Multi-Channel Pricing Strategy –Why Price Transparency in E-Commerce Demands a Cross-Channel Strategy

One of the most significant differences between online and offline retail consists in pricing: in brick-and-mortar retail, prices are generally very difficult to compare and the exploitation of existing price differences requires considerable effort (e.g. through a change of physical location). In contrast, online retail generally offers complete transparency, whereby prices are easy to compare and the exploitation of price differences is only a mouse click away – or, in the B2B segment, occurs through fully automated purchasing systems.

Against this background, it’s those vendors who are purely price-oriented, in particular, for whom ever further price reductions serve as an encouragement to win as many customers as possible and for whom yields are only achieved with large sales volumes. The consequences of such price erosion dynamics are particularly devastating for brand-name manufacturers. The risk is an increasing watering-down of the brand and a buyership conditioned purely to focus on price reductions. In addition, manufacturers receive pressure from “loyal” distributors who offer the brand-appropriate presentation of products and services as part of the manufacturer model of conditions and thus contribute to the branding, but cannot compete with price-oriented vendors or can only achieve minimal sales. All this considered, it is clear that the control of prices and price changes in e-commerce is a crucial issue.

However, this price transparency and its consequences are not exclusively a matter for e-commerce. If, as is usual, there is no strict separation between online and offline product ranges, a purely e-commerce-focused price strategy would be far too short-sighted for a number of reasons. On the one hand, thanks to the widespread nature of mobile Internet, price comparison has long occurred between offline shops and online stores rather than merely between different offline shops. With so-called “showrooming”, consumers use the brick-and-mortar shops to choose the product they want, but then make the purchase online with convenient home delivery – sometimes even while they are still physically present in the shop. On the other hand, alleged “offline” distribution channels also contribute to the aforementioned price erosion, since it’s not just manufacturers, but a wide range of vendors who sell products through online sales channels. The consequence of this is – especially in the case of non-selective distribution systems – that the flow of goods is simply not controllable.

• Providers: If we exclude private providers, it is primarily manufacturers, wholesalers, e-commerce players, specialist retailers and others (e.g. production-related traders) who function as commercial providers

• Online distribution channels: In general, online shops, online marketplaces and price search engines are the three distribution and marketing channels used by commercial providers

This lack of controllability of the flow of goods is fully exploited by players such as Amazon, who use different sourcing options for price optimisation. With the help of dedicated sourcing teams, a systematic optimisation of purchasing price is carried out: cross-border sourcing, for example, makes optimal use of the manufacturer’s organisational structure by purchasing from different country organisations depending on the destination country. It is also common for Amazon to buy directly from wholesalers and thus to achieve better prices than if they were buying directly from the manufacturer. These price advantages are then passed on to the customers of the marketplace, which also contributes to the above-described dynamic of price erosion.

Figure 1: Example of price erosion driven by the Amazon vendor model

(A price analysis of this kind can be created for Amazon using the freely accessible analysis tool https://de.camelcamelcamel.com/, among others)

Figure 2: Provider-channel distribution matrix

As can be seen from Figure 2, Amazon is active in three main areas:

• Amazon vendor: In the Amazon vendor model,  Amazon orders the goods directly from the manufacturer or from other suppliers, such as wholesalers. Amazon sells under its own name and is responsible for pricing and sourcing the items as efficiently as possible. Accordingly, Amazon is permanently on the search for newer, more affordable sources of goods.
• Amazon direct sourcing: Alongside its classic vendor model, Amazon operates a direct sourcing unit in Luxembourg that seeks to make use of international and, where possible, direct sourcing for large purchase volumes. Acting as a kind of disintermediation service, it aims to skip as many levels of the value chain as possible in pursuit of better prices. This means that manufacturers must contend not only with competition from players such as wholesalers, but also with cross-border challenges – that is, when their own country organisations undercut them in price and unwanted competition arises within the manufacturer organisation. In light of Amazon’s “unbeatably low” logistics costs, this method of sourcing is exceptionally attractive for the online marketplace.
• Amazon marketplace: In the Amazon marketplace model, third-party providers sell on their own account using the Amazon Marketplace infrastructure. As such, this plays no role in Amazon’s sourcing behaviour. However, this channel is favoured by wholesalers, in particular, to monetise good purchasing conditions with manufacturers through price-oriented direct selling to end consumers.

