Price Points by Omnia Retail

The phrase ‘Loss Leader Pricing Strategy’ can sound confusing, tautologous or even verge on doublethink. It is a strategy defined by its aggression, inherently risky nature and being shrouded in questions of ethicality...

The phrase ‘Loss Leader Pricing Strategy’ can sound confusing, tautologous or even verge on doublethink. It is a strategy defined by its aggression, inherently risky nature and being shrouded in questions of ethicality and legality. But nevertheless the strategy exists. Not only does it exist, it’s very common and can be incredibly lucrative when executed properly. What is it? What are its characteristics? How can it be effectively implemented? And how can Omnia help you do so? We will provide answers to these questions during this piece. Loss leader pricing involves selling products at a loss, below cost, which in itself could seem odd. In actuality, it has strong parallels with the popular High Runner strategy. The idea is that the attractive low prices will reel the customer in and increase sales opportunities elsewhere. In 2018 a survey by Slickdeals.net found that consumers spend on average $5400 a year on impulse buys. Customers these days are driven by value and convenience. So these increased sales might be on other products in store or online, they could be complimentary products or even part of subscription models. It can sometimes be considered a marketing strategy, designed to increase customer traffic and draw attention away from competitors. It’s often geared towards market penetration as part of an ‘introductory’ pricing strategy. However it’s used, the aim is to attract a larger customer base and achieve a larger long term recurring revenue. In Action Where better to start than the heavyweight of online retail. The mighty Amazon has adopted loss leader pricing to help construct its global empire. The Kindle was sold at a huge loss, with earnings being recouped later down the line with the sale of eBooks. This is actually very common in the gaming world too. The R&D costs that go into developing a new PS5, for example, are astronomical and as such each console is sold at a loss, but the money is made back with the sale of games. Amazon Prime Membership is also offered at an initial loss, but the promise of future prime purchases helps to mitigate that. Amazon entered the Dutch market in March 2020. We anticipated the superpower would offer discounted prime membership, 2.99 euros a month vs 8 elsewhere, to achieve market share in what is a very mature marketplace, with well established incumbents like Bol.com and Coolblue. This not only turned out to be the case, but also a very effective strategy. More traditional examples include placing a heavy discount on a grocery essential, such as bread or milk and positioning that item at the back of the store. The hope is that something else gets picked up on the way back to the till. Back in 1959, British Motor Corporation decided to run the loss leading on their brand new model - the Mini. The base model was priced at a heavy discount, generating positive headlines. The desire was for those positive headlines to incite sales on the more high end, profitable models. What actually happened... the Mini ended up being the best selling car in Britain and BMC made little or no profit that year. D’Oh! Gillette on the other hand have become a world leader on the back of selling mechanical razors well below cost, but then generating enormous resulting sales from the recurring revenue of replacement blades. Other more recent examples include Google offering Gmail for free, removing the barriers to entry to adopt the full GSuite. In addition the recent so-called ‘Digital Streaming Wars’ involved Disney gaining a reported 10 million users signing up for Disney+ on day one. Their end goal is to achieve 90 million users by 2024, in a marketplace that already has some pretty big players: Netflix, Amazon Prime Video, Apple TV+ and HBO Max. They plan to reach this target with pure and simple aggressive pricing. Their current offering of $6.99 a month is already cheaper than Netflix’s $8.99. Cons Starting with the Cons, many of which may already be obvious. Depending on where your business is located, you may not even be able to implement the strategy. Some jurisdictions have interpreted the controversial pricing strategy as being completely against the spirit of a competitive marketplace. As such, many US states have severely limited and others outright banned the practice of selling below cost. In Ireland the practice has also been outlawed within the domain of groceries. As indeed this practice has been outlawed in certain quarters, we have to question its ethicality. Nevertheless, the practice has been made illegal in only a narrow set of circumstances. To make the foregoing examples more accessible we have mentioned some pretty household names, big players. But the fact of the matter is, when it comes to loss leading, it is very often only the big players that are able to sustain such a strategy. Opponents state this strategy is predatory, coming at the expense of small businesses, unable to match the low prices and eventually forced out of the marketplace. There are of course inherent financial risks involved to the business pursuing such a strategy. The first more tangible demonstration has already been illustrated by the BMC example. You are selling something at a loss, what if your sales for that item skyrocket? Some retailers have mitigated this risk by setting a cap, for example with an offer only applying to the first 100 patrons. Furthermore, the strategy is founded in the belief that earnings will be recouped by the sale of other goods, what if they aren’t? As we know, today’s customer is more discerning than ever, driven by value. Ecommerce has created far more transparency around price - the most important P in the marketing mix. So what if customers simply hop from one website to the next scooping up the best deals? Loss leader pricing can condition consumers to wait and ‘cherry pick’ only the best deals. Pros Nevertheless, consumers are not only driven by value, but also by convenience - the convenience of facilitating picking up additional and complementary products in the same place. There’s a belief that pricing a part of an assortment below cost will lead customers away from competitors’ websites and lead to more sales on other products. The price of a product is of course a signal, and as such, loss leader pricing can be seen as an investment in Marketing in order to drive customer traffic. The impact can be further improved by SEO if the products sold below cost are ones with high search volume anyway. Indeed displaying products cheaply on a website’s landing page increases the chance of sales elsewhere and is a strong visual merchandising technique. Furthermore, the signal a price emits also has implications on how that retailer might be perceived. One attractive price, can lead to a seller being considered good value in general. However, this could have negative consequences in equal measure. Customers are naturally wary and distrustful of companies offering heavy discounts. They might believe, often understandably, that there’s a trick being hidden behind that price tag that seems a little too good to be true, or that a low price represents low value. For businesses focused on growth, absorbing initial losses as well as the risks of such a strategy has historically been a small price to pay for growing a customer base and achieving increased customer lifetime value. Indeed, when an organization enters a new market or new stores are opened, a loss leader strategy might be the best way to expand quickly. Amazon’s entrance to the Dutch market as well as Disney+ to the world of online streaming highlight this. There are similarities with introductory pricing, which cable and phone companies have endorsed for years, banking on future cross sales. Additionally, this technique can be an effective means of selling off excess stock or perishables before they go off. This tactic was adopted by Camden Brewery in the UK, who as a result of Corona Virus were left with a huge amount of excess stock. They ran a competition, giving away some of that delicious beer and in return received a huge amount of positive attention! Doing it Right To evaluate, there is the potential for negative outcomes with this approach, whether to the company following it, small businesses in the same market as well as to the customers targeted. Nevertheless, in the main, pursuing a loss leader pricing strategy is perfectly reasonable. It is strong when there is a good selection of other products to purchase, it is even stronger when there are complementary products with high margins that are properly merchandised close to the loss leader product. There are of course more subtle ways to reap the rewards of loss leading, and one of those is to have a rewards program. Rewarding the loyalty of customers is a great way to incentivise future purchases and build lifetime customer value. Furthermore, offering free shipping above a certain purchase threshold is another means of subtly implementing the strategy. Successfully implementing a strategy with so much potential downside is made much easier when you are assisted by a pricing software like Omnia. The basic concept behind loss leader pricing is drawing the attention of a customer with one product, in the hope of selling them others. Omnia can help keep that customer on your site. By designing a strategy that works for you, identifying the right products and the price changes in the sweet spot, can have exponentially better results for your revenue and your margins. It’s vital to not only pick the right product to cost below price, but to price it at the right level. A tool such as Omnia helps you do this by displaying sales data, page views, margins and competitor price levels all in the same place.

