Determining a pricing strategy for your products and services is one of the most complex processes you'll ever engage in, particularly if you are an online retailer. Set prices too high, and customers won't bite. Set them too low, and you could wind up losing money.
Add to the mix the ability of enormous retailers like Amazon to sort their transaction data and price at rock bottom due to their scale, and it seems like you're definitely going to get caught beween a rock and hard place. That's often the case if you sell a lot of different products, where prices can fluctuate on all of them throughout the day.
But don't despair. A growing number of software tools can help you compete. And there's just plain old good business strategy that can do a decent stand-in for technology.
"A lot of the sellers are using one or another form of repricing, basically a software that scans the Amazon marketplace to see if they are seling at the lowest price, and if not they will automatically update the price for you," says Andy Kim, founder and owner of Sunnyvale Wheels, and online retailer of outdoor sporting goods, based in Sunnyvale, California.
Amazon is, of course, not the only marketplace. Kim sells on about 30 different ones, including eBay. And managing pricing is a pretty all-encompassing job, which occupies a lot of Kim's day. In order to survive, he's set some formulas. That includes determining a specific profit margin for each item, and never dipping below that--even when he's undercut on price by a competitor.
"Eventually, when inventory in a competitor's stock [reaches] zero, it'll be our turn to sell at the lowest price, until they are able to restock," Kim says.
Although there are at least a dozen repricing software products available, Kim says three of the most popular include Appeagle, Feedvisor, and Repriceit. A number of online marketplace logistics services now include pricing modules as well. (SolidCommerce and ChannelAdvisor are two to consider, says Kim.)
Aspects of Kim's methodology makes sense to pricing experts such as Jean-Manuel Izaret, partner and head of the global pricing practice of consulting firm BCG, based in San Francisco. Although Izaret works primarily with large, Fortune 500 companies, he says many of the same principles apply to small business owners as well. Here are a few of his pointers:
- Collect regular data and benchmarks about products and pricing and map them to your competitors.
- Conduct regular "AB" testing, or different prices in the same or different markets, to determine pricing elasticity for a set of products. (Elasticity measures how much volume moves as a result of price changes.) Compare those price differences to your competitors' prices.
- If you use a pricing algorithm, update your prices every morning.
That last point is one that's critical for any online retailer, where your competition truly is global.
"Knowing your market is imperative to building your pricing platform," says Mitchell Fillet, a professor of business and finance at Fordham University in New York."But online retailers are like deer in the headlights, they have to check prices every five minutes, because they are globally competitive."