Competitive Pricing in Online Retail. Case on Implementation

Product price is a key factor for a customer when choosing an online shop. For this reason, each seller engaged in online retail uses competitive pricing to some extent. The case on competitive strategy implementation in a specific online store will show how to track competitor prices and effectively apply received data to increase sales, income, and profit.

Income and Profit Difference

Income is all the money received from selling services/goods.

Profit is the amount of money left after all the taxes, salaries, manufacturing expenses have been excluded.

In practice, there are only a few people who implement one and only pricing strategy in their online shops. Besides, it does not make much sense to do that as it is way more productive to use various pricing strategies: one at a time or in the complex. The feature of online retail is that a user can choose among several offers of the sellers just by switching the browser tabs. That is why using a competitive pricing strategy on a regular basis is the most optimal option.

With the help of special services, competitor price monitoring allows us to do it quickly. There are several types of pricing strategies that a shop may apply.

Types of Pricing Strategies

The choice of a pricing strategy defines the profit of the shop. In order not to make a mistake, many factors should be taken into consideration: a potential number of buyers, a number of competitors and competition conditions, other sellers’ prices, a link between the products, etc.

If the price of the goods has been defined right, it will attract buyers and increase profitability. Marketers distinguish 3 main types of pricing strategies, and each of them is divided into subtypes:

1. Differential pricing strategies.

 This is used when different prices on goods are set for different population segments in one time frame with pre-planned discreteness (several price levels).

For instance, discounts for students and pensioners or varying ticket prices in the cinema depending on the row in a hall.

2. Assortment pricing strategies.

The strategies are used when goods belong to the same product series, complement each other as well as for proven products.

For example, when selling products in a set, the price of the goods bought together is cheaper than bought separately. Also, one of the products will be the one that is sold poorly.

3. Competitive pricing strategies.

To define personal prices, the prices of other sellers are taken as a basis.

For instance, sales at an average market price, economy, or premium costing.

These are the classical types of competitive pricing strategies.

Competitive pricing among online stores has its own specificity:

• To find the best offer, a buyer on the Internet has got a chance to quickly compare the goods by their price and other parameters.
• There are no territorial boundaries for Internet users. They easily order products from other regions or even countries. On the one hand, it increases reach and website traffic. On the other hand, competition grows too. That is why you should not track shops from your city only.
• There is no sense to track only those retailers that are equal to you in terms of brand popularity or sales volume. When choosing a product, more than 50% of buyers pay special attention to the price, reviews, and other criteria not connected to the store name or brand awareness.
• The E-commerce market is highly variable, that is why it is a good idea to monitor it regularly. It is much better to track the maximum number of sellers on every single product than to gather prices in specific shops only. Firstly, it is not likely that you have competitors with a 100% similar assortment. Secondly, users search for specific products on the Internet and choose among all offers, not from specific shops.

The choice of a pricing strategy is defined by the profit it may bring. Let us have a more detailed look at different types of competitive pricing strategies in online retail. At the end of the article, we will show how its use affected the sales results of the STALL online device shop.

Competitive Pricing Strategy and Its Types

Competitive pricing is forming your product prices based on the competitors’ prices. You may stick to the average market price or choose a strategy of low and high prices.

Classical types of competitive pricing strategy for online stores may alter taking into account the specificity we have written before. So, the following types of the competitive pricing strategy are distinguished:

• market penetration strategy (a strategy of minimal prices);
• high initial price strategy (a strategy of premium pricing, ‘skimming the cream’ or increased prices)
• neutral pricing strategy (a strategy of average prices)
• skimming pricing strategy

Competition-based pricing strategies

Let us consider types of competitive strategies in more detail.

Market penetration strategy (strategy of low or minimal prices)

Shops may use this strategy both with old assortment and new products. The aim of implementation is to increase the market share and sales by means of an aggressive low price policy as well as secure yourself from the appearance of new competitors. When customers are sensitive to the price and are not interested in specific brands, they always choose the best price points. To define minimum market prices, retailers make use of special services (e.g. uXprice) that conduct automated everyday monitoring.

But one should bear in mind possible risks when choosing current tactics as product sales at understated prices may significantly reduce the margin. It is important that the profit received from increasing the volume of sales paid off the expenses. If you are planning to use this strategy temporarily, do not forget to plan the terms of a gradual rise in prices to the required level.

