The era of low-price battles in eCommerce is over. Instead of countless discount campaigns and other reductions, online retailers are increasingly focusing on the formation of a positive pricing image. Some 90 percent of eCommerce companies surveyed are aware of the importance of profitable price management. At the same time, online retailers regard strategic price-setting as a major challenge. Many companies find an approach to a pricing strategy, but nevertheless fail to firmly implement it. But how can profitable pricing be designed and at the same time offer retailers a competitive advantage?
What some pricing strategists recommend
If you search for it, you will find a broad range of pricing strategies in eCommerce. In doing so, you should ask yourself which strategy will enable you to achieve profitable and sustainable growth. But what does “profitable growth” actually mean?
Companies have two ways of growing profitably: The first consists of reducing costs. Pricing strategists, however, see no further options here.
The second choice seems more plausible to them: Companies have to raise their prices to increase their revenues. Graphical representations such as the so-called “price waterfall“ are used to depict earnings potentials. This clearly shows the difference between a desired price and the significantly lower actual net price. This allows you, as an eCommerce company, to capture lost revenue through low prices.
Raise prices to increase revenues
The waterfall shape depicts the basic development graphically: An unsystematic and unyielding pricing strategy reduces returns and leads to a big difference between the desired price and the actual price. Too low prices, which are insufficiently aligned to the corresponding customer segments, provide no positive contribution margins. They thus prevent profitable growth.
Companies like the MediaMarktSaturn Retail Group have recognised this at an early stage and revolutionised their pricing policy. “Media Markt has done away with special offers and ended with discount battles. […] People do not want that any longer. We are committed to price realism and clarity”, said Horst Norberg, CEO of MediaMarktSaturn Retail Group, in an interview with FAZ (02.10.2011).
The experience of in-house pricing experts shows that even slight price increases can increase profits.
But how can you sustainably design your own price management? We show you this using the five “levers for more profitability”.
#1 Profitable pricing by realising prices and conditions
Reduce the difference between gross and net prices by reducing discount and bonus campaigns. Should you still offer conditions in the form of bonuses, discounts or rebates, you should also clearly define those conditions and point the way to the net price. Instead of responding to customer desire for the lower net price, you should pursue a transparent and comprehensible pricing policy. Orient your conditions to the respective customer segments and clearly define the rewards to the customer. A transparent pricing policy helps you to better understand the end prices of your competitors. A fair pricing system not only convinces your customers, but also gives you an advantage.
#2 Using advanced services for profitable pricing
Services such as shipping options or returned goods are often seen by the customer as a customary right and considered free of charge. However, you should pay close attention to these services in your price management, so that you thus differentiate yourself from your competitors. Your services should also be reflected in your prices. A transparent pricing policy is important in this respect. Do not shy away from transparency and tend towards balancing your prices with your competitors. Also, determine in consultation with your customers the benefits of the service and align these to customer segments. This then allows you to further differentiate your prices.
#3 Implement more value-added services for profitable pricing
Many online retailers avoid setting higher prices and explaining this to the customer. Only one in four has succeeded in establishing a price-increase of more than 80 percent on the market, according to a survey conducted by Simon, Kucher and Partner. This is often caused by external barriers like the competitive situation. In reality, however, internal obstacles such as a reluctant and lacking price management are the main reasons.
In order to justify higher prices, you have two options in your price setting.
- Offer value-added services and differentiate according to selected criteria. Pricing professionals, by their own account, increase their prices more often by products (24 percent more), by customer segments (20 percent more) and by markets (10 percent more).
- Clarify to your customers the added value expected, for which they should be willing to pay more. You justify your services through transparent price setting.
#4 Include your competitors in your price management
Today, you will find increasingly competitive markets in which products as well as conditions and prices are comparable. A pricing approach does not help you much, so that only through sustainable pricing strategies can you achieve a competitive advantage.
The implementation of price management strategies means not only that you recognise deficits in comparison to your competitors. Benchmarking helps to compare yourself with the best and to further develop continuously. Consider in advance:
- What is my own position in competitive comparison?
- How have the market and my competitors reacted to past price increases?
- How did the behavior of competitors shape up then – with a massive price undercutting taking place?
#5 Use intelligent software solutions for profitable pricing
As an online retailer, you will be dealing with an overwhelming amount of information.
The dynamics of the Internet require that this information must be collected and analysed at a rapid rate.
To optimally evaluate your own market position, as well as those of your competitors, intelligent software solutions like blackbee offer you a comparison with daily updated data. This not only saves you costs, but also saves in time expenditures. Our analyses help to find the appropriate pricing strategy for you and to optimise your prices.
In summary, we would like to offer you the following recommendations:
- Pursue a strategic and well-considered price management
- Use intelligent software solutions for extensive market and pricing analysis.
- Include your competitors in eCommerce within your pricing strategy.