How to Use Technology to Win a Price War
Chances are you've looked on Amazon for a used book that didn't seem to be anything particularly special. And yet, when you saw the price, you thought to yourself, "Am I in the wrong business?" It was hundreds. Maybe thousands.
In fact, in one case a book about the genetics of flies--you know, the things you swat at during the summer--led to a price duel between two sellers that ultimately reached tens of millions. Each of the two set a price that was a consistent multiple of the other. The result was the simple power of a geometric progression gone amuck. (Eventually the top price rose above $23 million, generating quite the Internet buzz.)
This was a case of algorithmic pricing. A growing number of resellers have begun to use so-called repricing software to automatically set product prices based on what competitors are doing. Vendors such as Appeagle, FeedVisor, Mercent, Teikametrics, and SellerExpress all sell a version of the software. In the extreme, it can be silly. But when used with greater control, the results can be helpful.
In most businesses, keeping an eye on competitors' pricing is important. When your stock-in-trade is commoditized products, you head to online mass markets such as Amazon, eBay, or Buy.com. You end up dealing with more direct competitors than you could fit on an ark--and that means massive pressure on price.
"[Consumers are] looking for something that you saw at the local Best Buy or something your friend has," says Koby Kasnett, CEO of repricing software vendor Appeagle. "[They] want the best price." And it's too easy for others to go into business, trying to sell the same products to the same people you are.
Get the price right compared with your competition, and you could see the orders coming in. So how can you use repricing software to your advantage? Here are some tips from Appeagle:
Determine your goals.
Some sellers want to get into the recommended-buy box on a service like Amazon, figuring that they will make money on volume. Others want to maintain higher margins and stress factors like high buyer approval ratings. What's your goal?
Know what it takes to reach your goal.
If you want to be in the buy box on Amazon, for example, you must be a featured merchant, enjoy a high satisfaction rating and low order cancellation percentage, and may take a longer time selling. Competing on price isn't the only action you need to take to win customers.
Understand your competition.
If you compete on price, or even match, make sure you pick the right competitors to monitor. You don't want to lower your price to match someone with comparatively bad user feedback. And you certainly don't want to blindly follow the prices of someone who follows you, lest you price used books at tens of millions. (Unless you get someone to actually buy at that price.)
Don't be a sucker.
If you sell your wares on Amazon's marketplace, then forget about trying to undercut Amazon itself. Not only does it have greater buying power than you, but you're also paying the company a percentage of your sales and possible fulfillment fees. You're better off focusing on something where business doesn't mean constantly betting against the house.
Of course, price isn't everything if you want a sustainable business that gets people to come back for more. But it's important, so use the tools available to get things right.
ERIK SHERMAN | Columnist
Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.