In this thread we are investigating and ultimately uncovering what everybody wants to know: when it comes to pricing, what separates the winners from the losers. Last time we covered price change frequency and why it is...

In this thread we are investigating and ultimately uncovering what everybody wants to know: when it comes to pricing, what separates the winners from the losers. Last time we covered price change frequency and why it is vital to timely update your product’s prices if you want to keep up with today’s fast paced world of (online) retail. Now, hold on to your hats as we dive into the second main element setting the winners apart from the losers: understanding price ratio. But before that, we need to take a little step back, perhaps way back to your high school years if you took economics, and talk a little bit about price elasticity. More importantly, how to think about price elasticity within most retail assortments. Price elasticity Defines the height of the effect a % price change has on volume For all retailers, elasticity (also known as price sensitivity) is different between products in their assortment. You can say some products have high elasticity, some low, and most in between, forming a normal distribution that looks like the graph below. Imagine we are running a retail store selling sanitary products. Our branding team is quite creative and came up with the name: Bath’s R Us. If we were to identify our products on the elasticity distribution above, on the high elastic side we could have a bath tub. It is highly elastic because it’s an orientation product: someone needs a bath tub, finds a model they like, and looks on the internet to get the best offer. It compares the price of your offer, to the offer of the other retailers for the exact same product. The subject price is your price, the reference price is the lowest offer of the main competitors. On the other end we could have a bathtub table, this is an add-on product people mostly buy after they have already chosen to buy the bathtub. Meaning they are partially locked in. You can ask relatively more for the addon product because for the add-on, the reference price is not what other retailers ask for it. Instead, in the mind of the consumer, the reference of the add-on product is a combination of the price of the orientation product (buying a 10,000 euro car will make a 50 euro radio seem cheap), and an intuitive upper limit that the add-on product could be priced at (150 euro for a car radio might seem expensive regardless of the price of the car). Interestingly, the add-on product sales are mainly influenced by the price of the orientation product. This is called a cross-effect. If the bathtub is reduced in price, becoming cheaper than competitors, their sales will spike. Meanwhile, while the table’s price is unchanged, it’s sales too will spike as a result of the increased bath tub sales. Understanding the concept price elasticity within retail is the first step to understanding what makes an effective pricing strategy. The second step is understanding the Price ratio.You can see price elasticity as your relative price. For example, product A is 100 euro. This is the absolute price: It doesn't say anything about if it’s expensive or cheap, because there is no reference price. Now let’s say the average price is 120 euro. This would make your price ratio 0.83 (100 / 120). That is a cheap relative price. Price ratio Is your price divided by the average price of the competitors. A price ratio of 1 means you sell at the average price. It can be very insightful to analyze the price ratio of your whole assortment, especially when seeing how your assortment is distributed among price ratio ‘buckets’. A bucket could be 0.85-0.90 (like product A above), 0.9-0.95, etc. Since this article is about winners and losers in retail, we wanted to find out how this distribution differs between the two. Interestingly though, at first glance they look almost identical. Price ratio total assortment We divided the retailers in our data set in to groups: those performing very well in their category - winning, and those performing poorly - losing. We then calculated the price ratios (their price / average market price) for all their products, and plotted how much percent of their assortment is in each price ratio 'bucket' (<0.75, 0.75-0.8, etc.) To get an idea of their pricing strategy. As you can see, the distribution is quite equal between the two, with most products having a price ratio around 1 (retailer's price = average market price), and a little skew to the left side (relatively more products below average market price then above). But this graph only shows the overall and 'high over’ numbers. What we want to see how the distribution looks considering the price sensitivity of the products. We would expect the winners to have properly identified the highly elastic products and priced them accordingly. In practice, this would mean that for example orientation products, the winners will have made their price more competitive, resulting in a lower price ratio. When we dug into the data some more and made this cross-section, it is exactly what we encountered. Below you again see the number of products per price ratio buckets, for winning and losing retailers, only taking high orientation products into account. In the winning graph you can the distribution is skewed to the low end of the price ratio. Price ratio high elastic products Selling more by pricing down is easy, and most retailers that have discovered the effect of competitive pricing do it. But what really sets apart the winners from the losers is knowing when to price UP. We would expect winners to identify which products are less elastic and can benefit from a higher price ratio. Looking at the data, this exactly what we saw. Relative to the losing retailers, the winners far more often had a higher price ratio for their long tail / add-on products. Price ratio low elastic products Let us get back into the role of being the CEO of Bath’s R Us. The ‘hot item’, the bath tub, is what all consumers are looking for. Your competitors know this, and everybody is lowering their prices in order to capture the sale. So in the end, the retailer with the lowest purchase price can go the lowest and will win, right? Not quite. The margin generated by the bath tub is not the only profit you make for a bath tub sale. We saw before that often, we are able to sell the bath table as an add-on product. By identifying this cross-effect we have established that: If I lower the bath tub price, I will sell more bath tubs AND more bath tables The bath table is likely to have a low price elasticity since it is an add-on product As a result, with our gained understanding of price elasticity we will want to price the bath tub lower, and partially finance the loss in price by increasing the price of the bath table. Additionally, with our gained understanding of price ratio, we will apply strategies such as this across our assortment, and make sure we have a winning price ratio distribution rather than a losing one. In summary: winners recognize the difference in price elasticity in different parts of their assortment and then they adjust the prices to reflect this in their price ratios. Eager to find out how Omnia can help you determine your optimal price change frequency? Or if you want to discuss how we can advance your pricing strategies with our software - please let us know by contacting us!

