Brands and retailers know better than anyone — one bad apple can ruin the whole bunch. 

In a competitive market where consumers can compare and shop for the best prices in an instant, sellers are incentivized to offer the most competitive prices. But pricing is a delicate dance between brands, their retailers and consumers to ensure fair value, profit margins and the highest quality products.

What can you do to prevent deep discounts from eventually driving your products off the digital shelf? Here’s everything you need to know about price erosion and how to stop it.   

What Is Price Erosion?

Price erosion is what happens when a retailer or a marketplace seller discounts a product to a new market low (meaning it offers the best online price for this item) and triggers a chain reaction where other sellers lower their prices in a “race to the bottom.” This results in a loss of profit for all sellers of this product, , as well as potentially damaged partnerships between the brand and its retailers. 

While consumers may benefit from lower prices in the short run, price erosion can result in lowered quality or total elimination of the product down the road. 

With so many sellers, high-traffic marketplaces can be hotspots for potential price erosion. Sellers, both authorized or not, may compete on a listing to offer the best possible price. Retailers and sellers on other marketplaces could pick up this new price and try to match it, or worse, beat it. This could happen even if your retailers signed a minimum advertised pricing (MAP) policy: either they knowingly violate it, or they have automated repricers that are not configured with a floor price.

Why Is Price Erosion Bad?

What’s wrong with a little competition? A lot — especially when prices are so low that no one wins. Beyond losing a sale here or there, all parties involved get hurt by price erosion’s long-term effects. Namely:

• It diminishes product and brand value. Deeply discounted products come across as cheap and lose their exclusivity, harming luxury brands and those that tout high product quality. 
• It disincentivizes retailers. When their profit margins shrink and they lose to competitors, retailers have no reason to continue selling price-eroded products. This is especially true when authorized retailers cannot move below MAP pricing to compete with the offending sellers. 
• It risks total brand revenue. If they can’t achieve desired margins, retailers may push for refunds or markdowns, cutting into brand revenue. Plus, consumers may begin to expect discounts, holding out on full-price items or failing to purchase at all. 
• It forfeits retail partnerships. Price erosion can force retailers to break ties with your brand and partner instead with competitors who have more beneficial pricing policies. 

Even worse, price erosion isn’t specific to e-commerce. It can trickle down to brick-and-mortar sales too. While these stores can still secure sales by offering coupons and price-matching programs, it results in lost profits from making up the difference. 

How Can You Avoid Price Erosion?

Price erosion is not a problem with a quick and easy solution. However, you can take proactive steps to curb its influence.

Create a MAP and Other Seller Agreements

If you don’t already have a minimum advertised price (MAP) policy in place, it’s imperative you create one before going any further. Your network of sellers can’t adhere to your MAP rules if you don’t have them. You can also devise a reseller agreement that outlines all of your expectations prior to beginning the relationship. These rules give you leverage to take disciplinary or even legal action if needed down the road. Please note that MAP policies are often illegal outside of the US.

Choose Retailers Wisely

The more the merrier, right? Unfortunately, one of the main causes of price erosion is a wide distribution with too many sellers. Rein in access to your products by being strategic about the channels and marketplaces you sell on in addition to the selling partners you choose. Create an approval process and select sellers who have:

• Similar brand values and who practice integrity
• High ratings
• A positive and credible online presence
• A compliant return policy

From there, keep in close contact with your authorized sellers and regularly audit your approved partners list to ensure credibility. 

Regularly Assess Your Pricing 

The market is constantly in flux, warranting the need to modify prices and thresholds over time. Be realistic about your MAP policies so retailers can comply. If the MAP is too high, it might fail. If it’s too low, you may leave money on the table. 

Automate Price Monitoring

There are too many sellers and channels to manually monitor price fluctuations. Implement an automated price monitor to be your “eagle eyes” across the internet so you can spot price fluctuations and MAP violators early and often. Look for a high-frequency price monitor: if multiple sellers drop their price, it can tell you which one did it first.

Stop Price Erosion Before It Starts

The market is too saturated with competing sellers to not have a pricing strategy in place. Rithum’s Managed Services experts can guide you through the process to devise a pricing strategy, implement price monitoring and make the biggest impact on your profit margin. Over 20+ years, we’ve helped companies fight pricing wars with proven technology and ironclad strategy. Let us help you execute the best repricing options to accomplish your goals and continually monitor performance as circumstances change. 

Contact us to learn more or request a demo with our team of e-commerce experts today to get started.  

The post What Is Price Erosion and How You Can Stop It appeared first on Rithum.

Price: the topic that may very well consume most of your mindshare as an online seller. Between ensuring profit and enticing customers, there never seems to be a happy medium. Is it really feasible for your teams to monitor competitor price changes and update your own in real time? 

Luckily, there’s an option that combines the best of both worlds. 

As supply costs soar and consumers go hunting for deals, these dynamic pricing tricks will help you stay competitive while keeping your team flexible. 

What Is Dynamic Pricing? 

Dynamic pricing is a strategy that modifies prices based on current market demands. It is sometimes called variable pricing, surge pricing or demand pricing because it capitalizes on changes in supply and demand in the moment. 

Consider a ride-share service that increases prices during peak travel times or a grocer who lowers prices when produce is in season. Unlike static pricing, dynamic pricing in e-commerce helps you maximize profit. 

