Price Matters: Live Price Testing Helps eRetailers Capture Profits

By: Robert Drescher, President & CEO, Optivo Corp. 

Online merchants are discovering that by leveraging the Internet, real-time data can be collected and used to make accurate decisions regarding inventory control and supply chains. However, one component of the retail model has remained largely untapped by most e-retailers - price. What most e-retailers have yet to uncover is that by adjusting price levels based on real-time market data, dramatic increases in gross margins can occur. In fact, according to Arthur Andersen, a 1% increase in price can lead to operating profit improvements of 11% or greater.

Online Retail - A Bright Outlook Despite Current Challenges

Online retail has struggled to survive in the last year, but future predictions validate this vertical as holding formidable opportunity for growth. A recent study by Boston Consulting Group predicts online retail sales will reach $65 billion this year. Additionally, the study reflects the market's steady increase in revenue: online retail revenue hit $44.5 billion in 2000, up 66 percent from the $26.7 billion retailers generated in 1999.

However, many online retailers continue to find financial success elusive. In the scramble to emerge profitable, many online merchants are spending money on tactics that have no direct bearing on profitability.

Strategic Pricing Contributes To a Successful Business

The road to profitability and success is direct. The Yankee Group's recently published March report, "The Seven Key Factors for Success in Online Retailing," identifies the essential elements of an effective business plan for achieving results selling online. Selling goods at sufficient gross margins to sustain a profitable business model is at the top of the list.

A key method in expanding those gross margins is finding the "right" price for a product. A recent McKinsey & Company report titled "Getting Prices Right on the Web," discusses the power of price and shows online merchants using strategic pricing methods are more likely to garner long-term success. McKinsey analyst Walter Baker also indicates that improved pricing holds much untapped potential for online retailers.

So why haven't businesses been reaping the benefits of strategic pricing? In the offline world, identifying price ranges via traditional market research methods has proven an unreliable, expensive and time-consuming process for most companies attempting it. As retail migrated to cyberspace, many online merchants starting out knew little about how to effectively leverage price in a profitable manner. At first, many e-retailers offered extremely low prices, sacrificing financial health for time-to-market advantage. Other multi-channel vendors applied the same brick-and-mortar prices used offline to their Web storefronts. These tactics are largely "stabs in the dark" at making money; pricing decisions like these are implemented based on assumptions and traditional approaches to research.

Enter the Internet - Live Testing Enables Profitable Pricing

To make an effective adjustment in price levels, accurate, concise information is imperative. Historically, data mining (amassing mounds of information then painstakingly extracting useful and relevant nuggets) has served as the time-honored way of utilizing data. Unfortunately, this passive-based approach creates a detrimental lag-time; online retailers are powerless in responding to fickle market demands. Additionally, making future assumptions based on data from a year ago is not only careless in today's marketplace it's downright dangerous.

In light of the Internet, eRetailers needn't rely on the archaic data mining approach. Merchants can now capture real-time information about their marketplace by performing "live testing" on the Internet. Live testing allows online retailers to get a holistic sense of what is driving the market. Everything from customer demand to competitor influence is available immediately. A brand's perceived market value can be captured instantly and capitalized on. Instead of purchasing X amount of goods based on last year's numbers then dramatically slashing prices to get rid of surplus inventory, online retailers can measure demand in real time and adjust prices accordingly, saving money by finding out the "right" price for products early in the season.

To survive, online businesses need to concentrate heavily on core tactics that directly affect gross margins. By harnessing the untapped abilities of the Internet, eRetailers can now leverage accurate market information to automate pricing decisions effectively and immediately. This approach, combined with attention to all other core elements in a successful business model, will help shape a bright e-commerce future for 2001 and beyond.

For more info., see the 2001-4 & 2001-5 reports

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