How much do you use the potentials of dynamic online prices? Probably, in comparison to Amazon at least, still way too little. Experts estimate that Amazon makes up to 3 million price alterations daily. At the same time, over 70% of consumers are driven primarily by price whilst shopping online.
In times during which e-commerce no longer grows limitlessly, the conquest of market shares will be increasingly important in order to achieve the desired growth objectives. Many retailers react to this with a merciless price-leading strategy. “Top spot by all means – even when it weighs on margins”, as the motto goes. Many know that a one-sided strategy here of this type offers longer term promise only to a very few retailers.
How then would an intelligently differentiated strategy look, one which secures long term margins and simultaneously gains shares in revenue? A decisive element here is an active price management in line with market requirements. A multitude of leading retailers are using blackbee for this purpose. In this series, we will be presenting you with the recipe for success gained from these projects and tailored toward successful online pricing.
In the ideal model for dynamic pricing, you would be selling each item at a price the consumer is willing to pay and which achieves a minimum margin. To ensure the success of this model, three dynamic factors need to be factored:
- The consumers’ purchasing situation
- Company cost structure
- Market conditions
While the consumers’ purchasing situation may still be something of a mystery, clear figures are available for internal cost structure and market conditions. These need to be gathered and intelligently utilised on an ongoing basis, so that you can shape your prices optimally to both market and margin. In just a few steps, you will be harnessing the potential of your online prices, securing margin and increasing your gross profit.
Based on a client project from a leading retailer in the pharmaceuticals sector, we describe for you in this series the most important steps toward the successful introduction of active price management and its concrete outcomes:
Our client is a mid-sized retailer in the pharmaceuticals sphere. Offering ca. 150,000 items, they achieve an annual turnover in the double-digit millions. Up until now, the prices were manually adjusted once, or maximally twice, per year on the basis of altering purchasing conditions. Only for eighty key products would the prices be manually set anew on either a daily or weekly basis. With the introduction of active price management, our client has set the following goals:
- To harness immediate price potentials
- To maximise the leverage-effect of pricing
- To positively influence a sustained profit development
Our client’s most important goal is a sustained increase in profits. The following drivers are available for this purpose:
Through price reductions.
- When margin losses are overcompensated by increased sales.
- Through forming a good pricing image, meaning the consumer relies upon the online retailer for finding the lowest prices, without having to actively question this time and again. Potentials for higher pricing thus emerge, above all in the long tail.
Through price increases.
- When price increases lead to no declines in sales, or only minor ones. This is particularly the case when position in a price comparison is maintained through a price increase (see Fig. 1).
Through the creation of impulses and increasing combined purchases due to higher frequency of pricing.
- Due to these more frequent price alterations, spontaneous or impulse purchases will be stimulated.
- Additionally, good price positioning for key products leads to further items, such as matching accessories, being frequently ordered also and without any wider price comparison. Since these products often carry a higher margin, they serve as compensation items to the key products of lower margin.
The five simple steps toward active price management
In order to harness these potentials, it is important to segment within the individual product range and to selectively employ the appropriate driver to these individual product groups. Specifically, this entails the following procedure for introducing active price management:
- Selection of the top products and creation of a focus-product list
- Segmentation of the focus-products
- Definition of the target positions
- Setting of the price floor
- Rolling out the active price management
In the following series, we will be introducing the specific individual measures and linking them in this article.