To succeed in eCommerce you must get your pricing right when compared to the competition. Are you taking advantage of the moment when the competition runs out of stock? Do you automatically react when your conversion figures are low? What do you do when your competitor changes their prices, whether it be an increase or decrease? How do you avoid a price war?
There are plenty of avenues to go down regarding this wide topic. In this blog post, I will limit myself to explaining a good structure for competitor based pricing for eCommerce. I will cover the steps involved as well as a few scenarios which require different configurations.Let’s start by looking at the structure of this strategy.
The strategy structure consists of three main calculation steps: Price Positioning, Guardrails, and Rounding. The strategy will work as follows: the optimum price from the price position step will be checked against the maximum and minimum prices allowed by the guardrails, and finally, the output from the guardrails will be rounded.
Needless to say, how you position and what minimum margin you are willing to accept will vary in different scenarios. However, the structure will always be the same.
The price positioning step
This is where the magic happens. The output from this step will be the target price you strategically would like to set.
We will go through two possible methodologies to use in the step:
- Position the price x percent/EUR higher/lower than the competition. This is the classical positioning method.
- Set the price to reach a targeted position in a price comparison website. This is a great option if the majority of your traffic comes from comparison sites such as Pricerunner.com. Instead of focusing on the actual price difference, focus on what position in that comparison site you need to be at.
Regardless of which positioning methodology you are using, it all comes down to price elasticity. If you have no idea of how price affects demand, you have little chance of hitting the optimum price point. So how can you find your price elasticity?
To analyze your elasticity you need to have access to sales data. Your data need to show you how successful you are selling at different price premiums compared to your competitors. This analysis can easily become sophisticated and complex, but it can also be surprisingly easy and hands-on. Here are a few options to consider:
- AI-generated elasticity curves. This is the most advanced and also the best option. Neural network models will be able to consider most parameters and once they are set up they require little work to maintain. They usually need a lot of data before becoming really useful, though, so before you embark on this route consider if you have enough data.
- Create reports showing your daily generated margin value on one axis, and on the other axis, you show price differences to your competitors. The report will show you the relationship between price delta and generating profit. You need to be a bit careful when you read the conclusions, but this report will very quickly give you a feeling for your price elasticity.
The guardrail step
The purpose of the guardrail step is to make sure you stay within a certain price corridor. The optimum price from the price position step will be checked against the maximum and minimum prices allowed. The common practice is to not allow any price under a certain minimum margin and not allow any prices higher than the recommended retail price.
The minimum margin could be a value (EUR) or a percentage. The best option is determined by your company targets and the level of pricing. Another way to define minimum prices is to set a maximum discount from the recommended retail price.
Having a maximum price can seem silly. Why not take advantage when your competitors set high prices right! Well, there are a few very good reasons to define maximum prices. Your competitors could have made a mistake, added one too many 0s for example, or you could have incorrect competitor data. Maybe your matching is wrong, and the products you are comparing are entirely different. In other words, maximum prices will protect you from mistakes
The rounding step
This last step is usually quite simple. You just apply a rounding principle that is accepted by the market. It can be to set the price at psychological “price points” – e.g. if the price is between 147 and 154, you set it to 149. Or it can be as simple as rounding up to the closest 9. Usually, you can follow the standard in your industry.
Configurations for different scenarios
Now you know and understand the structure of this pricing strategy. The optimum price from the price position step will be checked against the maximum and minimum prices allowed by the guardrails and, finally, the output from the guardrails will be rounded.
Next is to configure the strategy differently for different situations. The best practice is to define a set of scenarios and then dynamically assign each product to the scenario maximizing your results.
Here are a few examples of scenarios our best customers are using:
- Sales performance-based scenario – If you are selling poorly, you might need to decrease your prices to start turning your products. This is especially true if you are selling poorly and have products in stock.
- Conversion performance-based – Low conversion is a sign that you might need to have a more aggressive sales approach.
- Competitors are out of stock – Take advantage! Increase the price a bit when you are the only player in the market with the product currently in stock. When they have the product back in stock you adjust the price back down.
- Individual SKU optimization using AI – if you have the opportunity you can let an AI engine identify the best price position for each product. You still have your guardrail to protect yourself from crazy prices. Make sure to deploy the AI model when it can predict the elasticity with a high confidentiality level.
- Your sales are slow and you have plenty of products in stock. This can be a situation where you want to price more aggressively in order to remove some stock.
- If your sales level is high and/or your conversion is high, take the chance and increase the price to a higher level.
Make sure to set up a solid governance model to allow you to detect scenarios that are performing poorly. I hope you found some new ideas on how to boost the performance of your company. Reach out to us if you want to learn about real cases where this strategy is put to use.
About The Author: Rickard Glamsjö
Co-founder and CEO of PriceEdge. Rickard writes blogs from time to time about pricing ideas and learnings he has picked up during his 10+ years helping retail & manufacturing companies improve their pricing.
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