The ability to reprice your product at a high frequency is one of the most impactful tools to control revenues and margins. The whole market is transparent and price differentiations are very visible to consumers. Price...

The ability to reprice your product at a high frequency is one of the most impactful tools to control revenues and margins. The whole market is transparent and price differentiations are very visible to consumers. Price is the major factor influencing sales decisions for consumers. Online retailers constantly exploit this to get the competitive advantage. They can instantly change the price on the website, maybe multiple times a day. This causes a dilemma for many omni channel retailers that deal with paper price tags. Of course, it is possible to install electronic shelf labels in all the stores as described in further detail in our blog articles about dynamic pricing in physical stores and 5 benefits of electronic shelf labels. However, electronic shelf labels are a big investment and take time to implement. So how do I create as much pricing power without putting a large burden on the stores? A few tips: 1 - Split Online Only & Store Assortment And Update With Different Frequencies Splitting your assortment in web-only and omnichannel assortment allows you to update the assortment in different frequencies. Despite its simplicity, this highly effective split in assortment is often still not implemented in dynamic pricing strategies and systems. As the shelf space of stores is limited and your webshop is not, the online-only assortment is larger than your omnichannel assortment. With your online-only assortment there are no physical shelf labels that need to be replaced and you can (and should) update these prices with a higher frequency to compete with your online only competitors. Make note products that are temporarily out of stock in the stores can be seen as “online-only assortment.” Be sure to add these products to the higher update frequency as soon as this happens. 2 - Do Not Treat A Price Change Of Every Competitor In A Similar Way As described more extensively in the blogpost on "how to respond to competitor price changes without starting a price war?" it is best to split your competitors in different tiers. This allows you to follow any price change of your major competitors directly, while only following smaller competitors when multiple of them changed their price. Regarding your omnichannel assortment, be more strict on who and when you want to follow. For example: Only take your omnichannel competitors into account, especially for specific products that consumers would like to pick-up in the store straight away (e.g. household products) Only change your price if multiple (major) competitors changed price This lowers the frequency of price changes significantly and makes it easier for the stores to keep up with the required price changes. 3 - Only Change Your Price When The Price Gap Is Significant Once you have created those competitor groups, differentiate between price gaps you are willing to allow. Regarding your online assortment, we advise following price changes of only a few percent or euro. These small changes are however not worth the effort for your omni-channel assortment. It’s good to add some additional logic to take this into account. 4 - Combine With Other Data Points Like Your Sales Data Split the assortment further by looking at other data points, like your sales data. You would not want the price gap of your main competitors to get too large for your top selling products. This hurts your revenue and pricing image the most. For those products that only sell occasionally, it doesn't matter if there is a temporary price gap. You can use this difference in your pricing setup. For example: For products that are sold more than five times in the last four weeks, follow the pricing of multiple, larger competitors. Allow for a small price gap only. For products that sold less than five times, look at a few major competitors and allow for a slightly larger price gap. Next to sales data you could for example also use your stock data as additional input. If you only have a few products left in stock, it might not be necessary to reprice continuously. These products will eventually sell out and it doesn't really matter if you sell the last ones a bit slower. More of these scenarios are covered in the blogpost: the margin vs revenue dilemma: how to stay competitive and profitable? 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. Market conditions 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” How to respond to competitors without starting a price war? Margin vs revenue: how to stay competitive and profitable?

Download the whitepaper to learn: How you're wasting 25% of your week on manual price checking. Why Omnia customers love Pricewatch What the benefits of pricing insights are for your company.

Download the whitepaper to learn: How you're wasting 25% of your week on manual price checking. Why Omnia customers love Pricewatch What the benefits of pricing insights are for your company.

When it comes to online shopping, bundle pricing is ubiquitous. This pricing method is extremely popular amongst Internet retailers, and for good reason. Competitive bundling is an excellent way for you to push more...