Figure 3: Example of price erosion driven by Amazon Marketplace providers

The Amazon example shows that a price strategy purely geared towards online channels is too narrow in scope; rather, businesses should pursue a multi-channel price strategy encompassing all channels. A proven concept offering solutions for the various pricing challenges described above is a systematic multi-channel performance pricing (MCPP) strategy with a market-driven, performance-based model of conditions. In the first step of the second phase (see Figure 4),gathered market data is used to establish up-to-the-minute e-commerce price transparency for the strategically relevant core product assortment. This is accompanied by the identification of products with strong price pressure (RRP vs. market price) and significant price-driving providers, the latter of which are determined through a first mover analysis investigating which providers initiate price reductions. On the basis of these results, businesses must then define a performance-oriented multi-channel conditions model that systematically incentivises both “classic” distribution services (e.g. sales) and brand-enhancing sales activities, thus rendering distribution unattractive for purely price-driven providers.

Our experience has shown that brand-damaging price erosion can only be sustainably prevented with a systematic, cross-channel pricing strategy such as the one described above.

Figure 4: Multi-channel performance pricing (MCPP)

Stuttgart, 17 March 2017 Following the rebranding of FOSTEC Commerce Consultants as FOSTEC & Company GmbH, we are excited to announce the soft launch of our new website. As well as presenting FOSTEC’s new corporate identity in vivid hues and an easy-to-understand tile format, the website also contains up-to-the-minute content and information on our expanded range of services.

Everything you need to know, at a glance

FOSTEC & Company evolved from the successful consultancy firm FOSTEC Commerce Consultants. With a broad spectrum of services on ofer, we advise our clients on a comprehensive range of digitalisation-related strategic issues. Our new website shows how we do this – not only through intelligent user guidance, but through user-friendly signposts that guide the reader from the core competences of our strategy consulting boutique to detailed, highly topical content.

Improved and adapted: The entire breadth of our new service portfolio

The rebranding also formed the basis for the expansion of FOSTEC & Company GmbH’s service portfolio. “Our diverse service portfolio was conceived to be tailored to our customers’ specific needs,” says Markus Fost. The issues of intelligence, strategy, digitalisation, e-commerce and execution are among the foremost challenges faced by FOSTEC’s client base, which includes multi-national corporate groups and medium-sized enterprises from a broad range of industries.

Clutter-free: Clearly arranged tiles provide a clear structure

The service portfolio is presented in a clear, clutter-free fashion, with the five core competences are laid out clearly in a tiled arrangement. Sub-tiles covering topics such as commercial due diligence, artificial intelligence, third party e-retailer strategy and more demonstrate the depth of FOSTEC & Company’s strategy consulting expertise.

Provision of corresponding in-depth content

It’s worth paying regular visits to the website, since the content on offer grows every broader with the growing experience of our strategy consulting boutique. FOSTEC & Company doesn’t just use its diverse knowledge to support clients with the targeted development and sustainable implementation of all-encompassing strategies – its years-long experience is also illustrated in a variety of white papers, publications and talks.

www.fostec.com – Unleash your digital potential. Now!

With the launch of Amazon Business in Europe and the associated surge in online B2B marketplaces, the rate of disruption of existing B2B business models is accelerating. At the same time, thanks to the convenient, seamless B2C shopping experience, the demands of B2B buyers are growing. Depending on their industry and on whether their marketplace strategy is implemented in a timely fashion, this can results in both opportunities and risks for manufacturers and retailers, 

Experts estimate that the online B2B market will reach $ 6,700 billion by 2020, by which time it will be more than twice the size of the online B2C market ($ 3,200 billion in 2020).[1] However, it is not only the market volume that is highly attractive, but also the expected growth momentum: compared to an online share of approx. 12-15% in the B2C market, the online share in the B2B market is currently only around 2-3%. This promises a dynamic, sustained channel shift from offline to online and represents the first component of a “BIG SHIFT” in the B2B market.

[1] Frost & Sullivan, 2015

Figure 1: Online B2B vs. B2C sales in 2020 (Frost & Sullivan, 2015)

In contrast to the B2C market, however, there are some specific B2B challenges to be overcome. The complexity of the B2B product and service range and the associated providers requires comprehensive yet easy-to-use solutions. Propelled by their B2C experience of private online shopping, more and more B2B buyers are now demanding a comparable business shopping experience.

It is clear that the European B2B online market has so far been highly fragmented and consists largely of niche providers in addition to address lists and industry directories. In other words, dominant market leaders – especially those with a dynamic ecosystem – have so far been lacking. In general, actors in the B2B sector exhibit deficits in regard to digitalisation, and often a lack systematic digitalisation strategies. Against this background, and taking into account the aforementioned market attractiveness and the need for a “consumerisation” of the B2B shopping experience, it is not surprising that experienced B2C players like Amazon (with Amazon Business) or eBay (with eBay Business Supply) are increasingly gaining a foothold in the B2B market. However, other players such as the global marketplace Alibaba.com, mercateo, WerLiefertWas and EuroPages are also playing an active role.

