How your ecommerce site can compete on price without sacrificing margins
Most online or omni-channel businesses now have hundreds of competitors both online and offline, all trying to grab a slice of the market. Some of those are likely to follow a heavily discounted, loss-leading strategy, some may have far greater economies of scale and buying power than you. There’s also the ever expanding behemoth that is Amazon, lurking in the background and entering more and more markets. They’re all potentially selling items a lot cheaper than you, so how do you compete? Trying to match their pricing is a one way ticket to financial ruin as your margin will erode to the point where you are not making money, even if the volume of your sales actually increases. So if consumers are more savvy than ever in sourcing the cheapest products, and you can’t always match on price, particularly with retailers like Amazon, how do you compete without sacrificing your margins?
All businesses want to believe that the quality of their products and services will keep them out of the rat race on price, but the reality is quite different. Here’s some ideas on how you can avoid it.
1. Sell unique products/ranges
A simple way to avoid having to erode your margins is to sell your own products/ranges of products. Now depending on your business model this may not be possible but having your own range can give you complete exclusivity in terms of where it’s sold, and at what price, meaning you don’t have to erode profit margins. This model is only really viable for the original manufacturer or producer of products but can potentially limit sales due to the proportionately smaller market share they are limiting themselves to. Some manufacturers such as Apple will try and control the price of everything they sell through both their own and third-party channels but as their product range, market size and reach grows this becomes harder and harder.
2. Product bundles
One tool that can help you protect margins and overcome price wars is product bundles. If you sell a number of items grouped together it’s far harder for consumers to disseminate the actual cost of each individual item, particularly if you discount the bundle. This will also help you increase average order value and revenue without taking such a hit on margins.
For example if you sold some golf clubs with a bag, an umbrella, a towel and a trolley, it’s far harder for a customer to determine the actual cost of the golf clubs within that bundle to compare them with a standalone product. Not only that, your margins may be far higher on the accessories so you may be able to discount those to a higher degree than the clubs making the overall bundle more attractive on price without eroding your margins.
3. Market knowledge
Understanding where you sit in the market is crucial to being able to know how to manage your pricing strategy and still remain competitive. Having real-time knowledge of competitor pricing to compare with your own helps keep you ahead of the game and using this information can help make sure you keep any discounting programme within the bounds of what your own revenue and profit goals are. Constant undercutting to try and beat competitor pricing is a sure fire way to head towards margin erosion.
4. Product knowledge
Alongside understanding where your business sits in the market is understanding where your product range is within that market. Are there some items where you know you can gain extra margin due to your position in the market? Are there others that are highly commoditised with huge competition where margins are almost non-existent? Understanding your pricing across each enables you to know which products you can discount aggressively and which you can’t.
5. Add value
This is an area where many successful retailers manage to compete, even with higher prices. Whilst customers won’t pay a huge amount over the market rate, they may be willing to pay a little bit extra for additional value such as free shipping, free gifts or additional warranties.
For instance, John Lewis offer free extended warranties (sometimes up to an additional 5 years) as part of the price on many of their electrical items which gives consumers clear added value, particularly when purchasing relatively high value items. So although they are not the cheapest place to buy them, customers are prepared to pay extra for that additional peace of mind.
With the growth of social media and more and more retailers looking to gain a competitive advantage, some may go a step further still by offering additional experiences that complement their products. For example a company selling pots and pans may invite customers to a free cookery class or a company selling yoga mats may offer free sessions.
Of course, the price still needs to be competitive, because if a shopper balks at that, it doesn't matter how much additional value you try to tack on, they're still going to move on to a competitor. However, there is also the potential lifetime benefit of them purchasing other items from you every time they come to a class to consider! This has huge value and can help foster significant loyalty.
Loyalty schemes also offer another avenue to add value with users perhaps prepared to pay a little more in return for loyalty points that could lead to future benefits, sometimes redeemable with a higher value than they were earned at to offer an extra incentive.
6. Compete on price but within your limits
Discounts are part and parcel of retail, and always will be, so you may well have to embrace them at some point. The issue is, what discounts can you afford to set to still meet the performance targets of the business? How do you avoid eroding your margins too much but still offer prices attractive enough to compete? You also have to set a limit beyond which it is not viable for you to sell something. For instance, some retailers may think they are smart using an automated price engine that always looks to undercut their competitors to win a sale, but what if their competitors are using one too? This ends up being a race to the bottom, so even if you’re using a pricing engine, you have to still set limits.
If you try and win on price all of the time, your business model will not be sustainable - your margins will be minimal (or non-existent) and your brand will have no value. Any potential short term gains in volume will not make up for the drop in margin, and any moves to then increase prices to begin making a profit from those additional customers, will see them abandon you as quickly as they arrived, having become accustomed to those low prices.