CEO Sharon Price John says Build-A-Bear’s old e-commerce system is a big reason for disappointing online sales in December.
As they wrestle with Amazon, merchants struggle to find the prices that will drive sales without gutting profit margins.
Surfboard and paddleboard manufacturer Isle Surf & SUP grew its year-over-year revenue by 25% on Amazon.com Inc.’s marketplace, thanks largely to a tool that continually adjusted its product prices on Amazon so that the company’s low prices caught shoppers’ attention.
The algorithm that repriced Isle Surf & SUP’s surfboards and paddleboards identified which merchants Isle Surf & SUP was competing with on Amazon and tracked their pricing moves. The software, which the retailer started using in September, reset the manufacturer’s product prices every 15 minutes in response to other sellers’ price moves. It also factored in parameters the e-retailer set for profit margin and visibility in the Buy box, the box on an Amazon search results page that lets a consumer immediately purchase the item from the retailer—Amazon itself or a marketplace seller—featured in that prime location.
Despite the sharp rise in sales from Amazon, Isle Surf & SUP stopped using Feedvisor’s repricing software on Feb. 22.
Marc Miller, Isle Surf & SUP partner and co-founder, says the software presented two problems: The price competition from Amazon and marketplace sellers with similar products drove the prices recommended by the repricing tool down so low it ended up posting prices on Amazon that undercut the prices the manufacturer listed on its own website, IsleSurfandSUP.com. Those lower prices, combined with the 15% commission the manufacturer has to pay Amazon on each Amazon sale, cut into the manufacturer’s profit margin. And having boards priced lower on Amazon than on its own site could all but guarantee consumers would place their orders on Amazon.
While it stopped using the repricing software, Isle Surf & SUP continues to sell through Amazon. But it no longer actively participates in price wars with other sellers to chase sales. Miller says he is considering using the repricing tool in the future to liquidate excess inventory. That can be an effective way to use repricing tools because the seller can set its parameters in a number of ways, including setting the price low enough that inventory moves more quickly. However, retailers don’t just use it to underprice online competitors. The software looks at a retailer’s competitors’ websites and across the web, and reprices the retailer’s products up or down so the retailer remains competitive and hits its targeted profit margins.
Some versions of repricing software incorporate an e-retailer’s inventory and its rivals’ inventories, when visible on the web, to devise an optimal price based on supply and demand. For example, a retailer with little remaining inventory need not set its prices too low because it likely will sell the remaining merchandise at a higher price. At the same time, if a retailer sees its rival has little inventory left it can also hold its price at a higher level, knowing that once the competitor sells out it will be able to get the higher price.
How to set prices—and how flexible a merchant is ready to be to change prices—is an issue online retailers struggle with. Consumers can quickly and easily compare prices across the web, clicking to Amazon or Google to survey competitive prices, and repricing technology can help merchants undercut competitors’ prices and all but guarantee sales. But retailers must make money, and competing on price threatens profitability. That’s compelling some to bank on being known for fair pricing rather than the lowest price.
“Almost all retailers are feeling pricing pressure from Amazon and possibly other marketplaces like eBay or Alibaba, as well as from brand manufacturers that are now selling directly to consumers,” says Chris Fletcher, Gartner Inc. research director. “They realize that there is a point beyond which they cannot drop their price without incurring a loss.” Alibaba Group Holding Ltd. operates an international shopping portal called AliExpress where thousands of merchants—Chinese and non-Chinese—sell their merchandise, often at low prices.
Nowhere is this conundrum felt more acutely than on Amazon. A Top 500-ranked e-retailer that asked to remain anonymous says it recently turned off the repricing software it used to meet or beat prices on several thousand SKUs it offered on Amazon’s marketplace. While it deployed the software in early 2015 to win the Buy box, doing so destroyed the merchant’s profit margin.
“It turned out to be a negative experience, as the end result was continual degradation of retail prices and not necessarily winning the Amazon Buy box since competitors or Amazon itself also had a repricing tool,” the retailer says.
After it stopped using the software, its profit per sale rose, the executive says. The e-retailer now sets prices based on meeting set profit margin thresholds. It continues to sell through Amazon, which is the starting point for 44% of U.S. online consumers when they look to buy or research a product online, according to survey results released last fall by digital marketing firm BloomReach Inc.
“We turned off the repricer and although we did not see an immediate sales increase, our margins ended up being positive,” the Top 500 e-retailer says, declining to be more specific.
Amazon often has the price to beat, at least on highly competitive products that are most likely to prompt consumers to compare prices. And while Amazon can wrestle down prices when it wants to on a lot of products, the mechanics behind its own pricing fluctuations are pretty straightforward economics. Its strategy is clearly visible on product pages. When it has a lot of inventory, it’s willing to offer a lower price than when it has less inventory. In product categories where the same product comes in multiple sizes, such as in apparel or shoes, Amazon will price according to its inventory level for each size and color. Instead of showing one price for the SKU in those cases Amazon routinely displays a price range—a pricing approach that is virtually impossible to replicate in stores.