Figure 2: Leading B2B marketplaces and their respective product focuses

Amazon Business as an Example

Amazon Business has been online at amazon.de/business since 6th December 2016. With more than 100 million products for business customers, Amazon has chosen, as for B2C, to pursue a long-tail strategy. The product range appeals to a broad target group: there are items for restaurants, laboratories, offices and many more. There are more than 5 million products listed for tradesmen and manufacturers alone, including lubricants, tools, goggles, paints and varnishes, etc. This is made possible primarily by registered retailers who sell their products via the platform. True to the slogan “Everything you love about Amazon. For work”, Amazon Business provides buyers and sellers the convenience they know and love from the B2C marketplace. Figure 3 shows the e-commerce maturity of different industries on a continuous spectrum in terms of the suitability of their product portfolio for different e-commerce channels.Depending on the presence or absence of a suitable strategy, This continuum also indicates the potential for disruption or risk for the respective product category.

Figure 3: The e-commerce maturity stage of different industries

The B2B version incorporates business-specific features such as payment on account, multi-user accounts, and the ability to display net prices. Amazon Business also integrates easily with leading purchasing systems, including SAP SRM, SQIQUEST, Oracle Fusion, iProcure and others.

Needs of B2B Online Customers

Amazon is replicating a great deal of its tried-and-tested B2C functionality on its B2B platform and is fully embedding the B2B structure in its existing Amazon ecosystem. But what are the needs of B2B online customers, on the sell side and the buy side? According to a study on online shopping behaviour in B2B e-commerce, customer requests are the most important reason as to why sellers begin to sell their goods online, with the main challenge appearing to be the complexity of online sales of products and services.[1]  In this regard, platforms such as Amazon Business appear to offer a solution – at least for standardised products in the lower price segment. The already-high degree of digitalisation of the customer journey is reflected in the results of buyer surveys, which show that online search engines are the dominant starting point in the search for B2B shopping options. This means it is important for B2B sellers to have sufficient online visibility. The three main reasons for deciding to shop online are improved usability, a broader product choice and lower costs [2]. The fact that B2B buyers are increasingly placing B2C-style demands on their “digital shopping experience” is not surprising. From a usability perspective, it is about “business-to-people”. Whether they’re shopping privately or for their business, it is the same people using both services. Their demands on the digital shopping experience are correspondingly similar.

In a general sense, the seller and buyer needs represented in Figure 4 are the ones that occur along a typical B2B e-commerce value chain. In reality, however, the relevance of the individual value creation stages varies depending on the product category. For standardised products in the lower price segment, there is a clear trend for full coverage of the value chain by online shops and marketplaces, while for more complex, high-priced capital goods, there is a more likely to be media gap (e.g. before the actual purchase). For example, it is likely that a machine in the 7-digit price range will rarely – if ever – be sold by means of “one-click shopping”. What is more likely is that negotiations, usually personal negotiations, will take place prior to the sale (in other words, a media gap).

[1] ibi, Votum, Online Shopping Behaviour in B2B E-Commerce (2015)

[2] ibi, Votum,Online Shopping Behaviour in B2B E-Commerce (2015)

Figure 4: Buyer and seller needs along the B2B e-commerce value chain

On the basis of the B2B e-commerce value creation chain, the commercial formats and business models that enjoy the most success are those that satisfy the above-mentioned buyer and seller needs in the best possible way. Generally, when advertising to advertise to shoppers, marketplace operators place their primary emphasis on increased market transparency and better usability and service. Thanks to the market entry of well-established B2C players (Amazon Business and eBay Business Supply), there has been a noticeable increase in digitalisation pressure on the B2B segment. Overall, some market participants appear to be better prepared for the new competitors in terms of their online activities than others; small and medium-sized providers can even benefit from the platform by expanding their customer base. The big B2B representatives whose distribution strategies focus on “brick-and-mortar” are in a more critical situation. For them, there is an urgent need for action in building an online operation. The strategic challenge is to position this online operation correctly alongside cost-intensive direct sales and capital-intensive physical branches.

It is the traditional wholesale sector, in particular, that is threatened by the growth of online B2B marketplaces and the associated disintermediation, i.e. the skipping of intermediates on a product’s journey from manufacturer to buyer. Future development in the sector is expected to mirror the Amazon-driven change in the book market, whereby book wholesalers and bookstores are being skipped on the path from publisher to reader. In this respect, it is hardly surprising that, according to a study by Roland Berger and the German Federation of Wholesale, Foreign Trade and Services (BGA), 54 percent of German wholesalers see digital platforms as the greatest threat to the traditional business model.[1]

It is expected that disintermediation and the associated threat of online marketplaces will lead to substantial shifts in market share and will  have a massive impact on the B2B industry. In addition to the above-mentioned shift from offline to online channels, this shift in market share is the second component of the forthcoming predicted “BIG SHIFT” in the B2B market. In order to withstand and benefit from this market development, B2B manufacturers and distributors must develop systematic e-commerce strategies. Their aim should be to secure the most sustainable competitive advantage in the dynamic market environment.

