Let\u2019s dive in!<\/p>\n
Perception is sometimes<\/em> reality<\/h2>\nDo you think we\u2019re rational decision makers?<\/p>\n
A person can make a decision that best suits their interests and needs. That\u2019s possible, for sure.<\/p>\n
But there are a lot of times where our knowledge on a matter is partial or incomplete.<\/p>\n
People don\u2019t always do what\u2019s best for them. But no judgements\u2014there are too many stimuli around us, and we can\u2019t always measure their impact on our decisions, let alone controlling them.<\/p>\n
For instance, all the price points you\u2019re exposed to every day actually influence how much you\u2019d pay for a product or service. It\u2019s almost like your daily dose of TV ads give you an idea about how much you should spend on a TV.<\/p>\n
When you\u2019re shopping for one, your brain recalls all the TV prices you see and goes like, \u201cWhy on earth would I buy a 15K TV if it\u2019s not made of gold?\u201d.<\/p>\n
That must be helpful, right? Seems like a defence mechanism.<\/p>\n
Not always. Because sometimes, even the most irrelevant inputs shape our decision-making.<\/p>\n
In a study on price perception, researchers asked a group of consumers to choose between a regular $6 pen and a Cross pen. Another group had to choose between the same $6 and Cross pens, and an additional one that clearly was the least attractive among all.<\/p>\n
Interestingly, the second group had a higher share of people that chose the Cross pen over the $6 pen.<\/p>\n
That meant, although very few people ended up picking the inferior option, its mere existence had some sort of impact on the group\u2019s decisions.<\/p>\n
And do you know who most successfully turned this cognitive tendency to their advantage?<\/p>\n
Amazon\u2014hardly surprising, I know.<\/p>\n
One proven pricing strategy Amazon nails is always offering competitive prices on popular products.<\/p>\n
![\"prisync](\"\/gb\/en\/blog\/wp-content\/uploads\/2021\/03\/prisync-1.png\")
<\/p>\n
Source<\/span><\/a>\u00a0 (Note that these lists are updated sometimes even hourly.)<\/span><\/p>\nIf you search for these products on a price comparison website, there\u2019s a good chance that you\u2019ll see the best deal on Amazon.<\/span><\/p>\n![\"prisync](\"\/gb\/en\/blog\/wp-content\/uploads\/2021\/03\/prisync-2.jpg\")
<\/p>\n
Source<\/span><\/a><\/p>\nThese Amazon Best Sellers are great in bringing traffic to the marketplace, and <\/span>product pages<\/span><\/a> are designed to encourage cross-sells.<\/span><\/p>\nAccording to a former Amazon Business Leader and founder and CEO of CommerceIQ Guru Hariharan, Amazon\u2019s purpose using this strategy is to <\/span>build the perception that it\u2019s the cheapest address for everything you\u2019re looking for.<\/span><\/a><\/p>\nYou might say, there\u2019s no way I\u2019m falling for that. But do you actually know what happens at the exact moment you\u2019re shopping?<\/span><\/p>\nAmazon\u2019s pricing strategy is built upon the presumption that when we\u2019re buying something that\u2019ll cost a good percentage of our income, we\u2019re paying more attention to its price.<\/span><\/p>\nAnd vice versa\u2014we\u2019re not that price-sensitive on less costly products.<\/span><\/p>\nSo once we feel like we\u2019re getting a good deal on this big purchase, we\u2019re less reluctant to add some accessories to the cart.<\/span><\/p>\nIn the long run, we\u2019re saving less than we think we do.<\/span><\/p>\nThat should remind you, even the simplest strategy can work wonders if you plan it right.<\/span><\/p>\nAlright, so Amazon nails this strategy, but how do they have such great control over their positioning?<\/span><\/p>\nDynamic pricing is fair, price testing based on demographics is not<\/span><\/h2>\nAmazon pioneered the use of <\/span>AI<\/span><\/a> and machine learning in the retail sector, and it was a turning point for all retailers.<\/span><\/p>\nLong gone were the days these industry leaders manually set prices\u2014that was not even possible with their gigantic assortments.<\/span><\/p>\nAnd their use of these dynamic pricing algorithms influenced the industry as a whole.<\/span><\/p>\nHarvard Business School Professor Alberto Cavallo studied the frequency of price changes in the US retail market between 2008 and 2017, and two of his findings are truly illuminating.<\/span><\/p>\nFirst, this \u201cAmazon effect\u201d as Cavallo calls it has been shaping the dynamics of the competition by forcing small retailers to change their prices more frequently.<\/span><\/p>\n![\"prisync](\"\/gb\/en\/blog\/wp-content\/uploads\/2021\/03\/prisync-4.png\")
<\/p>\n