When it comes to online shopping, bundle pricing is ubiquitous. This pricing method is extremely popular amongst Internet retailers, and for good reason. Competitive bundling is an excellent way for you to push more product, stand out from the crowd, and connect with your audience in an intriguing way. So what are the benefits of bundling? Keep reading to learn more about this strategy. Bundle pricing definition Price bundling, also product bundle pricing, is a strategy that retailers use to sell lots of items at higher margins while providing consumers a discount at the same time. With bundle pricing, retailers offer several different products as a package deal, then offer that package to consumers at a lower price than it would cost to purchase those items separately. In the example below, which shows a Fujifilm Instax camera bundle and which sells for $99, consumers get a camera, a case, batteries, two film packs, a camera case and strap, a photo album, a self lens, colored filters, hanging frames, a clips and string to hang photos from, sticker frames, a cleaning cloth, and standing frames. That’s a lot of product, especially when you consider that the camera itself costs somewhere in the realm of $60. Bundle pricing is a great way to move products quickly, sell off less-successful SKUs, and offer more value to your loyal customers. Bundling is extremely common in e-commerce and retail, and you’ll often see product bundles on cheap goods or discount items. However, it isn’t the only application for price bundling, and companies in all sectors from software to utilities (like Comcast) use bundles to sell their products. Bundling works because price is the most important “p” in the marketing mix. Price is often the most important differentiator for consumers, and when they can get a bundle price on products they love, they will feel like they’ve gotten the best deal possible. Product bundle pricing has advantages and disadvantages. On the one hand it’s a great tactic to use if you want to move product quickly or give your customers a great value. However, product bundling pricing may weaken your brand if done incorrectly. It’s ultimately up to you to build a great strategy that delivers value without hurting your image. What is an example of bundling? Bundles are everywhere in retail and e-commerce. They are most common in discount stores or amongst cheap goods, but luxury brands may also run promotional bundles on occasion. However, bundles are especially important to Amazon’s strategy, and the online marketplace makes great use of bundles (which you can learn about in our guide to selling on Amazon). There are countless Amazon bundle examples, so it’s easy to dive in and look at what works. In general, there are two types of bundles on Amazon. The first is a Seller-created bundle, like the one in the photo below. This bundle is built around one high runner — the Nikon camera — which is then sold with 22 other “accessory” items like camera straps, memory cards, lenses, tripods, flash devices, and more. It’s the perfect kit for someone who enjoys photography enough that they’re willing to invest in equipment, but who doesn’t already have everything a professional may want. An Amazon bundle example built around one major high-runner item: a Nikon camera. The key to this bundle is that it is a great deal for consumers. It would take countless hours to find all of these items separately, and it would likely be more expensive to purchase each accessory individually. With this bundle, which costs $619, a consumer can be ready with their complete camera kit within two days. It’s the kind of bundle that will leave an amateur photographer with sweaty palms and a thumping heart as they click “Add to Cart”. The second type of product bundling strategy on Amazon is the kind suggested by the marketplace itself. In the image below you see an Amazon listing for a Magic Bullet blender, which costs $38. In the bottom left hand corner of the image though, you’ll see a section on the page titled “Frequently bought together” which suggests two additional products to the consumer. This section is the Amazon-suggested bundle, which uses Amazon’s algorithm to determine similar products and suggest them in the same post. In one click, the shopper can easily add all three items to their cart and know they’re getting everything they could possibly need for this blender. This suggested bundling isn’t only for small electronics. In the screenshot below of a listing of a MacBook computer you can see that Amazon suggests a pink laptop protector and case as an additional item. Related: How the Coronavirus will Affect Retail Bundles are popular outside of Amazon as well. The below bundle is a great bundle pricing strategy example. It is from the company Alpkit, which makes outdoor gear in the United Kingdom. This bundle is built around the idea of a “mountain marathon”, which is, as you may have guessed, a marathon that takes place on mountain trails. An example of a bundle in the outdoor clothing category. This bundle includes two coats, gloves, socks, a shirt, and waterproof running pants. Mountain marathons require special technical gear because weather conditions can change so quickly out in the wild. Many races require that you bring things like gloves, jackets, and trousers with you as you run, but this technical gear is often extremely expensive. Some runners will acquire these pieces over time, but some of the individual pieces can create a significant hurdle to investment (like the rain jacket in the above bundle, which costs €120). Alpkit solved this problem with a smart bundle that includes much of the gear you would need for a trail race. This kit not only moves products out of Alpkit’s warehouses — it also saves the consumer €98. How to create and use price bundles To create effective price bundles, you need to get into the mind of the consumer. What are they really looking for, and how can you give them more value with a bundle? So what can we learn about bundling from Alpkit and the other examples we’ve seen in this article? A couple of things: Understand what your users are looking for, whether that is a camera or mountain running clothes Use a high-runner item as a centerpiece Fill in the gaps with simple accessories Product popularity data (which you can get with Pricewatch) is a great resource for creating effective bundle packages because you can understand which products are flying off the shelves and which products are taking up space. If the slow-moving products complement the fast-moving ones, you can pair the two together to create a bundle that helps clear out your warehouses. This is an especially popular strategy with electronics like TVs and laptops, which will often come in bundles with charging cables, HDMI cords, and other items. You can also create bundles of popular products, which can make your high-runners even more attractive. If you see that the most popular products in the market could combine well together, you could create a “sale” bundle of these high-ticket items and sell it at a slightly higher price than you could if you discounted each product individually. You can still discount these products individually to drive people to your store with dynamic pricing (especially if they are highly elastic products), but offering the products together gives you some room to improve your margins. Finally, you can use bundles to give consumers more control. If you follow a “build your own package” model, you can give consumers the chance to create their own bundles from a selected assortment of products, then layer a discount percentage on top of their final choice. Final thoughts Bundle pricing is an awesome way to get creative with your assortment and delight consumers in unexpected ways. If you can create a bundle that meets your audience’s needs and satisfies your business goals, you’ll find a happy medium that pushes products off the shelf while keeping your store profitable. Curious to learn about some other pricing strategies? Check out some of our other articles below. What is Value Based Pricing?: A full overview of how price and consumer perception work together. What is Charm Pricing?: A short introduction to a fun pricing method What is Penetration Pricing?: A guide on how to get noticed when first entering a new market What is Odd Even Pricing?: An explanation of the psychology behind different numbers in a price. What is Cost Plus Pricing?: In this article, we’ll cover cost-plus pricing and show you when it makes sense to use this strategy. What is Price Skimming?: Learn how price skimming can help you facilitate a higher return on early investments. What is Map Pricing?: Find out why MAP pricing is so important to many retailers. Here’s What You Need to Know About Psychological Pricing (Plus 3 Strategies to Help You Succeed): Modern day pricing is so much more than a numbers game. When thought about correctly, it’s a powerful way to build your brand and drive more profits. How to Build a Pricing Strategy: A complete guide on how to build a pricing strategy from Omnia partner Johan Maessen, owner of Commercieel Verbeteren. The Strategies Behind Amazon's Success: Learn how Amazon became 'the place' to buy products online. The Complete Guide To Selling on Amazon: In this guide we answer some of the top questions we hear about Amazon and give helpful hints on how to succeed on the platform. How Does Amazon's Search Algorithm Work: Find out how Amazon connects their shoppers with relevant products as quickly as possible. Price, The Most Important P in the Marketing Mix: In this article we'll look at the relevance of the 7 P’s in today’s online marketing context.

When you produce a product, it costs your company a certain amount of money. When it comes to pricing, this “cost” serves as an anchor point for most pricing strategies. Because it costs money to produce a product,...

