Pricing Strategy

The subject of pricing is typically dealt with as one part of the classic “five Ps” (product, pricing, processes, personnel, promotion). Although all five factors must be actively managed for sustainable growth in e-commerce to be achieved, pricing is an elementary success factor.

The relevance of a price strategy in e-commerce arises mainly from the following:

• Transparency regarding prices and price changes – that is, prices are simple and convenient for retailers and consumers  to compare
• Buying decisions from distributors are often based on sell-in prices – which means, for example, that a buyer for the Amazon vendor area is always on the search for the best price
• Automatic purchasing systems are often price-based – that is, systems belonging to retailers and marketplaces buy products automatically at the lowest price
• International sourcing is becoming more prevalent – in other words, as soon as the savings potential exceeds the associated transport costs, there is a tendency for cross-border trade to occur
• Logistical costs are “cheap” – which means that particularly for large marketplaces & third-party e-retailers, even small price differences make international orders worthwhile

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.

Figure 1: Provider channel distribution matrix

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 2: Example of price erosion driven by Amazon vendors

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 is a systematic multi-channel performance pricing (MCPP) strategy with a market-driven, performance-based model of conditions. The resulting added value includes:

• Achievement of e-commerce price transparency for the strategically relevant core product line through market-based price crawling of up-to-the-minute data
• Identification of products with strong price pressure
• Performance-based multi-channel model of conditions which systematically incentivises not only “classic” distribution services (e.g. sales), but also brand-enhancing sales activities, thus rendering distribution unattractive for purely price-driven providers
• The taking into account of market particularities through differentiated global add-on conditions

The multi-channel performance pricing (MCPP) strategy is divided into the following three phases:

Figure 3: Multi-channel performance pricing (MCPP)

I.) STATUS QUO ANALYSIS

In the first phase, the central objective is to provide full transparency regarding the following aspects:

• Strategic objectives and positioning, how they are reflected in pricing and what form the associated model of conditions will take
• Existing segmentation of customer groups, customers, products, countries and regions
• Analysis of the existing model of conditions
• Definition of offline, online and hybrid distribution channels
• Selection of a strategically relevant core product line

II.) PRICING INTELLIGENCE

The second phase focuses on the multi-channel performance pricing (MCPP) strategy and is divided into the following three iterative steps:

• Price monitoring: Since both non-binding price recommendations (RRP) and price lists represent purely theoretical price points, the first step is to create transparency regarding the actual e-commerce prices available for comparison. To this end, crawling-based price monitoring should be underaken for the strategically relevant core product line selected in phase I, enabling actual market prices for a clearly defined monitoring period to be obtained, the products with particular price pressure identified and the pricing strategies of different vendors ascertained. This data basis is the starting point for defining a model of conditions.

Figure 4: Price monitoring – an example of a price pressure analysis

Figure 5: Price monitoring – an example of a first mover analysis

• Model of conditions: Based on the previously collected data basis and the transparency regarding strategic objectives and positioning created in Phase I, a performance-based model of conditions is developed in line with the general framework of the multi-channel performance pricing (MCPP) strategy. To this end, clear performance criteria are defined in five categories (sales, product line, brand building, operations, promotions). In order to provide incentives for these performance criteria across all channels, adherence to the conditions is incorporated to dedicated front and back-end conditions.

Figure 6: Overview of a model of conditions for performance-based multi-channel pricing

• Global supplementary conditions: Once the basic performance-based model of conditions has been defined, the third and last step focuses on defining differentiated global add-ons to take account of market particularities. Relevant characteristics include market maturity, economic development, competitive landscape and existing cost differences.

– Market maturity: The willingness to pay and therefore the product requirement (premium versus standard) differs depending on the market phase
– Economic development: Typically measured using standardised indicators (GDP per capita, Big Mac Index, etc.)
– Competitive landscape: Different strategies and corresponding counter-reactions occur depending on the distribution of the market shares amongst competitors
– Cost differences: Significant differences in operational cost structures such as salaries, rents, logistics, taxes, etc.

III.) PERFORMANCE MANAGEMENT SPECIFICATIONS

In the concluding phase, performance management requirements are defined for the purpose of ensuring the systematic implementation of the price strategy. These requirements include, in particular, the determination of appropriate sources for sustainable e-commerce price crawling in relation to the strategically relevant core product line. They also include the specification of possible measures for sustainable price enforcement.

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