This is a terrifying time. We’re not only scared of losing our jobs and our companies, we’re scared of debilitating disease and death. As our country battles the health impact of the Chinese coronavirus and begins to experience the mounting economic impact, China’s experience suggests our own retail sales could be down 50% in the worst month.
And yet, the damage inflicted by COVID-19 isn’t uniformly distributed across online retailers. Some products (e.g. toilet paper, webcams, masks, etc.) sell out immediately, while others languish on shelves. Some retailers see stockouts across their entire catalog, while others see volume sink to new lows across the board, and still others experience each phenomenon in different product lines.
Through all the fear, escalating confirmed case counts and death tolls, and the whipsawing stock market, it’s nearly impossible to see opportunity. But, have no doubt, it is there.
Some unscrupulous profiteers are price gouging, but most online retailers have not even touched their prices. In fact, very many online retailers rarely change their prices. The ones that do typically don’t change them in the right way.
What’s that knocking at the door? Yep, it’s opportunity.
At the same time, we all know that our customers’ priorities have changed wildly. That is to say, the value they place on products is worlds away from what it was just in February. If customers don’t value our products the same, why are we charging the same prices?
Who’s that ringing the doorbell? Yep, it’s opportunity (again).
In this article, we examine four pricing options we can choose in a surreal time like now or any boring day before our world changed. As we get into it, you’ll see a pathway to capitalize on the opportunity. Spoiler alert: the first two options are not the answer.
Option 1: Status Quo
The set-it-and-forget-it method of pricing is the path taken by many retailers. We all know that changing prices is tedious and time consuming. For some ecommerce sites, with tens of thousands of SKUs (or more), it may not even be possible. Setting that aside, however, there’s also the quandary of what to pick as the new price. What to even base the decision on? Of course, beyond that, some online retailers are justifiably concerned that customers may see them as taking advantage. These are no doubt genuine and significant challenges and questions.
And yet, they have equally significant and as genuine costs – for retailers and customers. We’d like to take solace in the idea that underpriced products in high demand (e.g. masks, hand sanitizer, etc.) get into the hands of lots of happy customers in need. They don’t. They get hoarded. Worse, they get snatched up by profiteers and resold at ludicrously high prices on Amazon and eBay. Some of these profiteers don’t even take possession of the product. They put up listings on the marketplaces and then simply place the orders for their customers on unwitting retailers’ websites – having those retailers ship the product direct to the profiteers’ customers. In fact, as some know, there are software and services that automate that process.
Under status quo pricing, on the other end of the spectrum we have the products that are no longer selling. There are at present literally millions of businesses at a near standstill (or worse). The online retailers among them have payrolls to make. They all need cash and for that they need sales. It is the retailers who can get the traffic and convert it who will survive. For products that aren’t moving, but could, status quo pricing is blocking an opportunity.
Option 2: Price Gouging
Unfortunately, there are some retailers (and profiteering resellers) out there that, despite moral codes and the law, are gouging. We’ve all seen it. By March, Amazon had removed more than 1 million product listings for price gouging and related offences. To be complete, we’ve included it in this list, but clearly, gouging is an abhorrent option that none of our readers should or would consider. So, moving on…
Option 3: Selected Price Changes
An obvious alternative to status quo pricing is to make (at least) selected price changes. The place to start is with the products flying off the shelves. We know those prices should increase, but don’t know how much. Looking to competitor sites could be a place to start, though they may be too slow as well. We also have to be mindful of a reasonable ceiling so as to avoid gouging. This is logical and reasonable, but the problem is timing. These price increases have to be made quickly. For ecommerce retailers with larger catalogs, moving quickly is of course even more challenging. One of those profiteers could swoop in, place a huge order, and wipe out most or all of the inventory. Even if that doesn’t happen, masses of buyers will come and rapidly place orders when prices for the hottest products are below market. Meanwhile, suppliers may not have stock to replenish and if they do, wholesale prices are likely to be materially higher.
Timing is a bit less urgent for repricing the rest of the catalog, though it’s more complicated. Determining the price that will maximize cash flow in this new reality takes time – and, ideally, data. If prices are cut 5% is that enough? Or should they be cut deeper? How should price changes differ for products that had been selling well versus ones that were lower volume or products that rarely sell?
It’s challenging to make these decisions, and to do so in a timely manner. However, that’s not the bulk of the work. The real work starts after the price changes are in. It’s at that point that sales for every product need to be monitored to evaluate the new prices and adjust them accordingly.
Option 4: Dynamic Price Optimization
The idea behind the selected price changes is right, the problem is it’s hard to do, hard to get right, slow, and a lot of work. A better way is a dynamic price optimization solution, which is automated and data driven. Using real-time data, such systems observe what is selling and what isn’t. They see that masks and sanitizer are moving like hotcakes while sales of other normally popular products have dried up. Prices automatically adjust to reflect this fluid (read: dynamic) situation. Solutions that include forms of AI are able to iterate through different prices to determine the price that maximizes profit in the new paradigm. Of course, the profit maximizing price could be so high that it amounts to gouging. However, a proper dynamic pricing service will have an array of admin settings that includes price ceilings (and floors) to prevent those sorts of undesired results.
In divining the right price, dynamic pricing optimization is indirectly factoring in everything that matters – from competitors’ pricing to the retailer’s product costs to customers’ perceived value. When it sets a price at odds with one of those considerations, it self corrects and changes the price. Importantly, in fluid situations, it reacts as underlying conditions change. So when customers suddenly place high values on sanitizer or N95 masks, the system learns to increase price. It’s that automatic and real-time learning that enables online retailers to capitalize on opportunity.
As other retailers are caught flatfooted and stockout of suddenly coveted products, the retailer using dynamic pricing can materially increase profit while guarding scarce inventory. Conversely, as other retailers maintain too-high prices on products that are no longer in high demand, the dynamic pricing retailer can quickly undercut them and capture much needed cash to finance their business.
There is always opportunity and a dynamic pricing optimization solution can help online retailers capture it.