August 18, 2023
Here's a hands-on guide on how to keep the right prices low while capturing all the profit margin that's there to capture.
Most eCommerce retailers know by now — in 2023 shoppers are price sensitive; they look for deals and better offers. But here's the catch: if you offer the lowest price all the time, you will most likely not last long (unless you convince distributors to subsidize this feast of discounts). Luckily, there's a way to break this loop using market intelligence and data analytics.
Think of a restaurant. It's a well-known fact that the most profitable products for HoReCa belong to the drinks category. Coffee, tea, juices, cocktails, wines — these are what restaurants sell with a crazy margin of 120-180%. While keeping their margins very low for the meals as the dish prices on the menu are the main “hooks” that attract customers, restaurants restore the balance by charging 3-4 times more than a regular supermarket for a bottle of water. It makes sense — many people check prices on salads, soups, and main courses before entering a restaurant. But almost no one checks prices on water. And as long as you're already eating something, it doesn't make sense to withhold £/€ 3 and die of thirst.
Many people check prices on salads, soups, and main courses before entering a restaurant. But almost no one checks prices on water.
So, restaurants were lucky in figuring out this balance. How about eCommerce? Unfortunately, it's not that simple in this field. All eCommerce managers talk about price leadership, but very few actually know what it's about and how to use a data-driven approach to establish it without leaving money on the table.
In this blog post, you will find several real-life examples of how our customers do it.
In theory, price leadership should not be rocket science and must work as follows:
Woah, hold on here. How can this be done practically? Do you ask customers? Do you run surveys with your existing shoppers? Do you hire a marketing agency to run research for you?
Using search data is one of the ways to approach purchase intent in a data-driven way. If there are 10K monthly searches for product A, and 10 monthly searches for product B, we can safely assume that purchase intent for product A is higher than for product B.
How not to run out of cash flow in this scenario? Double down on cross-selling products that shoppers usually buy together but price them higher to capture margin on them.
This is definitely NOT what one of the big UK-based DIY retailers does. Look at their data.
This pricing strategy definitely looks like a finger in the air. Why else would the company we analysed subsidise pricing leadership for an item no one is looking for?
Another way to handle purchase intent is to capture not all searches but hot opportunities. This is what one of our customers does. They don’t care about category leaders or popular products. They only want to know what products become hot and fast. We automatically track Trustpilot reviews in real-time. As soon as one of the products in the relevant category becomes hot and gains a lot of reviews, the price on this product on our client's website instantly goes 5% lower than any of their competitor offers.
The result? They get a crazy conversion rate from Google Shopping.
If you're selling online not only through your own website but also using marketplaces and even different locations (cross-border), you have more options to pursue.
Using very simple but important knowledge about Google searches in a specific location, as well as marketplace data for brand searches, you can build a balanced price leadership strategy for products that people really want. This can be done, perhaps, after you secure some discount commitments from selected distributors.
This is what a mix of pricing strategies looks like for one of our customers. They don't opt for the lowest price on ALL brands. They have negotiated deals with selected brands and now can assert price leadership on Apple accessories in Germany for Google Shopping. Meanwhile, while selling on Idealo, they offer the lowest prices on Logitech products (not all, but selected items). In the UK market, they are more focused on being considered the best price provider when it comes to purchasing Optoma products. For other European markets, they employ different strategies. For example, on UK Amazon, they aim for capturing profit margin — meaning, as soon as their competitors go out-of-stock, they instantly increase prices to the upper limit.
As you can see, price leadership is not a one-directional road. By being data-driven and using a relevant pricing solution you can achieve much better results in sales while also leveraging all possible opportunities for capturing revenue.
Can you think of other ways to establish price leadership and not go bust in the process? Let us know — we'll automate this process for you for free. You're also welcome to sign up for your free pricing expert course. We teach important stuff, like you've read in this article. Without any product pitching:).
Step-by-step guide on maintaining high profitability in retail.