October 22, 2012, 12:18 PM

Price wars don’t necessarily maximize profits on Amazon or eBay

Marketplaces consider many factors when determining which sellers get top product listings.

Whether you’re a consumer or a merchant on Amazon or eBay, you’ve probably noticed that some prices change too fast to keep up with. And over the past few years as online marketplaces grew, merchants trying to stay competitive have increased the frequency with which they re-price their products, say marketplace sellers and the vendors who provide them with automated re-pricing and product listing technologies.

But now many of those vendors, including Mercent Corp., Teikametrics, ChannelAdvisor Corp. and Zoovy Inc., say that having the lowest prices isn’t the whole story when it comes to winning top spots in e-marketplace search results.  I caught up with a few of them to find out what they know about how e-marketplaces operate and what retailers can do to boost their sales with them.

Alasdair McLean-Foreman, CEO of Teikametrics, which specializes in helping merchants to sell on Amazon’s marketplace, says retailers who immediately list their products at the lowest price in order to beat competition may in fact be cheating themselves out of revenue. For example, if a merchant with 100,000 items lists them at a higher price point than a competitor with only 10 of the same item, once the competitor sells out its much smaller inventory, the merchant is free to sell its inventory for more money. For the retailer with lots of inventory, this could lead to significantly more revenue than if the merchant had aimed to offer the lowest price and ended up selling a lot of goods at rock-bottom prices, McLean-Foreman says.

Sometimes, he says, it also pays for retailers to wait before rushing to be in the Buy Box, or the first product listing that appears when a shopper on Amazon or eBay clicks the “buy now” button. That’s especially true for merchants selling seasonal or niche items. A costume retailer, for instance, might want to lay low until two or three weeks before Halloween so that other merchants sell out of their costume inventory. Then the retailer that waited can respond during the period of peak demand by selling its own wares at higher prices. Teikametrics helps retailers automate timing and inventory optimizations for clients.

Looking at the question from Amazon’s perspective, experts say price is only one of the factors that determine which merchant gets the top listing.

Brian Horakh, founder and CEO of Zoovy, says he’s noticed that sometimes simply refreshing product information on Amazon without making any price changes garners a top listing. When he dug into the factors that determine retailers’ rankings in Amazon search results, he was surprised to find that price was only one of many—the others include proximity to a buyer, shipping offers, inventory levels and reputation.

Amazon also tracks a retailer’s statistics on operating performance over 30-day, 90-day and lifetime periods, he says. Such statistics include consumer ratings and cancellation rates, which come from not having the inventory to fulfill an order, and which can lower a retailer’s ranking in search results on Amazon.com. “Retailers don’t understand how bad it hurts them to accidently oversell,” he says.

Amazon also factors into its marketplace search rankings whether a retailer participates in Fulfillment by Amazon, a program in which Amazon ships goods from its own warehouses on behalf of its marketplace sellers, Horakh says.

Still, Eric Best, CEO of Mercent, adds that despite all these factors, retailers that don’t re-price with some regularity aren’t doing all they can to win on e-marketplaces. Standing out online is tough, and with 90% of sales on Amazon coming from the Buy Box, he says, retailers need to be on their toes. Mercent monitors and updates product information for two million SKUs per hour. This holiday season Best says he expects to see for the first time merchants re-pricing more frequently than every hour.

“If your competitor re-prices daily and you do it hourly, for 23 hours a day you are in position to own the [purchase] decision,” he says. “You might not have the Buy Box, but you can decide what to do—if they re-price at midnight or one a.m., you can decide if you want to replace them for the rest of the day.”

Indeed it’s up to retailers to decide whether they want to race to the lowest price to win sales. But to really maximize e-marketplace profits, they’ll need a deeper strategy.

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