How to Compete on Price Against Large Companies
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.”
PEC: How does competitive analysis work?
Carvalho: “At BlackLocus we are constantly crawling the web and we identify all the other retailers that are selling the same products that you are, and we tell you that. So you don’t have to tell us who your competitors are. We tell you who they are and we tell you so that you know who you should be focusing on.”
PEC: Tell us more about BlackLocus.
Carvalho: “BlackLocus is a web platform. We have the goal of helping online retailers to better price their products. When a retailer signs up, they tell us the products. They give us a feed for their product catalog, and we crawl the web. We find everyone that is selling the same product, and then we work with them to create a pricing strategy.
“So, what does that mean? In the platform we have a way to allow retailers to set rules. For example, you have your cookware web store and for the knife category you want to be competitively priced against, say, Knives.com. So you set up a rule saying: okay, every time that Knives.com changes their prices for specific products, and my price is above knives.com by 10 percent, let me know.
“We are tracking the data on an ongoing basis and whenever the rule is violated it triggers an alert, and we send weekly digest emails with all the alerts that were triggered in the system. The users log in, and this way they don’t have to go through the thousands of products that they have. They know which ones to focus on and then when they go into the specific products that they have an alert on, they can see the competitive landscape. They can see how they are positioned against the competition and they can change their prices either up or down to satisfy their strategy.
“We started the company at the end of 2009 out of Carnegie Mellon. Basically, the foundation of the company was based on product matching which is a very, very hard problem to do because we’re crawling the data and need to make sure that we’re comparing apples to apples on a scalable way. It’s extremely complicated. We worked very closely with the machine-learning department to put that in place, and now we have very high accuracy levels. The company recently moved from Pittsburgh to Austin, Texas. I started the company with two other graduate students from Carnegie Mellon, and we have more than 55 customers.”
PEC: How much does it cost?
Carvalho: “It depends. It varies by the number of products that we are tracking, the number of users that are using the system. We usually give custom quotes to our customers and we work with small retailers all the way to big retailers.”
PEC: Where does the name BlackLocus come from?
Carvalho: “Locus is a psychology term from ‘internal locus of control,’ which means that the actions that you take today will define your future tomorrow, and Black is profitability. So with BlackLocus, we give intelligence. We give predictive analytics to the retailers so they can take action today to become profitable in the future.”
PEC: Give us an example of a client that has used your services to good result.
Carvalho: “There’s one retailer that had a good looking website. They had all the marketing things in place. They have significant traffic to their store, but their conversion rates weren’t performing as high as they wished. When they signed up for BlackLocus and we started running the analytics on their products, we found that their items could qualify into two different buckets. One bucket was their items that are what we call commoditized products, where many other retailers sell the same item. The other bucket was niche products that not too many people carry those products — they had very high search ranking for those items.
“When we started looking at the breakdown of each one of the different buckets, we noticed that the commoditized products that they have were priced significantly higher than the competition, and with that we helped them adjust the prices so they were more competitive. But they didn’t necessarily start selling more of those products. What happened was that once customers started going to their store, they saw those products — where they could compare prices — and the perception of being an over-price retailer went away. And for the unique items, the more niche items, we helped them increase prices 35 percent without changing the conversion rate that they were getting on them.”
PEC: What type of products were involved there?
Carvalho: “It was motorcycle equipment.”
PEC: Anything else?
Carvalho: “I hear a lot of people saying in the media that smaller online retailers shouldn’t try to compete on price. I totally agree with that. You shouldn’t try to be matching prices against the bigger retailers. But, it is very important for even the small guys to make sure that they have a pricing strategy, and to make sure that their prices are somewhat competitive. They can see significant changes in profitability and margin just by adjusting prices alone. We see it happening.”