When you produce a product, it costs your company a certain amount of money. When it comes to pricing, this “cost” serves as an anchor point for most pricing strategies. Because it costs money to produce a product, retailers and brands, understandably, want to have an end price that is more than that cost. If the end purchase price is lower than it costs to produce a product, the retailer or brand will lose money every time they sell that product. This is where cost-oriented pricing comes into play, most notably a cost plus pricing strategy. In this article, we’ll cover cost-plus pricing and show you when it makes sense to use this strategy. What is cost plus pricing? Cost plus pricing is the most straightforward pricing strategy out there. Sometimes called a variable cost pricing strategy, variable cost pricing model, or even full cost pricing, this price method guarantees that you never lose money in a sale. Cost based pricing is the foundation for any smart pricing strategy, and is both easy to calculate and apply to your assortment. There are only three steps involved in the cost plus pricing formula: determine how much it costs to produce a product, determine how much margin you want to make (also called the “markup,” meaning how much you mark the price up above the costs), then calculate the final price by combining these two figures. “Markup” another word for the amount that you add onto the cost of a product in order to achieve your desired margin. Markups are expressed in percentages and currency amounts. How to calculate markup percentages Markup percentage is the percent amount that you add to the price for markup. To calculate a markup percentage, there is a markup percentage formula. All you need to do is subtract the cost of the product from the end price. Divide that number by the cost of the product, and multiply the result by 100 to find the markup percentage. The retail markup calculation, also called markup pricing formula Pros and cons of a cost plus pricing strategy The biggest pro of a cost plus pricing strategy is that it’s simple: just calculate your costs per unit, decide how much margin you want to make and calculate a price based on this information. But this simplicity means that cost plus has a few major disadvantages in the world of variable pricing. To start, it only considers internal variables in calculating a price, but doesn’t account for larger market influences in the pricing equation. Imagine you are selling a hair dryer, which costs you €10 to make. Say you want to make a 50% margin, in which case you’d add a €5 markup to the item on the market. This is a great strategy, and you’re guaranteed to always make that €5 with every sale. But if you looked at other products on the market, you may discover that you can raise that price a little more. Below are the first two results that appear when searching for a hair dryer. The first is from Philips and is listed at €22.49 at MediaMarkt. The second is from Hema, and is listed at €20. Even if you want to be the lowest price out of these three hair dryers, you’re still missing out on margin by only pricing yourself at €15. Related: Price: The Most Important P in the Marketing Mix The second major disadvantage to cost-plus pricing is that it isn’t flexible enough to keep up with the current dynamic market (especially if you are selling on Amazon or other fast-paced market places). If you only use cost-plus, your prices will never change with market dynamics. So, if the two hair dryers in the above example drop price unexpectedly, you may accidentally end up as the highest-priced option on the market, which can damage your price perception and lead to a reduced number of sales. Cost plus pricing also makes digital investments in things like electronic shelf labels, dynamic pricing, and pricing data like Pricewatch useless. Finally, a cost plus pricing strategy doesn’t account for the times where you may WANT to sell items at a loss. Some examples of these kinds of strategies include end-of-season sales, clearance sales, Black Friday sales, penetration pricing strategies, or even times when global pandemic fundamentally alters retail. Related: How the Coronavirus will Affect Retail What to think about when using a cost plus pricing strategy When you consider the cons of a cost plus pricing strategy, it’s easy to see why we at Omnia don’t advise cost-plus as the only strategy you use. Determining markup varies from retailer to retailer and category to category. There’s no standard markup pricing, and there isn’t any sort of markup pricing “formula” that can fit every retailer’s needs. Instead, retailers and brands need to think about markup within the context of their market. There are two main considerations: stock rotation and strategic positioning. Stock rotation Let’s start with stock rotation. If you are in an industry that has fast stock rotation, you can get away with having lower margins on the products you sell. This is because you’ll sell a high volume of these products, meaning you’ll still make profit even if there isn’t a high margin. If you produce or sell a slow moving product though, you’ll need to think about your markup differently: because you won’t sell a high volume of products (and because your products will take up valuable shelf or warehouse space for longer periods of time), you need to recoup the loss with a high margin. This is why luxury goods — like a timeless Rolex — come with high prices. You’ll have to think about where your products sit on this spectrum when determining your markup. Strategic positioning Beyond thinking about stock rotation though, you also have to think about the product’s strategic positioning. In some cases, you may want to sell a product at a LOSS instead of a gain, in which case the cost-plus pricing strategy may not be relevant for you. “Diapers are a great example of this strategic loss,” says Sander Roose, CEO of Omnia. “It’s well known within retail that diapers are not a profitable product. But smart retailers use this knowledge strategically. In many cases, they may run a sort of high runner strategy and sell the diapers at a loss, but with the ultimate goal of pulling families into the online shop. These families have bigger budgets, so retailers can easily make up for the loss on the diaper with other products.” When to use a cost-plus pricing strategy “I think a cost-plus pricing strategy makes sense for non-comparable products or own-brand products,” comments Sander. “If you can’t compare your product to anything in the market, or don’t have price elasticity data, then you can use cost plus to arrive at sensible prices for your products.” A cost plus strategy may also be good as a fallback strategy or a “last resort” pricing strategy within your dynamic pricing engine. Cost oriented pricing can be an effective way to figure out the pricing floor for your dynamic pricing strategy. When you account for a certain amount of margin as your lowest price, you can still ensure that all sales will be profitable. Final thoughts The cost plus model pricing is easy to apply to your assortment, but it does have a few major disadvantages. That said, it’s a great starting point that you should use as your price floor in any dynamic pricing strategy you create. Curious about other pricing strategies? Check out our series of different strategies, all linked below. What is Value Based Pricing?: A full overview of how price and consumer perception work together. What is Charm Pricing?: A short introduction to a fun pricing method What is Penetration Pricing?: A guide on how to get noticed when first entering a new market What is Odd Even Pricing?: An explanation of the psychology behind different numbers in a price. Here’s What You Need to Know About Psychological Pricing (Plus 3 Strategies to Help You Succeed): Modern day pricing is so much more than a numbers game. When thought about correctly, it’s a powerful way to build your brand and drive more profits. How to Build a Pricing Strategy: A complete guide on how to build a pricing strategy from Omnia partner Johan Maessen, owner of Commercieel Verbeteren.

Have you ever asked “what is penetration pricing?” If so, you’re not alone. In this article (part of our continued pricing strategies series), we’ll break down penetration pricing and help you decide if it’s the right...