Source<\/span><\/a><\/p>\nSeeing Amazon change prices often, small businesses realised that they have to be more flexible to make sure they\u2019re not left behind the competition.<\/span><\/p>\nBecause they knew online prices are transparent. And shoppers easily compare prices on multiple stores to see where the cheapest offer is.<\/span><\/p>\nSo in a sense, competing on price was not an option, it was a necessity.<\/span><\/p>\nBut of course, such a shift to technology on such a scale had carried its risks.<\/span><\/p>\nIn 2000, <\/span>Amazon faced a backlash from customers<\/span><\/a> who bought the same DVDs at different prices. Interestingly, the reason they\u2019ve paid different prices was that they used different browsers. This was not fair in any circumstances, and there was no way the company could legitimise what they did.<\/span><\/p>\nIn an interview with The Associated Press, Jeff Bezos apologised to affected customers:<\/span><\/p>\n\u201cWe’ve never tested and we never will test prices based on customer demographics. What we did was a random price test, and even that was a mistake because it created uncertainty for customers rather than simplifying their lives. The policy we put in place two weeks ago removes that uncertainty.\u201d<\/span><\/p>\nCavallo\u2019s second finding shows that retail chains used to charge somewhat different prices across the country, but later were forced to go with a unitary pricing structure. Because online prices are transparent.<\/span><\/p>\nSo how do you build a <\/span>market-oriented<\/span><\/a> dynamic pricing strategy that allows you to compete with giants like Amazon, but not alienate your customers in the process?<\/span><\/p>\nDynamic pricing in a fair way<\/span><\/h3>\nYou really should stay away from demographic segmentation when it comes to pricing. It works well in so many areas of marketing, but just not pricing.<\/span><\/p>\nInstead, use dynamic pricing software<\/a>\u2014or have people build one for you\u2014that uses competitor pricing data, your costs, and target profit margins when setting a profitable price.<\/span><\/p>\nSet dynamic pricing rules like:<\/span><\/p>\n\n- My price should be <\/span>5% cheaper<\/b> than my <\/span>cheapest competitor<\/b>, but not lower than my <\/span>cost + 7% markup<\/b>.<\/span><\/li>\n<\/ul>\n
You can also use currency units if you\u2019re not comfortable with percentage calculations:<\/span><\/p>\n![\"prisync](\"\/gb\/en\/blog\/wp-content\/uploads\/2021\/03\/prisync-5.png\")
<\/p>\n
This way, you\u2019ll be able to compete with other stores\u2019 offers without compromising profits. But more importantly, you\u2019ll position yourself just as you want.<\/span><\/p>\nMeaning, regardless of competitors\u2019 price changes, you can match or beat their prices\u2014or more expensive, depending on your pricing strategy.<\/span><\/p>\nKnow a market before entering<\/span><\/h2>\nHave you heard about Best Buy\u2019s expansion to the Chinese market?<\/span><\/p>\nNot your fault if you haven\u2019t, because that was a story cut short.<\/span><\/p>\nIn 2006, Best Buy entered the Chinese market. But the giant couldn\u2019t compete with the regional players, because it was impossible to match or beat their low prices.<\/span><\/p>\nConsidering price is a top priority for the consumer, that doesn\u2019t come as a surprise.<\/span><\/p>\n![\"prisync](\"\/gb\/en\/blog\/wp-content\/uploads\/2021\/03\/prisync-1.jpg\")
<\/p>\n
Source<\/span><\/a><\/p>\nAnd that\u2019s how their China adventure ended.<\/span><\/p>\nWhat\u2019s striking in this story is that even a giant like Best Buy, despite their years of experience, can fail to put up a risk-free plan before taking such an important step.<\/span><\/p>\nBut don\u2019t worry, because there is a safe path to expanding your business to markets abroad.<\/span><\/p>\nIdentify the competition<\/span><\/h3>\nOnce you find the right products to sell<\/span><\/a>, the next step is understanding the dynamics of the competition.<\/span><\/p>\nFirst, start by identifying your competition\u2014direct and indirect.<\/span><\/p>\nDirect competition refers to companies that sell what you sell: identical brands and models. Indirect competition is the stores that sell close substitutes.<\/span><\/p>\nKeep in mind, what\u2019s considered as alternatives for each other depends on the characteristics of a market. Take the consumer electronics market for instance.<\/span><\/p>\nNow, if you\u2019re selling iPhones in the US market, you probably don\u2019t consider Huawei smartphones as close substitutes for your products. Even if all smartphones have similar technologies, Huawei is not an important player in the US smartphone market due to government sanctions.<\/span><\/p>\nWhat if you stick with the same <\/span>marketing strategy<\/span><\/a> when expanding to another market?<\/span><\/p>\nBefore anything else, you\u2019ll miscalculate the size of your target market for not considering Huawei\u2019s market share.<\/span><\/p>\n![\"prisync](\"\/gb\/en\/blog\/wp-content\/uploads\/2021\/03\/prisync-3.png\")
