With the increased transparency in the market, pricing becomes a very competitive game. All retailers are monitoring one another, and a single price change can trigger a chain of price changes.
This is especially true for leading enterprise retailers, the one being monitored by competitors. A small price change provokes main competitors to follow. Within a day, the new status quo can become a few euros lower than before.
So how can you create a sustainable setup that keeps you competitive yet does not disrupt the market?
We have 3 tips on how you can make smart pricing decisions.
1 - Split competitors into different tiers
It is important to take a wide range of competitors into account. This establishes a price benchmark, even if your main competitors are not selling this product.
However, keep in mind you may not want to follow the price change of a smaller competitor at the risk of pulling your major competitor (and the rest of the market) down with you.
This can best be avoided by analyzing your competition and splitting it into different tiers:
- Tier 1 competitors are major competitors. They generally decide the pricing level and everybody follows.
- Tier 2 competitors have a proper shop (not the image you and major competitors have)
- Tier 3 competitors are all other competitors selling the product
Once you split them into tiers, apply more sophisticated logic. For example:
- Tier 1 competitors: when one of my tier 1 competitors is priced lower I do the same
- Tier 2 competitors: when at least two of my tier 2 competitors are priced lower, then I follow.
- Tier 3 competitors: do not follow down, only up
If you sell products in a wide variety of categories, we’d highly recommend creating competitor tiers for each. For example, your competitor landscape for high-end cameras is different than those for kitchen appliances.
2 - Accept a small pricing gap to avoid a race to the bottom
A single euro difference can make a huge difference in terms of revenue when comparing prices to that of your competitors. However, you do not have to match the prices of every competitor.
Some example scenarios:
- For the tier 2 or 3 competitors be willing to accept that they are priced a few euros or percentages lower than you. Your stronger brand should be able to compensate for the difference. However, do lower your price if the gap gets too large.
- Regarding competitors continuously undercutting you by a few euros or cents, do not continue the pricing war and allow a small price gap. Otherwise, within a few days, you will lose all the margins and the new status quo is low.
3 - Think Of When To Price-up & Work Towards Healthier Margins
When implementing dynamic pricing, most consider how to compete with competitors when prices are going down. But, it is equally important to think about scenarios where you have an opportunity to price-up.
If your competitors follow your prices down all the time, there is also a big chance they will follow you up. For example, if there is only one other (tier 1) competitor, and you are both priced on the same level, you can try to price-up a few euros. There is a big chance that your competitor will follow your pricing strategy.
You both remain equally competitive (so revenues will not drop that much) but you will have a better margin.
In the blogpost related to “margin vs revenue: how to stay competitive and profitable” there are more examples of how to price-up and increase margins.
So... how do you implement such Logic?
We recently added new (beta) functionality to our pricing engine, called market conditions. This allows you to select parts of your assortment on both product assortment conditions as well as market conditions:
Product assortment conditions
The *if* statement that you are familiar with lets you select any product characteristics. Either static parameters, like categories and brands, or more dynamic parameters, like sales and stock levels.
An additional layer of conditions that allows you to select any combination of market scenarios. There are 3 templates:
- When a certain number of competitors are present for that product
- When a certain number of competitors are lower/higher than my current selling price
- When a min/max/avg/most-occuring price is lower/higher than my selling price
The combination of product assortment and market conditions is very powerful and enables you to outsmart competitors by tuning our repricing engine. This allows you to follow your desired pricing strategy regarding any subset of your assortment and in any market scenario.
The market conditions will allow you to implement the above tips. Moreover, conditions allow you to create solutions for other dilemmas as described in the “dilemma blogs”
Berend started working at Omnia Retail as a Consultant and Product Manager four years ago. He holds a MSc degree in Industrial Engineering and Management from the University of Groningen.