Have you ever asked “what is penetration pricing?” If so, you’re not alone. In this article (part of our continued pricing strategies series), we’ll break down penetration pricing and help you decide if it’s the right strategy for you. Penetration pricing definition So what is penetration pricing? To answer that question, you first have to understand market penetration. Market penetration occurs when a company launches a new product in a market where similar products already exist. Since there is already an alternative to the product, marketing and pricing teams need to be creative to figure out how to make their product stand out. One way to do this is through a penetration pricing strategy, or a price penetration strategy. A penetration pricing strategy lets businesses attract customers to a new product by offering a discounted price upon its initial offering. After generating enough interest and gaining market share, a company will then begin to raise the price again back to market levels. The goal of a penetration pricing strategy is to introduce consumers to a product at a low risk, gather interest in a product, and build brand loyalty — not necessarily to turn a profit. Instead, the major objectives associated with a market penetration pricing strategy are to: Hook in new users Introduce consumers to a product Undermine established market leaders Create market share These goals are achieved through low, low prices which are raised again after a certain period. Companies that employ this strategy will use a price monitoring software to track average market prices over a given period of time, then use that data to calculate their introductory price. Price skimming vs penetration pricing Penetration pricing is often confused with price skimming, but these two strategies are very different. A marketing penetration strategy is when companies forego margins for the sake of drawing users to their products. It’s mostly used when a company or a new product enters a market and when the main goal is to get as many users as possible. Because margins are so slim, penetration pricing is less flexible than price skimming. Price skimming, on the other hand, is a strategy used by luxury products or other high-ticket items in inelastic categories to maximize margin. Instead of offering a low price for a product, companies using a price skimming strategy will put a high price on their products and optimize for high margins. Price skimming is frequently used by companies with high brand recognition and loyalty or products that offer significant amounts of differentiation from competitors. That’s why companies like Apple can get away with charging a relatively high price for new and innovative products. Related: How the Coronavirus will Affect Retail Penetration pricing advantages and disadvantages When deciding whether to use a penetration pricing strategy, it’s important to weigh the pros and cons. While penetration pricing is considered to be a great approach to pricing for maximum visibility in the market, it also may harm your brand perception if you don’t execute the strategy well. Pros of penetration pricing There are a few key points that make penetration pricing so powerful. 1. Introduces new customers to your product offering at a low risk One major objective associated with a market-penetration pricing strategy is to connect consumers with a new product or service. It’s a great way to enter a new market, draw attention to your product, and get some sales traction right from the beginning. It’s also an opportunity to pull customers into your store and increase potential for cross and up sells. 2. Influences price perception Penetration is also a great way to influence your product’s price perception right from the start, regardless of whether you want to be seen as a high-end retailer or a value-for-money option. With careful marketing campaigns (and using tactics like odd even pricing, charm pricing, and others), you can build an image around your product value and tell a story that influences how the consumer sees your brand. 3. Shakes up the market Penetration pricing is also a way of overhauling a market if there is an established leader. In many cases, “underdog” companies may enter a new market and sell a new product at a low price to attract customers away from an established product or service. Cons of penetration pricing While penetration pricing is an awesome strategy, it can be risky. If you don’t proactively account for the hazards of the strategy, it could be devastating. 1. Lack of value Penetration pricing’s greatest strength — its ability to draw attention to your product amongst a sea of similar alternatives through aggressive pricing — is also its weakness. Dropping a price too low will leave consumers disgruntled when you begin to raise the price — they’ve anchored their value of the product on the low price, and may not return to purchase when you adjust your price to normal levels. 2. Potential race to the bottom Another disadvantage of market penetration pricing is the potential reaction from other sellers when you introduce a low price on the market. If competitors or other market players also lower their prices in response to your introductory offer, it could spark a race to the bottom. One way to protect against this race to the bottom is to use a dynamic pricing software and set a price floor that still leaves you with some margin. Penetration pricing example An excellent example of a marketing penetration pricing strategy occurred in the Netherlands just a few months ago when Amazon.nl officially launched. Amazon’s pricing strategy is notoriously aggressive and dynamic. The company is well-known for extremely frequent price changes and an ethos of providing the best customer experience in the world — which often coincides with rock-bottom prices. As a marketplace it carries almost any product you could want, but it delivers it at a price significantly lower than other retailers. Upon launch, Amazon didn’t differ too much on its prices compared to other major online retailers in the Netherlands. But over the last few months, Amazon has competed heavily on price to drive traffic to its shop. Since most of the products on Amazon are highly elastic and offer lots of alternatives, it’s a smart strategy; it drives the average price down for most products on the store and solidifies Amazon’s price perception as the cheapest place to shop on the internet. Amazon NL has also deployed the company’s most deadly weapon: Amazon Prime. Prime is one of the key drivers of Amazon’s webshop because of the brand loyalty it inspires. It’s so effective that 82% of US households have a Prime membership, according to a recent survey, and Prime members spend almost double the amount of non-Prime members every year. When consumers have a Prime account, their first thought when they need something is to go see if Amazon sells it. Amazon knows that once consumers become Prime members, they are unlikely to leave because of the convenience Amazon provides. Prime is so critical to Amazon’s success that it was a clear part of Amazon’s Day One strategy in the Netherlands. At the time of launch (and at the time of this writing still), Dutch shoppers could try Prime free for 30 days. After the 30 day trial period, they’d only be billed €2,99 per month. This is a stark contrast to most markets, where Amazon Prime costs around €8 per month. Amazon’s goal in the Netherlands is clear: they are coupling an aggressive market penetration pricing strategy with their exceptional loyalty program, all at a low risk for consumers. Related: The Complete Guide to Selling on Amazon in 2020 When to use a penetration pricing strategy A penetration pricing policy is most likely to be effective when the product is highly elastic and in markets where there is little difference between Product A and Product B. If consumers are both sensitive to price changes and if comparable products are virtually the same as yours, it’s the perfect breeding ground to make price the only differentiator. Why? Because, according to basic economic theory, demand will increase if you drop your price. And if your product offers a better value-for-money promise, consumers will quickly buy your offering over an alternative. Say you sell blenders, for example. The basic feature of all blenders is the same: they blend liquids. Some may have shaper blades. Some may have a nicer build quality. But for many consumers, these features don’t make much of a difference. What they want is something that will last a long time and do a great job blending up smoothies every morning — nothing more, nothing less. If you wanted to introduce a new blender to the market, a market penetration pricing strategy may be a great way to get your brand noticed. If you can craft a thoughtful marketing campaign around your pricing strategy, you may be able to keep that attention and build brand recognition and perception. If you’re successful, future consumers won’t bat an eye at increased prices: they’ll know the value of the product. Final thoughts Penetration pricing is a great way to take on a new market and get your product noticed. But make sure you’re careful in the execution. If done poorly, penetration pricing can harm your brand image rather than help it — and nobody wants that. Curious to learn about other pricing strategies or interested in our Amazon guide series? Check out some of our other articles below: What is Value Based Pricing?: A full overview of how price and consumer perception work together. What is Charm Pricing?: A short introduction to a fun pricing method. What is Odd Even Pricing?: An explanation of the psychology behind different numbers in a price. What is Bundle Pricing?: Learn more about the benefits of a bundle pricing strategy. What is Cost Plus Pricing?: In this article, we’ll cover cost-plus pricing and show you when it makes sense to use this strategy. What is Price Skimming?: Learn how price skimming can help you facilitate a higher return on early investments. What is Map Pricing?: Find out why MAP pricing is so important to many retailers. Here’s What You Need to Know About Psychological Pricing (Plus 3 Strategies to Help You Succeed): Modern day pricing is so much more than a numbers game. When thought about correctly, it’s a powerful way to build your brand and drive more profits. How to Build a Pricing Strategy: A complete guide on how to build a pricing strategy from Omnia partner Johan Maessen, owner of Commercieel Verbeteren. The Strategies Behind Amazon's Success: Learn how Amazon became 'the place' to buy products online. The Complete Guide To Selling on Amazon: In this guide we answer some of the top questions we hear about Amazon and give helpful hints on how to succeed on the platform. How Does Amazon's Search Algorithm Work: Find out how Amazon connects their shoppers with relevant products as quickly as possible. Price, The Most Important P in the Marketing Mix: In this article we'll look at the relevance of the 7 P’s in today’s online marketing context.

