Price optimisation step #1: How to strengthen your competitive standing

Do you price your products in online retail dynamically? If not, then you are giving away valuable potential in profit and sales increases. In our new series of articles “Price optimisation for online retailers: How to improve your competitive position with intelligent price management”, we show you how dynamic price optimisation can look like. You will gain an overview of the possibilities the use of intelligent software offers and how you can use price to your advantage as the most important online shopping factor.

Internet retail is one of the major growth markets worldwide

Internet retail is one of the major growth markets worldwide. In Germany alone, eCommerce turno-ver has risen to over EUR 42 billion, amounting to a 25% increase on the previous year.
New Internet shops are emerging daily, thousands of new customer are being won and countless products ordered online. Complexity and aggression in the price war are continuously increasing. The operators of online shops are compelled to precisely follow market happenings, in order to gain competitive advantage over rivals at an early stage. One possibility, which holds enormous potential in increased margins and profits, lies in pricing policies.

As the renowned pricing consultancy Simon-Kucher & Partners found out in their ‘Pricing Stress Test’, a price increase of just 10% can lead to a doubling of profit. According to the ‘Global Pricing Study, 69% of companies making a price increase were in a position to improve their profit margin.

For this reason, the price of the strongest profit drivers can now be included amongst the marketing tools.

But how far can the operators of online shops go in increasing and reducing their prices, without forfeiting margins or market shares? This is largely down to the competitive situation. Depending upon strategy, ecommerce companies pursue a target of increasing their profit margins or expanding their market share. Pricesetting mostly occurs strictly based on this pricing strategy. The recording and analysis of the market situation is thus indispensible to correct pricing. Automated solutions help in price optimization here. Not only sparing company resources, but also reacting rapidly to altering market condition.

Price optimisation in online retail: Status quo

The leading pricing consultancy worldwide, Simon-Kucher & Partners, has arrived at the conclusion that price increases, in comparison to cost reductions or growth in sales volumes, have the greatest positive effect on profit. Furthermore, pricing is especially suited as a marketing instrument since strong demand effects can be achieved in a very low cost and time-saving manner.
In the field of eCommerce, however, some peculiarities are to be considered. The price elasticity of demand is relatively high here, due to market transparency.

Minor price alterations can precipitate into strong fluctuations in demand.

 

This makes a sensible price-setting in online shops essential, whereby the monitoring of market happenings becomes vital. Some companies have already opted for intelligent and dynamic pricing technologies. But as a study by the Chemnitz Technical University has established, there still exists much potential in their application. Only 30% of the eCommerce companies surveyed have implemented systems for dynamic price optimisation. Of this figure, 61% nevertheless report increasing profits. In this regard, it is no wonder that a full 76% of e-commerce companies still not using dynamic price optimization plan its introduction either in the short or medium term

Price optimisation: The market in automated software is inreasingly growing

The market in automated software for price optimisation is growing due to this increasing demand. Different software models for various requirements are being offered. The so-called repricing tools are directed mainly at the operators of shops on marketplaces like Amazon and eBay. These monitor the pricing trends of particular competitors within an online marketplace. And automatically set a shop’s prices according to pre-determined rules at just below the cheapest competitor offering.

One problem in this area is price erosion. It is frequently witnessed on market-places of this type. The more vendors at an online marketplace that are using such a repricing software, the more often these tools undercut one another and the price descent then becomes bottomless. In addition, the scope of these repricing tools often does not fulfil the expectations of online retailers. The software quality is frequently unsatisfactory by its limitation to individual online portals or channels, as well as its straight EAN-query absent of title matching.

Technologies of dynamic pricing

Besides the repricing tools, there are also dynamic price optimisation technologies, which reveal and optimise the internal potentials of price management. These call upon figures such as cost, turnover and sales volumes in order to optimise the prices. When, for example, the sales volume of a product decreases, a dynamic price optimisation software will mark the price somewhat down in order to stimulate demand, and vice-versa also. The development of market-related figures, such as competitor prices, is nevertheless most often excluded here.

An innovative development in the market for price optimisation solutions in eCommerce are technologies which integrate cross-market analyses of the competitive situation into their dynamic pricing systems. Competitors for particular product groups are firstly established here, before cross-market competitor data is collected and then compared to the retailer’s own data. The infor-mation gained for price optimisation should be compiled in a user-friendly way. And thus represents a solid basis for the implementation of comprehensive price-setting strategies for eCommerce companies. And all from a competition-related perspective. The quality of the data provided plays a decisive role in this process. Cross-market optimisation of prices with regard to complex and detailed pricing strategies is required by a system that meets the highest technological and qualitative standards.

In the next blog article in our series “Price optimisation for online retailers: How to improve your competitive position online”, we will be discussing the challenges and benefits of implementing tools for price optimisation.

Do you need further insights on the topics of pricing? Then download our whitepaper „Price optimisation for online retailers: How to strengthen your competitive standing using intelligent price management.“.