For 5 years, we have been providing our clients with price image management solutions. On the strength of this experience, we would like to share three lessons that we have learned in that time.
The erosion of profit margins is not inevitable :
The last 20 years have been marked by the emergence of e-commerce. Taking their lead from the pioneer, Amazon, the pure players have taken up positions in almost all sectors, in each case with the promise of lower prices than those obtained from classic distribution channels for clothing, computers, music, films, DIY, accessories, cars, etc. Only food products remain largely unaffected by this trend (because for this activity the equation is reversed and the higher last mile delivery cost cancels out the advantage of not having physical stores). At the same time, Amazon, the bookseller, has extended its activities to almost all consumer products and is, by itself, a significant threat for many brands.
In response to this underlying trend, the immediate reaction of the majority of distributors has often been to pare their costs and profit margins in an attempt to fall into line with these new competitors, involving a race to the bottom in term of prices (at least in the short term), but an unsustainable situation for brands in the longer term.
However, this trend has undergone changes in recent years, because the historic distributors have understood that their physical presence has opened them up
a means of developing services with significant added value, for which consumers are ready to pay more. We can cite initiatives such as that implemented by Fnac, which
is developing synergy between its website and its stores to offer its customers more buying options with “click and collect”, or the CDiscount corners in the Casino hypermarkets which enable the two brands to combine forces. In more general terms, the training of retailers, the quality of the advice offered, the selection of the offer and assistance with installation or promotional initiatives are various ways of improving the customer’s perception of value and retaining or regaining profit margins on the strength of this good price image.
The ability to compete takes place at the most basic level
Working on a brand’s price image in an overall sense is not sufficient. It is also necessary to know how to adapt to specific local circumstances. The presence or absence of certain competitors in a store’s trading area can create significant constraints or opportunities which one must know how to exploit. It is not simply a matter of aligning prices: if, for example, your local competitors are not offering delivery services or (in the case of a store in a border region) have few native speakers from your country, you will be able to take advantage of these leversto create value and regain profit margins. Border regions or major cities are thus territories in which the competitive environment is very different from the rest of the country, with positive or negative effects depending on the brand’s market positioning. Once again, the challenge is not to be systematically aligned, but to be competitive in areas that consumers expect from you and to regain profit margins wherever else the opportunity presents itself.
This requires not only having a clearly defined understanding of the competition and of customers’ habits, but also the ability to translate this understanding into industrially defined price rules (to cover the essential items in its catalogue using
reasonable resources and within a reasonable time frame) which is then deployed in different ways depending on the local context. Even brands that have a unified pricing policy at the national level are forced to adapt their range, their promotions and their services to meet specific local demand.
Technology and algorithms cannot (yet) replace commercial experience
We have been analysing the pricing practices of several major e-commerce players in France over 2 years. In particular we have noted how Amazon, which is a technology
leader as much as it is a distributor, engages in pricing activities which are, at one and the same time, both intense and remarkably stable over the course of the year and in different categories on its site, a sign of highly automated pricing processes.
For traditional brands this is both a threat and an opportunity.
A threat, because they are up against one of the biggest information technology companies in the world, which has added to its activity (and often invented) big data processing tools, algorithms and online monitoring.
An opportunity, because this technological gap can be overcome through solutions developed by specialised editors that perform equally well but permit a more targeted
approach. In fact, by relying wholly on automation, Amazon deprives itself of the possibility of carrying out keener price adjustments of a seasonal or temporary nature when the context lends itself to this. The reality is that the e-commerce giant operates more on the basis of reaction than on taking the initiative when circumstances have not been modelled by its algorithms.
Another limiting factor, this time common to all online operators, is that they offer the same prices throughout France. In contrast, brands that operate locally can take advantage of regional differences in demand and competition structure to find advantageous
market positioning and attract more customers, thereby retaining their overall profit margin.
The main concern of most businesses with which we work today is to preserve or recover their profit margins, and not to seek by whatever means to be the cheapest. This is no surprise, because the continuous realignment with the least expensive competitor is relatively easy to implement and does not demand tools as powerful as those offered by our price image management platform, but the long-term effects of this pricing strategy are often negative.
On the other hand, the successes achieved by our clients in this regard prove that it is possible to succeed, provided good strategies are adopted and provided one has appropriate tools for implementing them effectively and easily