As a retailer, you’d prefer not to see your competitors undercut your prices. But at the same time, you want to avoid a race to the bottom at all costs. In this article, we explain four ways that you can use intelligent...

As a retailer, you’d prefer not to see your competitors undercut your prices. But at the same time, you want to avoid a race to the bottom at all costs. In this article, we explain four ways that you can use intelligent dynamic pricing to protect your margins. More and more retailers are using intelligent dynamic pricing solutions to ensure that their prices are never undercut by competitors. This often prompts retailers to worry: if all companies start using dynamic pricing software, won’t this cause a race to the bottom, driving prices down so far that our margins will completely evaporate? On the contrary, this can be avoided, provided that you use an intelligent dynamic pricing solution. Unlike simple dynamic pricing, this intelligent software doesn’t simply follow the lowest price in the market. It also takes account of your commercial strategy and company-specific variables (such as buying prices and stock levels). 1. Implement your commercial strategy As the CEO of Coolblue, Pieter Zwart, said during the ING Business Boost: “In the end, there is only one thing that allows you to distinguish yourself online and that is the price. Since I have 60,000 competitors in the Netherlands alone, you can understand that this is a race to the bottom.” Despite this challenge, Coolblue is showing significant profitable growth. How do they realize this? “It’s not about the photo, the price or the buying button. It’s about the entire customer journey. It’s not only about the product that you offer, but about the complete need you are trying to meet with.” So for the purposes of your commercial strategy, it’s important to bear in mind that consumers don’t only look at prices. For instance, if you’re a retailer who offers fast delivery and payment after delivery, the consumer will be more willing to pay a premium price. Your market position within the product category also plays a role: if you’re the market leader or a niche retailer, you have more scope to charge premium prices. You can implement this kind of pricing strategy effectively if you use software for dynamic pricing. 2. Take advantage of the price elasticity of products Price elasticity is the extent to which demand for a product changes as its price rises or falls. For instance, a TV may be highly elastic, but a TV wall mount is not. When it comes to this kind of upselling product, consumers don’t generally compare prices. The same applies to articles that are relatively cheap anyway. This reduces the need to follow the lowest price in the market and enables you to widen your margin. 3. Make stock levels a factor in your pricing Many retailers currently adopt a reactive pricing strategy, reducing prices significantly once stock becomes unsellable. Dynamic pricing allows you to make stock levels a factor in determining the optimum price, so that you can optimise demand and supply. Is your stock at risk of becoming unsellable? Then cut the price to secure the lowest price position on Google Shopping, so that the product will start selling again. 4. Try the high-runner strategy The high-runner strategy is a clever strategy that has been used to great success by Amazon. It offers its biggest discounts on its most popular products, while making profits on less popular ones. Consistently low prices on the highest viewed and best-selling items drives a perception among customers that you have the best prices, taking advantage of the psychology of price perception. Another advantage is that you attract a lot of customers to your website because of these popular and competitively priced products, which provides the opportunity to cross or up sell other products with better profit margins. Intelligent dynamic pricing software makes it easy for you to configure the variables for determining your high runners, for instance the number of views or number of products sold. The algorithm of Omnia Retail’s Dynamic Pricing module determines your optimum prices based for instance on price elasticity, variables in your own system and competitor pricing data from Pricewatch. It then makes automatic adjustments. The flexible pricing business rules enable you to implement any pricing strategy that you want. Want to find out more? Ask for a demo and try Omnia for two weeks free of charge.

With today’s pricing transparency, price has become one of consumers’ key purchase decision factors. Shops navigate a tricky path when it comes to pricing: they don’t want to be undercut by competitors and lose sales,...

