May 23, 2016, 12:36 PM

How to compete with Amazon in price and still make a profit

Offer deals on popular items to create a perception of low price, and boost margin on private-label and less sought-after merchandise.

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In today’s ultra-competitive retail environment, Amazon is the biggest challenge omnichannel merchants face. It comes as no surprise that no matter what category—from office supplies and household goods to books and apparel—almost every retailer considers Amazon its biggest competitor.

As Amazon undercuts pricing schemes and has an endless aisle of merchandise comprising more than 200 million SKUs, it is a race to the bottom for omnichannel retailers as their profit margins reach unsustainable levels. Instead of trying to beat Amazon on price, where it has a home-field advantage, omnichannel retailers must be much smarter about discounts and product mix.

Traditionally, there have been three distinct pathways to discounting items:

  • Delivering everyday low prices
  • Taking differentiated pricing strategies by products/categories
  • Advancing a private-label strategy

Traditional discounting—the low-price leader pathway—no longer serves retailers well. Before Amazon, omnichannel retailers would change their prices every quarter or, perhaps, every few months. Now managing prices and making sure that the most popular items are available is an hourly and daily concern. Using manufacturer-provided, trade-marketing dollars, retailers often rely on promotions—such as coupons, two-for-one offers and short-term price cuts—to temporarily lure customers to stores and boost sales.  These strategies might have short-term gains but are unsustainable against a competitor as flush with cash as Amazon.

The most compelling discounting strategies in today’s market are differentiated pricing and private-label merchandise. Differentiated pricing divides products by popularity, volume and margin. Frequently searched-for items can be positioned as loss leaders and will drive most of the overall consumer price perception; in a typical online retail setting, this amounts to 10-20% of the products sold. This is a strategy born of the brick-and-mortar era. In fact, Walmart famously priced its staple grocery products that lived on the perimeter of its stores (think: milk, eggs, bread) very aggressively. This helped instill in consumers the belief that the company was the lowest priced retailer across the board. Amazon.com brought this strategy to online book selling.

Being a price leader on the hottest products can fuel consumer perception, retailers and e-commerce merchants must still preserve profit margins with their other products. For instance, Amazon prices popular items aggressively in the consumer electronics industry versus its competition.  

Based on Boomerang Commerce’s “Consumer Electronics Retail Analytics Report,” Best Buy and Walmart’s SKUs were priced 10-12 percent higher than Amazon’s. In other, less popular categories, Amazon priced higher than its major competitors, looking to take margin where possible.

Another compelling discount strategy is a private-label strategy. According to Boomerang Commerce data, e-retailers are using their private-label merchandise to improve profit margins while beating Amazon on price.  In April, Boomerang Commerce studied women’s activewear apparel with plenty of private-label options. At JCPenney.com, for example, 84 percent of women’s activewear was private-label merchandise, while Kohls.com featured 57 percent private-label stock and Macys.com offered 27 percent. On that same day, Amazon.com had no private-label products in women’s activewear. The gap shows a clear opportunity for competitors to establish their own private-label brands in that category and extract profits. At least it’s an opportunity until Amazon at some point decides to enter the activewear category.

As Amazon continues to grow both its SKU count and perception as the lowest-cost player, it is increasingly important for omnichannel retailers to develop new strategies to retain profit margins. Traditional everyday low-prices and temporary promotional pricing has limited impact. Instead, retailers must adopt long-term strategies for differentiated pricing and private-label product lines to stay ahead of the competition.

Boomerang Commerce provides price-optimization technology and competitive intelligence for online retailers and brands.

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