Conventional wisdom is that smaller ecommerce merchants cannot compete against larger ones in terms of the prices of their respective products. That may not be necessarily true. We recently spoke with Rodrigo Carvalho, founder and CEO of BlackLocus, a pricing-intelligence service. He says smaller merchants should maintain an overall pricing strategy, while understanding what their competitors are up to.
Practical eCommerce: Our readers are mainly smaller ecommerce merchants. How can a smaller merchant compete against a larger company on price?
Rodrigo Carvalho: "Even with small merchants, they usually have thousands of products that they carry on their store. Oftentimes they have a few niche items that drive most of the profitability, but they also have a good product mix in their store that allows them to cross-sell, and also gives an impression that they're like a big store with lots of products.
"What we found is that a lot of small merchants don't often adjust prices. A price is set once when they include the product in their store, and it just stays the same way for months, sometimes years. When we use BlackLocus on their product catalog, we find that that about 30 percent of their products were under priced.
"It was very surprising when we started looking at that data, and one of the reasons we believe this happens is because while the bigger merchants are changing pricing or adjusting prices, the smaller ones just keep their prices static, and as cost of goods sold increases, they don't necessarily adjust to keep up with the competition.
"And we also found out — for niche items that the small retailers carry — we found that it's also important for the retailer to understand a little bit about the price elasticity for those items, because oftentimes there are not many people selling those niche products, and sometimes you can increase prices with very little impact on your conversion rate."
PEC: How does a merchant know that? Just by testing?
Carvalho: "It's an art and a science. By doing some A/B testing, adjusting prices. Not too much, but a little bit at a time so you can start noticing that how it impacts your conversion rate and determine an appropriate price for the product."
PEC: Walk us through a hypothetical strategy that a small merchant could utilize on pricing matters. Let's assume a smaller merchant sells cooking supplies. Assume there are much larger companies that carry the very same or very similar cooking supplies. What's the pricing strategy in that scenario?
Carvalho: "The first thing that you have to do is understand what products you're carrying that are grossly overpriced or under priced. So if you have thousands of products, it's important to know like how far you are from the competition. Running a competitive analysis on your product assortment to adjust prices so you're closer to the competitive price — we found that to be very important for the online retailers.
"The second part is to look at conversion rates. If you go to your Google Analytics and you look at conversion rates for each one of your products, you can find the ones that have very low conversion rates. Sometimes the picture is not good. Sometimes with the title and description there's something wrong there. Sometimes even the add to cart button is not working properly.
"Those are some of the things that could be causing the low conversion rate, but it could also be price. It’s important to look at your competitors and understand your price relationship to them to see if that’s causing the low conversion rate. And the same for high conversion products — you should try to understand what things are leading to that high conversion rate, and how can you replicate that?"
PEC: Does your company, BlackLocus, facilitate that type of competitive analysis and testing?
Carvalho: "Yes. We allow you to see how much your competitors are charging for the same items that you sell on a category level. Small retailers usually compete on product categories, and that is usually driven by search. Search is huge, of course, for ecommerce. So you have a couple of keywords that are driving traffic to specific categories and then those keywords that are related to the category will somewhat define your competitive landscape.
"You mentioned a cookware supplier. If you sell knives for example, you might sell a bread knife or a steak knife. For each category there are certain keywords that are driving people to the products in this category. You want to make sure that you’re not necessarily competing against Amazon, but competing against the other niche retailers that are ranked high for those search terms."
PEC: Do you advise smaller merchants to always be less expensive on price, or to at least match price on their competitors? If a smaller merchant were a BlackLocus client, would you advise that client to at least match Amazon’s price?
Carvalho: "Not necessarily. It really depends on the retailer’s strategy. For example if you want to expand — if you have the cooking supplies and you want to expand on the knives category, maybe you will start competing a little bit more heavily on price on that specific category just because you want to gain market share. You want to help with your search rankings, your keywords. But it depends. It really goes by strategy by strategy, and also having something like a loss leader – having products that you know that are attracting people to your store and then making sure that those are properly priced and knowing that people, sometimes when they buy those products, they buy other things together with them."