In our article series “Price optimisation for online retailers: How to improve your competitive position with intelligent price management”, we have provided you so far with a status quo on the topic of “price optimisation on the Internet”. You now also know which challenges emerge when using pricing tools and which positive benefits arise for you by employing them. In today’s article we present a brief summary of two options for structuring your pricing policy: the low-price or the high-price strategy.
Which pricing policy actually suits my company?
The optimisation of your own prices is a complex endeavour for retailing companies. Many factors merge together during price-setting. Besides the procurement and administration costs, which to an extent represent the lower limit for price-setting, various market conditions play a central role. Depending upon the retailer’s competitive strategy, the price elasticity of demand and the development of competitor prices are important elements.
Based on product type and company targets, various pricing strategies await the retailer’s selection. For those pursuing the target of expanding market share for certain product groups, the low-price strategy suggests itself. In this case, a few innovative products addressing a sufficient market demand are sold at low prices. This strategy is directed towards a quantity effect. The more products sold and the higher the market share achieved, then the higher the profit turns out to be. Examples of low-price strategy include products for daily use and discounter goods.
Margin orientated retailers, on the other hand, prefer to opt for a high-price strategy. In this case, innovative products are placed on the market so that fewer units are sold but at a higher unit price. Examples here are high-value branded products and innovative technological goods. The price elasticity of demand is quite low, so that demand here should not be too high, thus ensuring the maintenance of high margins.
There are many options for the online retailer existing between these two pricing strategies to find the optimal prices. Stationary discounters such as Aldi and Lidl sometimes perform a balancing act between market share and margin increase. While maintaining not only prices, but also the costs for floor space, staff and procurement extremely low, discounters are often more profitable and market-dominating than classic supermarkets.
Requirements for successful price-setting
The requirements for successful price-setting, besides knowledge of your own costs, are those targets such as turnover and sales figures, as well as a precise monitoring and analysis of the market. In online retail, monitoring of the competition is conducted easier in comparison to stationary retail, in that all competitors are gathered together virtually in one single place – the Internet. The difficulties here, however, lie in the sheer limitless size of the market. The number of vendors to be monitored makes the capture and analysis of current data virtually impossible in a manual fashion, so that a suitable reaction to competitor price-setting is slow and inefficient for many shop operators. A late or inadequate adjustment of your own pricing policies gives away important turnover and profit potentials. A solution in automated price optimisation can provide a remedy here.
In our next blog article, we show in the example of blackbee how intelligent price optimisation functions for online retailers.
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