Ecommerce companies are finally waking up to the realisation that the main driver of their profit is price optimisation. What the most successful retailers are doing is pricing right in the first place and therefore reducing any need to discount. They even have the temerity to put up prices without losing customers.
A recent Bloomberg article revealed that both Ralph Lauren and Michael Kors were delivering higher profits by offering fewer discounts, accomplishing better management of their stock - and receiving no dissent from their customers about their pricing.
"Significant improvement in gross margin is a great sign the strategy of tightening inventory and pulling back on promotions is helping profitability,” said Bloomberg Intelligence analyst Chen Grazutis.
"Many shoppers seem to be less obsessed with getting a low price - and more focused on the product itself," said John Idol, chief executive officer of Michael Kors Holdings Ltd. “We really have shown that if it’s the right product you do not have to have these aggressive markdowns ”, Idol said.
For several months, JCPenney has also been focused on its pricing strategy initiatives, noting significant gross margin opportunities in areas such as pricing analytics, to balance inventory and also minimise markdowns.
Meanwhile, Zara is doing particularly well because it has focused teams of designers and product managers to achieve short lead times for new fashion ideas.
Today, Zara can replenish existing items very quickly, enabling the company to produce what their customers most want. Zara's tight integration of design, planning, merchandising and production enables the company to be flexible and therefore able to respond quickly to any market need.
How to Optimise Ecommerce PricesImprove Your Inventory Management
Inventory management is the practice of overseeing and controlling the ordering, storage and use of components that a company uses in the production of the items it sells - and also the practice of overseeing and controlling the quantities of finished products for sale. A business's inventory is one of its major assets and represents an investment that is tied up until the items sell.
Your businesses will incur costs to store, track and insure inventory and inventories that are mismanaged can create significant financial problems, whether the mismanagement results in overstocking or a stock shortage.
Successful inventory management involves creating a purchasing plan to ensure that items are available when they are needed but that just the right amounts are purchased, keeping track of existing inventory and its use.
Two common inventory-management strategies are the just-in-time (JIT) method, where companies plan to receive items as they are needed rather than maintaining high inventory levels, and materials requirement planning (MRP), which schedules material deliveries based on sales forecasts.
Ecommerce companies can save significant amounts of money, optimise their prices and reduce waste by using a JIT inventory management system. JIT means that manufacturers and retailers keep only what they need to produce and sell, which reduces storage and insurance costs, as well as the cost of liquidating or discarding unused, unwanted inventory.
To balance this style of inventory management, manufacturers and ecommerce retailers must work together to monitor the availability of resources at the manufacturer’s end and consumer demand at the retailer’s.
Without this co-operation, JIT inventory management can be risky. For both the manufacturer and ecommerce retailer, being "out of stock" results in lost revenue and a diminished reputation.
The MRP inventory management method is sales-forecast dependent. This means that manufacturers must have accurate sales records to enable accurate planning of inventory needs and to communicate those needs with materials suppliers in a timely manner.
Inability to accurately forecast sales and plan inventory acquisitions results in a manufacturer's inability to fulfill orders.
If you are tempted to succumb to pressure to drop your prices, or be more "flexible" in your negotiations with manufacturers then I suggest you have a long hard think about the consequences.
Discounting for many ecommerce businesses can have a devastating impact on bottom line profits, even with seemingly modest reductions.
For example, a business with a 30% gross profit margin that implements a 10% price reduction (either through promotion or negotiation) needs to increase sales by a massive 50% just to stand still in terms of profit!
It means that in order to maintain today's profitability you and your employees have to work 50% harder, you may need to drastically increase stock levels, your machinery and equipment have to handle 50% more output - and that's before you consider the potential negative hit on your cashflow.
The bottom line is you make no more profit. In fact, even if you achieve a 20%, 30% or 40% increase in sales you actually make less money!
While for some businesses a price cut can result in enough new sales to increase profit, the truth is that for most businesses a price cut is a recipe for disaster.
Increase Your Prices
"If you've got the power to raise prices without losing business to a competitor,
you've got a very good business." Warren Buffett
Don't panic! Putting your prices up does not necessarily mean you'll lose customers, your competitors will have a field day – or, worse case scenario, you'll go out of business.
Based on a 30% gross proft margin, if you put your prices up by 10%, you would have to do 20% less business before it affected your net profit.
In other words, 20% of your clients could leave, or your revenue could drop by 20% and you'd actually be better off.
You'd actually be doing less work and making more money – sounds good eh? And, ask yourself, what are the chances that 20% of your clients would leave if you are doing a great job and providing excellent value?
The reality is that many ecommerce businesses are undercharging and when they finally muster up the courage to increase prices, most discover that they keep their customers and continue to win more new business because they give great service and excellent value.
In order to achieve price optimisation, ecommerce retailers need good inventory management, a reduction of markdowns/discounts and serious consideration being given to price increases. Re-visit your pricing strategy on an ongoing basis to ensure you’re not leaving profit on the table and pay attention to optimising ecommerce prices.
Get The Price Right, Sahaj Kothari, 2015
Pricing With Confidence: 10 Ways to Stop Leaving Money on the Table, Reed K. Holden and Mark Burton 2014
Pricing for Profit, Peter Hill 2013
Pricing Strategy: How to Price a Product, Bill McFarlane 2012