) etc.
On top of using simplified rules such as margin based pricing, it is also equally common that when a product do not sell well the manager changes the rule/price based on "experience" or "feeling" with the hope that it will increase the demand.
This kind of blind-folded, instict based pricing leads to poor customer experience and makes it very difficult to replicate any success of it across the assortment time and time again.
The next level of pricing strategy is when retailers understand that they must be competitive in price versus their competitors, but the implementation of the strategy is done with a sledge hammer across the assortment rather than a scalpel with intent and strategy behind the decision making.
For example, we see time and time again retailers doing competitor research or using competitor price monitoring tools, and then deciding that they should outprice the competitor across the assortment. This may sound like a good idea at first glance, but what it means is that you are implementing signficantly lower gross profit margins for your whole business versus your competitors, which could lead to the downfall of your business over time.
Instead of having the mindset that you should "always" be cheaper than your competitor, the key is to identify in which areas of your assortment that you must be competitive, and in which areas you don't need to be as competitive. By identifying this you can have areas of your business with lower prices that drive traffic and customer value perception, and other areas of your business that drive profit and upsells.
A successful competitor based pricing strategy for ecommerce businesses will depend on a few different things
By implementing all of these aspects of the strategy, you are able to implement a granular pricing strategy that is differentiated throughout your assortment and product lineup. It allow you to reduce prices on ~15% of your assortment that drives most of the customer value perception, and finance that by increasing profit of the other ~85% of the assortment.
In the end, you are able to deliver a great shopping experience to your users with better priced products and better profit margins holistically.
Obviously, this kind of strategy is a bit more sophisticated and require more effort than simpler models. That is why Grindbyte's pricing tool help you with all the dimensions of this type of strategy, which makes it easy to implement and managable to maintain in the long run.