JD.com and Alibaba create indexes to identify Chinese shoppers’ spending trends, which help retailers gain insight.
E-retailers' frenzied re-pricing activity—20% of prices change daily on competitive products—puts pressure on web merchants to win sales without going broke.
“That [weekly data is] is too stale when competing with Amazon,” says Devin Van Hout, chief merchandiser for the web-only home improvement products retailer.
Now Build.com checks and adjusts its prices daily, using software from 360pi, one of a growing group of vendors that continuously track prices across the web to help retailer clients lower—or raise—their prices to produce maximum revenue and profits.
That strategy is called dynamic pricing, and Amazon.com Inc. has been among the most aggressive in tracking competitor prices and changing its prices on the fly to attract online shoppers looking for the best deal. On hotly contested products, Amazon will change its prices many times a day, and competitors have no choice but to respond. (See examples in the sidebar on page 26.)
Sears Holdings Corp. is among the retailers taking on Amazon, as highlighted by a 360pi study of 500 products in the consumer electronics and appliance categories for the period between April 28 and May 4. During that period, Sears, the fifth-largest North American web retailer by sales, changed its prices for 8.3% of those SKUs at least four times each day, and made three to four changes daily for another 3.6% of the items studied. Amazon changed prices four times a day for only 1.1% of those SKUs, but made three to four daily adjustments on 3.7% of SKUs. Apple Inc.’s Apple.com, by contrast, changed its prices hardly at all, a sign of the power the Apple brand possesses that keeps it from having to compete aggressively on price.
In a study during the 2013 holiday season of items in the electronics, toys and hardware categories, price-monitoring technology vendor Ugam recorded 9,715 online price changes on Amazon.com between Nov. 24 and Dec. 14, far more than the number of price changes made by such major competitors as Best Buy Co. Inc., Target Corp., Wal-Mart Stores Inc. and Toys ‘R’ Us Inc. (see chart on page 28.)
“No one can keep up with Amazon,” says Jenn Markey, 360pi’s vice president of marketing. She says Amazon might change a product’s price up to 10 times a day—more often on price-sensitive products, such as power tools, and less often for apparel. She says the most active retailers change prices daily on 15% to 20% of their product assortments.
As many as 20% of all online product prices change at least daily, with some of the hottest items changing price every few minutes, says Michael Paulson, vice president of product and business at Decide.com, an online price-tracking firm recently acquired by eBay Inc.
This drive to constantly best competitors’ prices on hotly contested products inevitably drives down profit margins. Amazon’s huge market share—it accounts for about 20% of U.S. online retail sales by Internet Retailer’s estimate—makes it a Wall Street darling with a market value of $166 billion last month despite profit margins that are getting thinner each year as Amazon invests to not only compete on price, but also to build and outfit warehouses so it can offer free and fast shipping and digital content for its growing line of Kindle devices. Amazon’s profit margin for a recent 12-month period stood at 0.38%, down from 0.51% for the prior 12 months and 0.99% for the same period a year earlier, according to the retailer’s financial reports.
Not many online retailers can survive on sub-1% profit margins. And that’s leading e-retailers to come up with new strategies that minimize the hit to their profits from their competitors’ dynamic pricing. They are choosing which products to compete aggressively on when it comes to price, offering consumers other lures beyond price, and in some cases getting ultra-competitive on prices only for their best customers. And experts point out e-retailers can take advantage of all the competitive price data available to figure out where they can raise prices without losing market share.
Price is important, but it’s not the only factor that determines where a consumer buys. A bigger selection and more aggressive marketing can also boost sales, even in the era of dynamic pricing. That’s illustrated by the experience of eBags Inc. with a three-piece set of luggage from the Rockland brand called the “Carnival Hardside Spinner.”
When the web-only luggage and handbags retailer began selling the set in 2001 for $180, it was a slow seller. Eventually, eBags decided to get into the dynamic pricing game, adjusting prices based on what its competitors were doing.
“With this set [and many other items] we were attempting to be ‘in range’ with a price that would deliver the right balance of sales and margins,” says Peter Cobb, co-founder of eBags. “We were not always trying to be the lowest price on the item.” But, he noted, eBags had to be price-competitive because luggage is “a highly price-competitive and price-elastic category.”
The e-retailer doubled down on the Carnival Hardside Spinner luggage set by adding three colors, giving shoppers a total of nine sets to choose from. That brought in more consumers comparison shopping across the web for luggage, Cobb says. “When a style increases in SKU count [it provides] more reasons for a consumer to compare prices across various retailers,” Cobb says. “This sort of situation is where dynamic pricing really starts to prove its worth.” EBags also promoted the item more heavily through e-mail and personalized promotions.
The effort paid off quickly, with the set’s sales quadrupling, which helped the retailer turn a profit on the product, Cobb says. In fact, the set remains one of the top sellers on eBags.com, and the e-retailer regularly shows up at the top of Google Inc.’s search results for the set, offering it last month at $139.99.