It seems simple, but the larger your catalog, the more difficult it becomes to set prices. Plus, dynamic pricing doesn’t always apply to every commerce sector, especially those where customers expect fixed prices, including restaurants or flat-rate shipping. 

What Are the Benefits of Dynamic Pricing?

E-commerce has played a huge role in the emergence of dynamic pricing, considering the number of choices consumers now have, the larger pool of customers and the online buying habits of digital shoppers. Retailers choose dynamic pricing strategies because they:

• Allow for nimble decision making. Instead of relying on team members to manually enter price changes, automated repricers adjust values based on real-time stock availability, changes in shipping and consumer demand or product seasonality.

• Maximize the potential for profit. Whether you’re experiencing an overstock and need to reduce prices to entice sales or your product is a hot item for the upcoming holiday season, dynamic pricing adjusts automatically to bring in the most profit. 

• Provide greater industry insight. Dynamic strategies give you deeper insight into competitor pricing and industry changes as they occur, helping you move more nimbly and make better long-term decisions. 
• Continue to bring in profit during downtimes. Weak economy? Suffering the effects of inflation? Unlike products with fixed pricing that consumers simply stop buying, dynamic pricing allows you to recoup sales with lowered thresholds and discounts. 

What Are the Different Types of Dynamic Pricing?

Dynamic pricing is not a one-size-fits-all strategy. Different forms allow different companies to choose a method that meets their needs.

Time-Based Pricing

Consider the old joke of umbrella prices that increase when it rains. Time-based pricing accounts for changes in demand based on timing, including rush hour ride-share surges, Black Friday pricing discounts or other limited-time offers.

Segmented Pricing

Under this method, different segments of customers receive different pricing for the same products. You may choose to segment customers by loyalty and membership or even how much they value your products. For instance, sporting event tickets may offer the same seat, but pricing depends on the teams playing, their performance and how many fans they have. 

Before engaging in segmented pricing, consider factors like customer demographics, location, seasonality or even the product’s format. For example, customers may be willing to pay more for a physical copy of a book than a digital one.

Peak Pricing

Like time-based pricing, peak pricing adjusts product values based on hourly, daily or even seasonal fluctuations in demand. But peak pricing focuses specifically on demand surges, when there’s congestion and higher prices are needed to reduce the mad dash. Utility companies sometimes charge peak prices in months or seasons when energy usage is at its highest, helping curb overconsumption.

What Are the Top Dynamic Pricing Strategies in E-Commerce? 

1. Use an Automated Repricer. Automated repricing tools adjust your prices to remain competitive and align with your goals — without manual monitoring. Choose from multiple options based on your intended outcome:

• Want to win more of the buy box at the highest price possible?  A marketplace repricer uses algorithmic pricing technology to help you win the buy box or best offer position at the highest possible price.
• Want to focus on specific goals? A velocity repricer automatically adjusts based on the goals you set — whether you want to extract more margin on fast-selling products or lower prices when sales are slow.

2. Constantly Monitor Competition. Searching for a single product can yield a dozen or more results, and if your listing doesn’t rise to the top, it’s unlikely to be seen, let alone clicked.

Staying ahead of pricing trends requires competitive data analytics that are easy to grasp at a glance. For this reason, visualization dashboards and benchmarking tools are key. The right analytics tools will provide SKU- and ASIN-level insights into how your pricing stacks up to the competition in straightforward, uncomplicated reports.

3. Look for Opportunities to Bundle. Bundling products into single-SKU offerings isn’t just a best practice for competitive pricing. It’s also a great way to differentiate from the competition. 

There will be plenty of times when a consumer is shopping just one of your items. But if they see your promotion for an even better deal — a discounted three-pack, for example — there’s a good chance you’ll land an even bigger sale. By grouping popular products into competitively-priced packages, you can inspire consumers to stretch their wallets.

4. Centralize Marketplace Management. Depending on how many marketplaces you sell on, managing multiple accounts makes it incredibly difficult to streamline your pricing strategy. How will you know when your Amazon price becomes higher than what’s on eBay or Google Shopping? The lack of a centralized view can lead to gaps in data, inconsistencies in pricing and delays in problem diagnosis. 

Instead, consolidating your multichannel efforts into a single, streamlined platform gives you total visibility over your entire e-commerce program and prevents small issues from becoming big problems.

Are There Downsides to Dynamic Pricing?

Dynamic pricing that results in lower prices is rarely met with criticism. But price changes that discriminate or take unfair advantage over customers are poorly perceived — and may result in substantial losses. Variable pricing works best when it’s clear why you’ve made adjustments and consumers have come to expect a certain amount of price fluctuation. 

You may consider applying smaller price hikes or only implementing dynamic pricing to some products and not others. That way, customers can better set expectations for your products and typical price ranges. 

How Can You Implement Dynamic Pricing?

Between optimizing listings, managing errors and fulfilling orders, there’s little time left to scrutinize pricing on hundreds or thousands of SKUs. With a little preparation and a lot of automation, building a competitive pricing strategy for each marketplace can be a hassle-free process — especially when you have expert-led guidance.

Rithum Managed Services helps you set proven dynamic pricing strategies that support your goals and give you time back in your day. Plus, we’ll show you how to implement and adopt an automated repricer to stay competitive in the marketplace. 

Contact us to learn how Managed Services can help you maximize profit with minimal pricing effort. 

Editor’s Note: This post was originally published in February 2020 and was updated in November 2022 for accuracy and comprehensiveness.

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