Why Online Retailers Should Reprice Within Reason
Now that the barriers to price changes are broken down, are all bets off in e-commerce? When retailers started selling online they realized that this new selling channel was going to require an updated strategy. Shoppers no longer had to go across town or hop on the phone to compare prices. The success of comparison shopping engines even makes it possible to find the best price from one website. The solution to hypertransparency in retail has been to reprice, but the frequency and amount of changes have been the moving pieces needed to unlock retail success in the digital age.
Recently on Harvard Business Review’s blog, Utpal Dholakia discussed the risks of changing prices too often. Amazon.com is a prime example of a company that updates prices frequently, depending on the category and popularity of a product. Retailers of all sizes have followed Amazon's lead on repricing for a few different reasons. Naturally, repricing is driven by the quest to be competitive, but it can also maximize profit, revenue and manage inventory. Let’s go into each of these:
1. Stay competitive: Dynamic pricing is all the rage in a few different industries, from sports to retail. In retail, dynamic pricing takes a number of factors into account, such as time of day, competitor pricing, demand and more. Competitor pricing has always been a strong force. Unless a retailer has a unique product that no other sellers have access to, there will always be competition on shared and similar items across sellers.
Price matching is often the phrase that would come to mind here, and it’s certainly a great thing for consumers. However, it eats into profits and weakens brand value for retailers. That’s why so many retailers have turned to pricing optimization software. It allows them to automatically change prices, but always keeps their brand image and business goals in mind with maximum and minimum price rules.
2. Maximize profits and revenue: Having flexible prices that are dictated by the market makes it possible to optimize for the metrics that matter most to an online retailer. Back to the example of Amazon; it's volume-oriented and having low prices is a time-tested way to boost revenue. On the other hand, increasing profits can be accomplished by raising prices. The perfect time to do this is when a competitor runs out of stock. Raising the price of an item slightly, but not so much that shoppers reconsider their purchase, helps retailers make the most out of every sale. Dynamic pricing allows retailers to play effortless defense and offense.
3. Manage inventory: Selling online can seem like the perfect way to get products into consumers’ hands, but when something goes awry and stock is depleted, the fun is over. Automatic price changes can help here as well. Sellers on Amazon are penalized when they run out of stock because it can lead to customer service disasters when customers have paid for items that aren’t actually in the warehouse yet. The solution to this is to have prices increase significantly in the event that there's dwindling inventory. This might seem unfair to consumers, but it’s simple supply and demand. If a consumer is willing to pay a higher price, then they’ll get it, but most will hold off until the stock is replenished and pricing goes back to normal.
While changing prices is easier and faster than ever, that doesn’t give retailers the license to do whatever they want. After all, they want to maintain consumer trust in their brand and build customer loyalty. That’s what makes Amazon such an interesting case. The retailer reprices some products as often as every 10-15 minutes, but shoppers keep coming back for more. The retailer is incredibly picky about which products’ prices it changes. Its assortment and free shipping often pull shoppers back, even if they're notified that an item in their cart has increased in price (this has definitely happened to me before).
Pricing is just one piece of the online retail puzzle and Amazon gets this. Succeeding in the industry is a matter of striking a balance between inventory, shipping and return policies, customer service, and pricing. Repricing might cause consumers to lose confidence in certain brands, but retail is a race and keeping up with the market is a must in order to make the most out of every sale.
When is it too much? What’s the tipping point when a consumer gives up on a retailer and all their flip-flopping? That’s where data comes in to keep retailers from repricing too often and by too much. Historical sales data can show the specific price at which demand dropped off to keep retailers from making the same mistake again.
I can certainly agree with Dholakia that a retailer should only change prices that are in line with its brand image and specific business goals. Repricing has proven to be an effective tactic for Amazon and others, but retailers still need to reprice with caution and stay up to date on the impact it's having on their bottom line. The gloves have come off in e-commerce, but a race to the bottom must still be prevented to protect margins.
Angelica Valentine is the content marketing manager at Wiser, a price intelligence engine for brands and retailers.
