Pricing is one of the most difficult decisions to make for eCommerce store owners. Although shoppers aren’t as price sensitive as some like to make out, poor pricing decisions can have a huge impact on revenues. If prices are high compared to the value on offer or the brand perception of the seller, sales will suffer, but in this article I’d like to discuss pricing errors made in the other direction.
It’s tempting to compete on price. If a store sells into a competitive niche, undercutting the competition might seem to be an easy win. But starting a price war or basing your business’s competitive strategy on low pricing puts it on a short road to a difficult place.
Let’s get the exceptions out of the way. There are successful businesses that compete almost entirely on price. They sell the same products other merchants sell, but they sell them cheaper. Their business model is based on being the low-cost leader in a market.
Big retailers like Walmart and Ikea have enough heft that they can put pricing pressure on their suppliers and benefit from economies of scale, but they offer little added value compared to up-market brands. And of course, retailers of commodity goods usually only have price to compete on.
Being the low-cost leader is a difficult business model to sustain unless you have a size advantage. Most smaller eCommerce stores will find it impossible to source products at prices comparable to those afforded to their larger competitors.
And that’s one of the major problems with competing on price. There are two ways to lower prices sustainably in the short term. Reduce profits or reduce costs. Reducing costs means cutting support, staff, wages, marketing budgets, and in many other areas that contribute to the growth of a business and the loyalty of its customers.
If you adopt low price as your strategy, then your business must be continually focused on lowering and controlling costs–like Walmart. You are attracting the price buyers, customers who are not loyal, but are looking for the lowest price. Once a competitor figures out how to sell a similar product for less, they will charge lower prices and you will struggle.
A key point to consider here is that if you can charge less, so can your competitor. If you have larger competitors in the same space, they may be able to afford to cut costs to the point at which they’re making a loss just to drive your customers to their store — and these are customers that have little loyalty because you won’t be able to invest in areas of your business that cultivate loyalty.
None of which is to say that promotions are a bad idea or that temporary price reductions to bring new customers to your store are harmful. They aren’t. But it is harmful to your business if you lean too heavily on price as a competitive advantage.
Many companies manage to thrive in spite of charging more than the competition, sometimes much more. How do they do it? By investing in branding and customer service processes that increase actual and perceived value. Shoppers are loyal to retailers that make them feel good about their purchases and valued as a customer — all of which costs the retailer. But if you have to choose between knocking a few cents off the cost of your products and investing in better customer service, I’d advise adding value before cutting prices almost every time.