Market penetration strategy will not do for: 

1. Premium brands’ products. Reducing the prices may discourage well-off brand loyalists. It is important for the buyers of the products of prestige that they were affordable only to people with high income.
2. Everyday products. The majority of consumers will not notice price reductions anyway. So, the profit is questionable.

The strategy of minimum prices may kick off the start of ‘price wars’ if one of the competitors has got an opportunity to counter by symmetrical price reductions. If you opt for this strategy, remember that you should have a solid strategic reserve of money to win.

High initial price strategy (strategy of premium pricing, ‘skimming the cream’ or increased prices)

Premium cost does not imply such big sales volumes like average or minimal price does. But the general profit should be higher due to a higher margin. When choosing a strategy, it is required to consider some extra budget on brand advertising. It is vital that in the eyes of customers the quality of the product was equal to its price.

This strategy will succeed if the price of a product is more noticeable, while the information about its quality — a bit hidden. The strategy works well when selling expensive vintage wines, coffee, tea, cosmetics, and other goods quality of which is not possible to check without special expertise.

Skimming pricing strategy

The current strategy is designed for new or inexperienced customers who are convinced that a high price is equal to quality. The aim of using it is to get extra profits. In this case, a seller offers low-quality goods at a high price, kind of ‘indicating’ with the high price that the quality is finest. In doing so, customers tend to find confirmation of quality and not to notice the flaws.

The use of this strategy implies gradual price reduction from maximum to optimal one. The tactics allow covering all segments of users: starting from solvent ones to buyers with low income.

In fact, the first customers purchase at the highest price. These are solvent users ready to pay more to try novelty. And the seller will receive good income with minimum expenses at a starting point that can be used for further scaling.

It will be perfect for manufacturers and distributors who just start selling a new product when demand exceeds supply. The best condition is if the product does not have many analogs.

Neutral strategy

This strategy implies that the prices are set at the average market level or with a slight deviation from them. Its implementation requires constant price monitoring of your competitors. If the number of goods in a shop is more than 100, price monitoring needs to be automated via special services.

A neutral pricing strategy allows them to receive stable profit during a long period. Even if the rest of the competitors follow this strategy as well, the possibility of ‘price wars’ remains minimal. Buyers, in their turn, get the goods at fair average prices.

The use of the average price strategy does not lead to the increase of market share. Besides, the choice of this neutral strategy itself may be both conscious and forced. For example, when other companies quickly react to recent price changes in products or when customers are too sensitive to the price.

Effective pricing: strategy choice

Pricing optimization is among the most significant factors to raise the company’s profitability. At the outset, it is impossible to accurately predict the profits from implementing one or another strategy. This process has too many factors that influence the result greatly. These are the cost of procurement, the competitors’ reaction, and other factors.

Nevertheless, the prediction of results must be necessarily done. If you have never tracked competitor pricing before, it is high time to start from it. For instance, the uXprice service has got a free trial period for that, and competitor prices monitoring can be launched right after registration.

Upon the results of monitoring, you will be provided with a comparative competitor pricing analysis. This includes both general statistics on tracked items and data on every separate product. Thus, you will have the following information on each trade item: the position of your price among competitors, the number of competitors, minimum, maximum, average price as well as a delta from their and your price in percentage.

Focusing on this data, you will be able to define an optimal strategy: of average, overpriced, or abnormally low prices. Using the audit results, you will always be able to change the strategy.

The most popular and secure option is to use the strategy of average prices. And this was the precise strategy that the STALL store used, but with a slight deviation.

Competitive Pricing Strategy on the Example of the STALL Online Store

Aim: to improve sales performance, increase the profitability of advertising investments, and increase profits.

Start of the project: Mid-July 2020.

Features of the store: There are about 3 thousand items on sale. The assortment comprises useful goods for home and original items that are usually used as gifts. Competitor price monitoring has not been done at all, even manually. A cost-plus method was used for pricing. The first monitoring of the prices has shown that the majority of items were overpriced or underpriced. This fact sheds light on why there was a group of products that had not been sold at all for the months before.

Service for competitor price monitoring: uXprice.

The choice of a pricing strategy. The shop management analyzed the data of competitor prices monitoring. As a result, a decision was taken to test two types of competitive pricing strategy on efficiency: the strategy of minimal prices and the strategy of average prices and deltas (deviations) from it.