Which sectors should consider using B2B online marketplaces?

In general, it can be said that an increasing digitalisation of the customer journey is occurring across all sectors, increasing the relevance of online marketplaces. Examining the extent to which this has actually progressed in individual cases is an essential hygiene exercise in the development of a systematic e-commerce strategy. In broad terms, the relevance of online marketplaces can be categorised according to product category. If we assume that the definition of an “online marketplace” includes an actual purchase transaction, we can see that online marketplaces are particularly well suited to standardised products in the lower price segment, particularly commodities and products from the maintenance, repair and operating sector (MRO). Examples of online marketplaces in this field include Amazon Business and Mercateo. These transaction-driven online marketplaces are especially important for manufacturers and distributors of commodities in the fields of (automated) sensors, construction, chemicals, electronics, industry, trade and MRO.

If you choose to expand the definition a bit further – as some platform operators do – the term “online marketplaces” can also refer to online directories and online platforms via which quotation requests can be sent, but no actual purchase transactions are executed. These non-transactional online marketplaces can also accommodate complex, high-priced capital goods. The reason for this is that a large part of the customer journey for these products now also takes place online, which means that B2B providers must be as digital as possible in the phases preceding the actual transaction (search and selection) and satisfy the information needs of potential customers. Examples of “online marketplaces” in this area are Alibaba.com (with a global focus) and WerLiefertWas (focusing on Europe). These non-transactional platforms have particular relevance for manufacturers and distributors of complex, high-priced capital goods in the fields of agriculture, construction and mechanical engineering.

The relevance of B2B online marketplaces for particular manufacturers and retailers – and how they can be used in a systematic fashion – must be determined within the framework of a holistic strategy. Essential first steps include the determination of a brand’s own digital maturity level in comparison to the competition and the industry and a detailed customer journey analysis of the selected target group. In the calculation of digital maturity level, various aspects are analysed (including strategy, customers, competitors, organisational structure, technology) to determine to what extent there is a need for action on digitalisation and where it would be most profitable. This creates transparency and a unified understanding of the digital “status quo”. The customer journey analysis provides information about the purchasing behaviour of B2B customers along the entire purchasing phase and across all touchpoints with a single brand. Figure 5 shows a schematic B2B customer journey.

[1] http://www.bga.de/fileadmin/user_upload/pressebereich_2/PDFs_Pressemeldungen/PM_Digitalisierung_Grosshandel_final_041116_D.pdf

Figure 5: Simplified representation of a B2B customer journey

It is important, in the context of the customer journey analysis, to segment the target group into age groups in order to be able to analyse at which point the “tsunami” of digital natives arrive to decision-making positions in the respective B2B product segment. Experience has shown that digital natives have a very “online” customer journey and are driving the “BIG SHIFT” in the B2B segment.

Once the foundation has been laid with the calculation of digitalisation maturity and the customer journey analysis, the development of the actual strategy can begin. Specific, individual measures are derived and summarised in a holistic, systematic digitalisation or e-commerce strategy.

Strategy consulting firm FOSTEC Commerce Consultants will be known as FOSTEC & Company GmbH as of January 2017.

Stuttgart, 24 January 2017 FOSTEC & Company is an offshoot of prestigious consulting firm FOSTEC Commerce Consultants, which, in recent years, has successfully supported numerous renowned brand manufacturers in the development and implementation of digital strategies under the leadership of owner and managing partner Markus Fost. “Our clients include multinational corporations and medium-sized enterprises in a diverse range of sectors: automotive, construction, fashion, industrial and consumer goods, trade and media,” says Fost.

The rebranding creates the basis for a broader range of services as well as for the inclusion of additional partners. As the leading strategy consulting boutique focusing on digitalisation and e-commerce, we are strategically expanding our official portfolio of services in line with our clientele’s needs and primary strategic challenges.

“As a subsidiary of FOSTEC Ventures GmbH, we see ourselves both as strategy consultants and entrepreneurs,” says Fost. With extensive experience across a range of investment projects – which we finance exclusively with our own capital – we prove our entrepreneurial values on a daily basis and are thus able to support our clients not only in the development of strategies, but also in their implementation.

As part of the rebranding, we will be carrying out the soft launch of our new corporate identity and the launch of our expanded website in the next few months.

We look forward to welcoming you regularly as a visitor on our website.