With today’s pricing transparency, price has become one of consumers’ key purchase decision factors. Shops navigate a tricky path when it comes to pricing: they don’t want to be undercut by competitors and lose sales, but they also don’t want to get caught in a “race to the bottom” where price cutting gets so extreme that margins completely disappear. In a race to the bottom, competitors fight fiercely for the customer due to continuous price reductions. To escape this, shops are increasingly using intelligent dynamic pricing software solutions. An often-heard concern is that when all companies in the same industry would use the same dynamic pricing software, wouldn’t that too result in a race to the bottom? Fortunately, this is not the case. Since both the commercial strategy as well as the input variables (e.g. purchase price, inventory) vary per company, there is no reason to end up in a race to the bottom. Intelligent dynamic pricing, instead of very basic dynamic pricing by simply following the lowest price in the market, actually enables stores to avoid the race to the bottom. This blog post outlines four ways how to use intelligent dynamic pricing strategies that can help you avoid a race to to the bottom and protect your margins. 1. Use your commercial strategy As CEO of Coolblue Pieter Zwart stated during the ING Business Boost: ,,In the end only one thing remains with which you can distinguish yourself online and that is the price. Since I have 60,000 competitors in the Netherlands alone, you understand that this is just a race to the bottom.’’ Despite this challenge, Coolblue drives significant profitable growth. What is their secret? ,,It’s not about the picture, the price or the buy-button. It concerns the entire customer journey. It is not just about the product you offer, but the complete need that you are trying to satisfy with that.’’ A shop’s commercial strategy influences the price because the consumer is generally willing to pay a premium price for extra services such as fast delivery, customer service or the possibility to pay by invoice. Another important commercial factor that plays a role, is the market position within the specific product category: being the destination store or a specialist/niche store could allow for a bit of a premium price. Analysis by A.T. Kearney shows that retailers with a large market share and high contamination risk could use premium pricing. Price contamination occurs when competitors quickly match a company’s pricing moves and when consumers switch providers as soon as they learn about a lower priced alternative. In many cases the optimal price is therefore not equal to the lowest price in the market. Since the commercial strategy is essential for determining the optimal price, the commercial and pricing strategy should be clearly defined before starting the implementation of dynamic pricing. The company’s overall strategy should translate to pricing tactics per category, based on the roles of categories within the retail format. A store with a broad assortment, may for example want to use aggressive pricing in a new product category to get market share whereas they may use premium pricing in a product category where they already have established significant market share. Dynamic pricing software usually offers complete flexibility to automate the pricing strategy through the creation of pricing business rules. A shop offering a high value proposition with several free services can for example: choose the most frequent price in the market + XX% and set a target margin level per product group or brand (or any other level), making sure profits will be dynamically protected to competitor’s price reductions. 2. Use price elasticity The price elasticity of demand measures the responsiveness of quantity demanded to changes in the price of the product. Elasticity per product(group) provides insights in how competitive the pricing needs to be. For example a TV is usually high elastic, whereas demand for a wall mount is less sensitive to price changes. In practice, it means that increasing the price for the TV by 10% results in a significant decrease of volume while increasing the price for the wall mount by 10% may negligible affect volume and therefore the right thing to do. Typically non-elastic products are ‘add-on’ products for which consumers generally do not compare prices or products with a low absolute price point, for which doing pricing research isn’t worth the time for shoppers. For those products there is less need to follow the lowest price in the market. 3. Use your stock levels Next to price elasticity, inventory levels are another important variable to make better pricing decisions in order to optimize profits. Early adopters of dynamic pricing, such as the airline industry, are characterized by having a fixed short-term capacity and relatively low variable costs. In such settings, it is the available capacity, for example, the number of seats still available on a flight, that causes prices to change throughout time. For several other industries using capacity or stock levels based on business rules in pricing, it also helps to optimize supply and demand and to avoid obsolete inventory. Usually a shop would reduce the price by a significant percentage after a product has become obsolete. Business rules based on stock levels could help to protect a store’s margin in case a competitor decreases its price because of obsolete inventory. If your inventory for this product is below your set limit of stock weeks or months (#units in stock divided by #units sold last 4 weeks), there’s no need to adjust the price and give away margin. The example underneath shows that if your stock coverage is less than 4 weeks and your stock age (# days in inventory) is less than 30 days the minimum margin should be 20%. One could also use the most occurring price point. Business rules on stock levels could also help to optimize profits for your own stock levels. Instead of static and reactive price reductions, business rules based on stock coverage dynamically adjust prices to stock levels. You may for example need to reduce your price by only a few percent to take the first price position on Google Shopping, instead of the static X% on the complete obsolete assortment. Proactively managing your stock levels could lead to a significant increase in contribution margin. In combination with Pricewatch, Omnia offers the unique opportunity to incorporate pricing data in the bid calculation. If you already have the first price position in Google Shopping, it may be more interesting to increase bids instead of further reducing the price. 4. Use a high-runner strategy Amazon uses a clever strategy that makes it seem like it undercuts its competition more often than it does. It offers its biggest discounts on its most popular products, while making profits on less popular ones. In Omnia you could implement this by using a high-runner strategy. You can choose a variable to select high runners: number of views, quantity sold or anything else. Consistently low prices on the highest viewed and best-selling items drives a perception among customers that you have the best prices, taking advantage of the psychology of price perception. Another advantage is that you attract a lot of customers to your website because of these popular and competitively priced products, which provides the opportunity to cross or up sell other products with better profit margins. Closing remarks These are only a few examples of how Omnia’s dynamic pricing software could help to avoid a race to the bottom. More information about Omnia? Don't hesitate to get in touch, or give us a call at +31 (0) 85 04 79 240. Curious to learn about other pricing strategies or interested in our Amazon guide series? Check out some of our other articles below: What is Value Based Pricing?: A full overview of how price and consumer perception work together. What is Charm Pricing?: A short introduction to a fun pricing method. What is Penetration Pricing?: A guide on how to get noticed when first entering a new market. What is Odd Even Pricing?: An explanation of the psychology behind different numbers in a price. What is Bundle Pricing?: Learn more about the benefits of a bundle pricing strategy. What is Cost Plus Pricing?: In this article, we’ll cover cost-plus pricing and show you when it makes sense to use this strategy. What is Price Skimming?: Learn how price skimming can help you facilitate a higher return on early investments. What is Map Pricing?: Find out why MAP pricing is so important to many retailers. Here’s What You Need to Know About Psychological Pricing (Plus 3 Strategies to Help You Succeed): Modern day pricing is so much more than a numbers game. When thought about correctly, it’s a powerful way to build your brand and drive more profits. How to Build a Pricing Strategy: A complete guide on how to build a pricing strategy from Omnia partner Johan Maessen, owner of Commercieel Verbeteren. The Strategies Behind Amazon's Success: Learn how Amazon became 'the place' to buy products online. The Complete Guide To Selling on Amazon: In this guide we answer some of the top questions we hear about Amazon and give helpful hints on how to succeed on the platform. How Does Amazon's Search Algorithm Work: Find out how Amazon connects their shoppers with relevant products as quickly as possible. Price, The Most Important P in the Marketing Mix: In this article we'll look at the relevance of the 7 P’s in today’s online marketing context.