Why Today's Price Wars Are Ecommerce's Biggest Mistake
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Online shoppers no longer look for the best prices -- they expect them. Price comparison tools and market saturation means that price is the point of difference that ecommerce customers care about most. In turn, profit margins continue to shrink as the industry competes on price to secure shoppers.
And this is a problem, because this commoditization of ecommerce has reached a tipping point where online customer experiences have become the same across many retailers, making the experience customers have with them almost indistinguishable. And when processes are the same, price becomes the sticking point.
This should ring alarm bells for entrepreneurs and startups. Price wars are not a long-term solution for ecommerce retailers, with a battle to the bottom price contributing to a weaker market over time. Let’s explore why and what the ecommerce industry must do about it.
Customer expectations continue to rise.
Ecommerce outlets are battling for the buyer by extending deals, increasing incentive prices and generally competing on price -- and this certainly gives the customer the upper hand in the transaction. For example, Black Friday has evolved from one day to several days, while delivery expectations have moved from a few days to, in some cases, just a few hours. Consider Walmart, which this month announced next-day delivery to parts of the United States in competition against Amazon.
Online shopping prices are largely cheaper than those found in brick-and-mortar outlets, and that is even before you factor in online savings codes, deals of the day, no-taxes-charged and free shipping offers. Then there are the online tricks of the trade which throttle prices even further.
Browser plug-ins make the best deals not only possible, but probable. Invisible Hand, for example, offers the ability to find, verify and place discount codes into the proper field on the checkout page without the customer even hunting for the correct coupon.
Price comparison services like Google Shopping also empower the customer of today to shop smarter. The platform compares product prices across several stores as well as user reviews to assist the purchase decision. Not only are retailers lowering their prices, but tech add-ons are comparing and contrasting the available outlets for the customer to make it even easier.
It all sounds good on the surface, but it's important to take a step back and consider what kind of shopper these actions encourage -- and it certainly is not one of value. It is the bargain hunter: a customer infamous for his or her disregard of brand loyalty and dedication to the best possible deal. All in all, competing on price to attract low-value customers does not contribute to a strong market in the long run.
Lower prices mean lower profits.
The result of this price pressure is lower returns in an ever-more-expensive playing field. It's simple math: Low price translates to less money per unit. This means ecommerce retailers need to sell significantly more to make the same profit before they slashed prices. Not only is this a bad outcome for an individual retailer, but a bad outcome for the entire market. Pitting stores against each other with price the only differentiator creates an industry which loses value across the board.
Margins across the ecommerce industry are simply getting squeezed tighter and tighter. On top of the battle for rock-bottom prices, retailers are competing in an online advertising environment that is more hostile every year. Take the fact that a survey by Profit Well found that customer acquisition cost (CAC) was up across the board for both B2B and B2C companies by about 50 percent over the past five years.
Interestingly enough, the price problem is one retailers seemingly inflict on retailers. Price wars happen only when price is the deciding factor in the purchase -- and the fact of the matter is that stores with cookie-cutter purchase processes and online experiences create this problem. Thus, online retailers must further other elements of their offering to ensure profits are sustainable.
How to beat the price war
If you can’t beat them on price, don’t join them in the war. There will always be a competitor who can offer cheaper prices, so why try to defeat them on this front? Ecommerce retailers and entrepreneurs should be looking to emphasize other attributes, ones which will have customers coming back for more than a cheap price.
The good news is that there are many ways for online stores to focus on their points of difference. Retailers cannot put a price on reputation, but it is something they can improve by appealing to the premium market. Going upmarket lets retailers enjoy larger margins while it also attracts higher-value customers, and this can often go hand-in-hand with online bundling. Farfetch is a good example of a company which created a global technology platform for luxury fashion to connect creators, curators and consumers.
Perhaps the retailer does price key items on a lower scale, but then bundles other products at a higher margin at checkout. Better yet, additional services like warranties and insurance are simple to add to checkout deals, and come with high margins.
Another potential win for ecommerce entrepreneurs is to differentiate their product offering so it cannot be compared. Now, this might mean introducing private label products, exclusive products or slight variations of the same model; but important points of difference like these work to create an online shopping experience that is difficult to compare against others.
In the end, long-term success in the ecommerce game comes down to the experience factor. Customers need more than a good deal to come back, so for most retailers, it makes sense to steer clear of any price wars which they may not win anyway. Copying competitors or battling them for bargain shoppers is just not good business, so be sure to build an online experience which is memorable, unique and functional.