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)