Using the Internet to Ensure Price Competitiveness

In this brief, we are going to write about something that might at first seem boring but in fact is very important if you are in a market place whose pricing has been transformed by the internet.

Before the arrival of internet many suppliers of goods and services could have different prices from their competition because the search costs (see a dry but good definition by the Economist) were a significant barrier to customers finding a cheaper price.

However as the Economist points out with the almost universal access to technology such as the internet, many industries have found that the search costs associated with decision making have tumbled; this in turn puts pressure on the prices that suppliers can charge.

Economist definition of search costs

The cost of finding what you want. The economic cost of buying something is not simply the price you pay. Finding what you want and ensuring that it is competitively priced can be expensive, be it the financial cost of physically getting to a marketplace or the opportunity of time spent fact-finding.

Search costs mean that people often take decisions without all the relevant information, which can result in inefficiency. Technological changes such as the internet may sharply reduce search costs, and thus lead to more efficient decision making.

Search Costs Definition at www.economist.com

Customers can now very easily see and compare thousands of similar products allowing them to ensure they pay an appropriate price. An example of the scale of change can be seen in the motor industry. Five years ago a typical edition of Autotrader might carry 2,000-3,000 vehicles for sale compared to their web site today that allows buyers to look at nearly 400,000 vehicles.

If you work for an industry whose pricing has been affected by the internet, we review below how you can combat this development and in fact use it to gain competitive advantage. The key areas we explore are:-

Creating the appropriate tools to analyse pricing
Extracting data for commercial advantage
Creating reporting to understand pricing
Moving beyond a price driven strategy

1) Creating the appropriate tools to analyse pricing

Over the last six years of analysing the effectiveness of media campaigns, we have watched the rapid rise in the importance of the internet to deliver enquiries for price sensitive goods and services. This has also been reflected in the valuations and importance of the companies that aggregate price sensitive data to create a market place – e.g. Ebay, Moneysupermarket or Pricerunner.

...competitive pricing is another way for saying reduced margins.

Companies who use these internet market places find themselves caught between a rock and a hard place because they want access to the large scale audience these sites provide, but at the same time to attract the audience they need to be priced competitively. Alas, competitive pricing is another way for saying reduced margins.

So how does a company stop this downward price pressure caused by internet driven price comparison? The answer is that it is difficult and to an extent will vary by the product or service being supplied. However, it can be allayed through dynamic pricing. The objective of dynamic pricing is to be consistently on top of competitors prices and change accordingly to try and neutralise or minimise price in the decision making process.

The budget airlines are a prime example of using dynamic pricing to maximise their yield. There now exists the opportunity to create dynamic pricing in a large range of industries to ensure companies can maximise their yields. So how is this done?


	Case Study - Camera Retailer A retailer selling digital cameras and accessories wanted to understand their pricing strategy and ensure that their products were keenly priced. By extracting pricing data from a number of price comparison sites they could identify how they ranked against their competitors price position. Through understanding their gross margins and stock position, they could take the competitors prices and micro price their stock to ensure that they always showed up on the first page on price comparison sites. Furthermore, relating this competitive position to their stock position, the retailer is able decide how much they want to change their pricing to react to the competitive trends in the market place.

2) Extracting commercial data for competitive advantage.

...it is vital to have an up-to-date understanding of your competitors pricing.

The first stage in creating an appropriate pricing strategy is to understand how customers price compare your products on the internet and the importance they place on price in their decision making. Do your products have any unique form of differentiation or are you just another retailer of other peoples branded goods?

If your product has few discernable differences from other retailers, it is vital to have an up-to-date understanding of your competitors pricing. Many companies try and do this on an ad hoc basis - either by getting a member of staff to regularly update a spreadsheet or by occasional reviews.

However, due to the dynamic nature of the internet this competitor review needs to be done on a regular basis otherwise it is possible to be caught out due to rapid changes in the market place.

This is very difficult and dull for a person to do, but happily the software tools are now available in the form of 'spiders' to mimic a user’s search habits and capture all the price sensitive data. Once a company has this data they can then turn it into management reports which will allow them to understand precisely how they should change their pricing for competitive advantage.

3) Creating reporting to understand pricing

Once the pricing and specification data has been extracted from competitor sites, it is possible to produce sophisticated reporting allowing companies to make the appropriate pricing decisions. This reporting can be analysed in many ways but at a basic level can show:

	A company's current price of a product compared to the cheapest price on the market and the change required to match the price
	A product's price position on the internet – i.e. how many competitors are cheaper or more expensive
	The current gross margin on a product compared to the revised gross margin at the cheapest price
	The internal stock levels showing whether it is appropriate to reduce prices – which might be the case in with lots of stock but not with no stock.


	Case Study - Car Retailer A car retailer wanted to understand the appropriate price for their vehicles compared to other dealers. Before involving Mediahawk’s pricing tools, their pricing was based on a mixture of 'gut feel', using industry guides (such as Glasses Guide) and regularly reviewing prices on the internet (which took up a huge amount of time and resources). Furthermore, when trading in vehicles the dealer worked on a pricing strategy of margin plus which meant that on certain vehicles they were underpricing their stock and making the price too cheap. Mediahawk provided the retailer with their 'market comparison tool' that allowed the dealer to instantly review their pricing compared to their competition and the amount they needed to change their price to ensure they were found on internet searches for models. The dealer now can micro price their vehicles on a daily basis which has created significant advantages to the business through: Ensuring vehicles are correctly priced to be found by buyers. This mitigates price decision making to allow them to focus on the vehicle features and their service offering Saving significant time on their pricing strategies by having the information instantly to hand.

4) Moving beyond a price-driven strategy

Ultimately with this pricing information, companies can 'micro price' their product or service to ensure that it is seen by buyers. The objective on the internet is not to have the cheapest price but to ensure that the price is at such a level that its importance in the purchasing decision is reduced. Once a buyer believes that a price is within the right range they will purchase a product or service based on:-

	Reliability and service – this is why retailers spend significant amounts of money building their brands. Would you rather buy a television at the cheapest price from Johnny-no-name or spend £10 more and buy the same product from John Lewis?
	Availability – when people purchase a product they generally want it now – there is no point being the cheapest if the product cannot be delivered for six weeks.
	Convenience – can a product be purchased close by and be seen? This is particularly relevant to large products such as cars.

If you operate in a commodity-based market (for instance mobile phones or certain white goods) it can be difficult as a retailer to find a form of differentiation. If this is the case then the solution is to try and obscure the price through bundling or adding other products or services to the basic product. This makes it more difficult to compare identical goods. This is why for instance companies selling TVs might add a free stand or delivery to the price.

However, if you are following an 'obscuring' strategy, this does not negate the need to understand the pricing strategies of the competition which can be done by constantly analysing competitors positions.

Conclusion

A suitable pricing strategy is vital to companies that are using the internet as a key channel for selling their products or services. As many competitors are doing the same, it is possible to extract and review their pricing data and react accordingly.

The challenge is putting in the appropriate reporting structures that can analyse competitive pricing. At Mediahawk we have created a number of market comparison tools that have provided significant competitive advantage for our customers – call us and we can show you how this is done.

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