Consequently, 2 hypotheses to be checked were formed:

• goods with minimum prices bring the most sales;
• goods with average prices bring the most sales.

We evaluated the impact of overpriced, underpriced, and average prices on sales volumes, income as well as the profitability of investments on advertising.

Hypothesis #1: products with minimum price are sold best

Before using the uXprice service, the prices in the online store had not been changed for several months. According to the monitoring results, the lists of products being sold at minimum, average, or maximum prices were formed. It was exciting to analyze the data on these product sales for the last 3 months.

To check this hypothesis, a developer sent a MySQL query to a shop database. The database included all the information on sales. After that, the data were united with a list of products’ price points received from the service. The first position of the list included goods that had minimum prices among competitors. The second position included goods with a ‘second’ price following after the minimum one, etc.

Next, the whole assortment was divided into groups of goods having an identical price point among the competitors. In each of the groups, the average number of sales per 1 product was calculated. The sum of all sales was divided by the number of goods in a group for that.

The analysis of the received data had shown that the goods with the cheapest among the competitors’ prices were not sold best. It meant that the strategy of minimum prices was not a good option for this very shop.

Hypothesis #2: products with average price are sold best

To check the second theory, the goods were sorted by Delta from average price. Delta from average price is the percentage difference between your price and average market price with an interval of 10%. Thus, all goods were divided into groups with such deviations from average market price:

… -50%  -40%  -30%  -20%  -10%  0%  +10%  +20%  +30%  +40%  +50%…

In each of these groups, we also calculated the number of sales per 1 product. According to the results, most sales were not accounted for by the average price product – Delta from average 0%, but goods with Delta from average -10%. However, goods from group Delta from average 0% also showed pretty good results, so did goods from group Delta from average -20%.

Thus, a conclusion was made that the cheapest goods weren’t credible among buyers and that they were sold worse. Nevertheless, a good price was really important for customers, and the balance between the trust and the price was a bit lower than the average price: -10%.

Upon the results of the research, it was decided that the average price strategy -10% is the best option.

API integration and synchronization with the Recommended price

To be able to unload data from the service directly to the server of the online store, the API integration was made. Thanks to it, the comparative pricing analysis of competitors appeared in the administrative panel of the STALL, and the price change became even more convenient.

By the way, the service has got one more useful metric — it is called Recommended price. You can change it individually depending on your needs as well as configure synchronization with the prices on the website. Using API, it is possible to configure data transmission from the service to the administrative panel of the website, where procurement price is indicated. And if it allows, recommended prices will be applied to the products on your website.

Competitive strategy efficiency

Adjusting to competitor prices began on July 14 and took about 5 working days. Positive influence on sales was noticeable right away although the competitive strategy implementation took place in summer when all sales tended to reduce. Currently, it has been two and a half months, and the indicators remain stably high. This is a screenshot from Google Analytics comparing to the previous period:

From the report, you can see that the number of transactions (by 22,73%), conversion rate (by 15,35%), average session duration (by 2,33%) as well as the number of pages per session (by 2,38%) have increased. Also, general revenue has increased by 36,14%. While the growth of the overall number of users and new users in comparison with the growth of previous indicators was quite small — about 3,5%.

In addition to that, the shop management was interested in the growth of such an indicator as the profitability of advertising investments. As cost per click, and advertising budget accordingly, are constantly growing. Let us analyze the profitability report within the last two and a half months compared to the previous period of this year:

So, the profitability of the investments in advertising has grown by 8,19%. This is a truly high indicator, especially taking into consideration the fact that the cost of the click has increased by 12,69% within this period.

What else we can see:

• the cost of the advertisement has increased by 25,83%;
• the number of users has increased by 2,04%;
• the number of impressions and clicks has grown by 15,34% and 11,66%;
• CTR (clickability) has reduced by 3,19%;
• the income from a click has increased by 21,92%.

Conclusion

Competitive pricing in online retail allows increasing sales, income, and the profitability of advertising investments. This is the exact opportunity that will help to compensate for the constantly growing cost of the click and increase profits of the online store.

To implement a competitive pricing strategy, it is required to monitor the prices of other sellers and conduct a competitive analysis of them. If the general number of items is several thousand or more, it is inappropriate to do it manually. The use of special services provides a chance to receive accurate data, all the required analytics as well as recommendations on optimal price.

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