Why Big Marketing Bills Make Retail Price Wars Hurt Much More

As retailers fight to win online market share, they're forced to up their game and push boundaries to meet customer expectations. The reality of competition in today’s cutthroat world of e-commerce translates into companies looking to one up or match their competitors, which is doing more harm than good to the industry. Many online retailers are picking and choosing features to reproduce their best offers, creating an online customer journey that's often similar across the board. Furthermore, matching promises to achieve faster delivery and extend deals only feeds into this competitive environment. This forces online retailers to battle it out on a much less lucrative front: price.

Price is becoming the deciding factor that sways the savvy buyer of today who not only wants the cheapest price, but expects it. This impacts business profitability and, ultimately, a retailer's bottom line. This spells financial danger for many retailers that are already competing in a digital marketing model that's getting more expensive every year. While competition should breed new ways of tackling problems, the resulting price war is actually squeezing the bottom lines of online retailers.

Let’s discuss what online retailers must do about it.

Price Wars

Sales to attract shopper interest make sense; warring retailers battling over consistently lower prices do not. The online retailer landscape of today is creating an environment which relies on the latter to secure sales, which can be a dangerous game in the long run.

This is happening because buying processes and customer incentives are similar or the same between retailers. This commoditization of goods without distinguishing features means that price is the main point of difference for the customer.

E-commerce outlets are battling for consumers by extending deals, increasing incentive prices and generally competing on price. This gives the customer the upper hand in the transaction. For example, Black Friday has evolved from one day to several days, while delivery expectations have moved from a few days to, in some cases, a few hours. Just look at Walmart, which announced this month it will be offering next-day delivery to parts of the U.S. in competition against Amazon.com.

This downward pressure on price means bottom lines are only squeezed tighter and tighter, making life difficult when considered alongside the ever-increasing price of online marketing.

The Rising Cost of Marketing

As online competition intensifies, marketing costs are being driven up. For example, global digital advertising spending is expected to rise 17.1 percent to $327.28 billion this year alone. Meanwhile, a survey by Profit Well found that customer acquisition cost (CAC) is up across the board for both B-to-B and B-to-C companies by about 50 percent over the past five years.

Consider that this spending is spurred on by more costly adverts. The average digital ad cost 12 percent more in 2017 than two years previous — a price hike five times the rate of inflation and 70 percent more than TV advertisements, according to a report by Adobe Digital Insights.

These big increases mean that marketing is only taking up larger portions of company budgets. On average, according to cmosurvey.org, marketing budgets comprised 11 percent of total company budgets in 2018. This figure only increases for companies in the B-to-C product space, which allocate an average of 16 percent to their marketing budget.

It's simple math to see that lower sales prices against higher marketing costs impact the bottom line of any e-commerce retailer. So, what can companies do about it?

The Bottom Line … Literally

This is business, and e-commerce retailers must be thinking strategically to tailor their prices and cope with rising marketing costs. This means not being sucked into price wars, but rather deliberately setting prices which attract customers and bring value. For example, driving down main item prices to then cross-sell complementary products with a higher margin ensures that a healthy balance is at play.

Furthermore, online retailers are best advised to use scarcity to their advantage. This means selling more white-label or private-label products, which have a higher margin, and sourcing unique products so price cannot even be compared. Skate label Supreme does a good job at this, selling small releases of clothing at a reasonable price, which then only increase in value for the customer when pieces sell out.

Cross-promotion and product bundling ensures the best chance for high-value margins. This works best when demand is high — as evidenced by Kanye West. The rapper turned designer required customers to buy $500 worth of sweats to get the newest edition of his sneaker line, Yeezys. This is an extreme example, but the principle of bundling products together for a higher total sale price still stands true for retailers. Lastly, and only when possible, cross-selling items from the same distribution centers is a handy way to decrease costs and ease logistics.

Quite simply, there are better ways to attract customers than rock-bottom prices. Lower prices against higher marketing expenditure only spells pressure for bottom lines throughout the e-commerce industry. Retailers with planned price points, unique products and cross-promotional options will be best positioned for success in this new marketing paradigm.

Anthony Ng Monica is founder of Swogo, the world’s first automated bundle solution for e-commerce retailers to increase margin.