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3 Pricing Optimization Strategies To Give Your Store a Competitive Edge

When asked about the important factors that influence them to shop at a particular retailer, 70% of shoppers surveyed answered competitive pricing.

Cross-industry global pricing study shows that most businesses have been speeding up their transformation to digital, and they’ve been experiencing greater price pressure in the past two years. A signal that soon enough, the digital competition will go neck and neck in all industries.

Pricing optimization is the key to making effective and profitable pricing decisions, and gaining a competitive edge in the fiercely competitive digital environment.

In this blog, you will learn,

  • Why do you have to compete on price
  • How to track competitors
  • How to set dynamic prices
  • How to reveal competitor strategies and plan for the long term

Let’s dive in!

Why do you have to compete on price

Online prices are transparent.

Let's dive in

What’s the reason for such a big price difference? More importantly, is there a reason why anyone should pay an extra £700 for the same product?

At this point, we clearly see the difference between brick and mortar sales and online retailing. If you had to buy everything from a local computer store, would it occur to you that you’ll find it for £700 cheaper elsewhere? Not likely.

While in online retail, comparison shopping engines—like Google Shopping— do the work for you. With the help of CSEs, it takes a few seconds to compare prices from numerous websites. That’s why price comparison has become an integral stage of the purchasing journey. And the fact that it has, in turn, is one of the reasons why you have to compete on price.

Harvard Business School Professor Alberto Cavallo’s research on retail prices shows that the frequency of price changes in the retail industry has been increasing in the past ten years. Cavallo’s findings indicate that retail giants like Amazon have been using automated pricing algorithms since the early 2010s.

Harvard Business School

These dynamic pricing algorithms helped marketers utilize the real-time data they’re collecting in making efficient pricing decisions. Cavallo suggests that the extensive use of pricing algorithms among retail giants compelled smaller online sellers to follow the track and today, many online retailers are using web scraping tools to follow competitor prices.

Apart from this, modern consumers are price-sensitive because they have less discretionary income than previous generations, yet more non-discretionary spending. Since they don’t have money to trifle away, competitive prices are a top priority for the millennial buyer.

And with the impact of COVID19 on consumption behavior, more companies are moving online every day, putting even greater price pressure on sellers.

For all these reasons, pricing optimization is a must for e-commerce companies.

3 tips for pricing optimization

Step 1: Track competitor prices

We all acknowledge that pricing is a pillar of marketing. Since your pricing strategy must reinforce your marketing strategy, your price positioning—where your prices stand against other players in the market—should be in line with your brand’s positioning. Before building a solid pricing strategy, you have to answer the following questions:

  • What are your short and long term objectives (for example, most small online retailers struggle to get traction to their store to begin with, so it’s an urgent issue at an early stage of business)
  • Who is your target audience
  • Who are your direct and indirect competitors
  • How do your competitors price their products
  • How do you differentiate from your competition(What’s your unique selling proposition)
  • How do you want to market your product or service

Selling high technology products—a robot, for example—requires an entirely different approach to pricing from that of selling mass-market products. Or, being an FMCG player calls for a different strategy than what luxury sellers pursue.

Once you’ve determined your goals and objectives, the first step of pricing optimization is collecting competitor price knowledge.

Here are the three most commonly used methods to collect competitor prices:

Manual Tracking

Daily manual price tracking takes 13 hours if you collate 100 products’ prices from 10 competitors. If Amazon’s on your list, before you complete the 13-hour process once, the company could make 7800 price changes.

On average, a product’s price changes every ten minutes on Amazon. How come the giant makes so many price changes that you can’t even track manually? The answer brings us to the second method.

In-house Software

Amazon invests millions of dollars into its in-house pricing algorithm. The company’s pricing engine considers many factors while pricing a product. Competitor price knowledge is a critical one. Of course, almost no other online retailer has the same resources to invest in an engine like this, but there are more affordable options for SMBs.

On average, hiring a web crawler company to build an in-house software would cost $250 for the initial setup. It’ll require maintenance and the monthly maintenance fee would average at $177 unless you have a team of developers to build and maintain your engine. Furthermore, as your business’ needs change, your software should evolve accordingly.

Pricing Software as a Service

Pricing tracking software automates the price tracking process and saves an enormous amount of time. The biggest advantage of using a pricing tool is that you don’t have to worry about software development or maintenance, and that it doesn’t require any technical knowledge.

Step 2: Set dynamic prices

Sticky prices underlie your competitive strength and impede growth. Why?

Online prices change so frequently that sticking with the same price for too long can cost you a lot of sales.

When one of your competitors suddenly drops the price of a product, before you notice they drive many customers to their store. Using a pricing engine can prevent that as the software collates this data immediately and allows you to act on it.

Turning back to Amazon, is it the cheapest marketplace for every product? For many, yes. But not for every single product.

The company sells the most popular products for the cheapest price, thanks to its pricing engine, to drive foot traffic to the store. Even though the retail behemoth sells so many products at above-average prices, many consumers subconsciously assume that it’s the cheapest place for any product. For many loyal Amazon shoppers, this is the reason behind their loyalty.

Although on a smaller scale, SMBs can pursue the same strategy. Competitively pricing popular products is a perfect way to convert new customers. After that point, you can work on building brand loyalty.

Perhaps more importantly, pricing software helps in testing different prices. Using the software, you can set dynamic pricing rules like:

  • My price should be 10$ cheaper than my cheapest competitor
  • My price should be 15% cheaper than the average price

Excessive price increases or price drops can push customers away. The software allows you to test slightly different prices and systematically analyze the effects of these changes on demand, eliminating the risk of alienating customers.

Although important, these short-term actions won’t be enough to drive long-term success. You need to make use of competitor price information for long-term planning.

Step 3: Use competitor pricing data for long-term planning

Pricing intelligence also improves your game in the long-term. It gives you the historical price information that will reveal competitors’ pricing strategies and tactics. Everyone discounts on Cyber Monday, but how do they behave in off-season times?

Say a competitor discounts right after a seasonal sale. They use this tactic after every sales season. Now that you’re seeing their past data—naturally some time passes before the data reaches to a meaningful size—you know:

  • When they’re going to discount
  • The type of discount
  • The discount percentage
  • Products/categories they offer discounts for

Having this information grants you a chance to develop counter-strategies. Acting before them or offering higher percentage discounts can give you a competitive edge.

What’s more, you can analyze historical data to reveal which competitors are most competitive in a particular product category, which products are they focusing on?

For example, if a rival offers a particular product at the best price, it’s highly likely that they enjoy a better deal with the supplier (especially if they’re selling below cost). Seeing their prices over time gives you leverage when negotiating with the supplier.

Let's dive in

With the current and historical competitor price information at hand, you can analyze competitor strategies, find loopholes that competitors are not aware of, and analyze the market trends to make well-informed decisions in the long-term.

Final Words

The technological advancements in favor of consumers enable them to choose between a large number of retailers easier than ever. The unprecedented level of competition in the e-commerce industry, the pricing algorithms that changed the nature of the online competition, and the useful tools in consumers’ hands compel businesses to compete on price. The first step of offering competitive prices is to track other players’ prices. There are three ways to do it:

  • Manual tracking
  • In-house software
  • Pricing SaaS

They have different advantages and disadvantages. It’s up to you to decide which one best fits your business. But your job doesn’t end here. You must make use of the data you’ve acquired, both in your short-term and long-term plans. Long-term planning is the key to success, and historical price information helps businesses make well-informed long-term decisions.