<\/p>\n
Source<\/span><\/a><\/p>\nYou might think the Huawei example is too obvious for anyone to overlook. But not everything might come to your knowledge without an effort.<\/span><\/p>\nSo, you\u2019ve found out who your competition is. What\u2019s next?<\/span><\/p>\nStart monitoring their prices from early on<\/span><\/h3>\nIf possible, start tracking competitors\u2019 prices several months before you officially enter the market.<\/span><\/p>\nDoing this will tell you several things:<\/span><\/p>\nIs there competition on price (in 95% of the cases, the answer will be yes)<\/span><\/p>\nWho offers the most competitive prices (which gives you an idea about their cost advantages\u2014or the lack of it)<\/span><\/p>\nHow frequently they make a price change<\/span><\/p>\nWhat kind of discounts they offer<\/span><\/p>\n\n- Type: <\/b>Percentage, dollar, Buy One Get One Off, etc.<\/span><\/li>\n
- Reach and Scope: <\/b>Store-wide discounts, personalised discount emails, etc.<\/span><\/li>\n
- Timing:<\/b> Seasonal, random, following competitors, etc.<\/span><\/li>\n
- Frequency: <\/b>Monthly, weekly, etc. (how frequently they send discount emails, for instance)<\/li>\n<\/ul>\n
How do they behave when entering a new market (will reveal the best practices in that local market\u2014penetration pricing, for one)<\/span><\/p>\nWe\u2019ll talk about why these are crucial to know before entering the market. But let\u2019s go over the three ways of monitoring your competitors\u2019 pricing moves.<\/span><\/p>\nManual tracking<\/span><\/h4>\nIf you\u2019re planning to sell several products that can be found in just 15 other stores, perhaps manual tracking is the way to go.<\/span><\/p>\nOtherwise, you\u2019d waste too much time.<\/span><\/p>\nManually tracking 20 products on 15 competitor stores takes nearly four hours.<\/span><\/p>\nAnd by the time you\u2019re done, there’s a good chance that your competitors will make a price change. Don\u2019t forget that Amazon changes prices every ten minutes.<\/span><\/p>\nPrice tracking software<\/span><\/h4>\nOne alternative is using price tracking software. This means automating the process, letting the engine handle this never-ending task.<\/span><\/p>\nPricing software brings you accurate and up-to-date price and stock availability information. Although often perceived as more expensive, using software is much cheaper than manual tracking. Because the hidden cost in not using any automation is the time you spend inefficiently.<\/span><\/p>\nIn-house engine<\/span><\/h4>\nLast but not least, you can have someone build a price tracking engine for you.<\/span><\/p>\nIf you need extra functionality that can\u2019t be found in existing tools, build an engine tailored to your needs.<\/span><\/p>\nJust keep in mind that software needs maintenance so it\u2019ll come with monthly maintenance fees.<\/span><\/p>\nSo, one way or another, you started tracking competitor prices. What\u2019ll you do with the data? How do you make it useful?<\/span><\/p>\nAdapt and survive<\/span><\/h3>\nOne reason Best Buy failed was that they underestimated their costs.<\/span><\/p>\nThe giant wasn\u2019t able to offer competitive pricing due to their high costs, and their policies didn\u2019t help either.<\/span><\/p>\n
<\/p>\nIf you search for these products on a price comparison website, there\u2019s a good chance that you\u2019ll see the best deal on Amazon.<\/span><\/p>\n Source<\/span><\/a><\/p>\n These Amazon Best Sellers are great in bringing traffic to the marketplace, and <\/span>product pages<\/span><\/a> are designed to encourage cross-sells.<\/span><\/p>\n According to a former Amazon Business Leader and founder and CEO of CommerceIQ Guru Hariharan, Amazon\u2019s purpose using this strategy is to <\/span>build the perception that it\u2019s the cheapest address for everything you\u2019re looking for.<\/span><\/a><\/p>\n You might say, there\u2019s no way I\u2019m falling for that. But do you actually know what happens at the exact moment you\u2019re shopping?<\/span><\/p>\n Amazon\u2019s pricing strategy is built upon the presumption that when we\u2019re buying something that\u2019ll cost a good percentage of our income, we\u2019re paying more attention to its price.<\/span><\/p>\n And vice versa\u2014we\u2019re not that price-sensitive on less costly products.<\/span><\/p>\n So once we feel like we\u2019re getting a good deal on this big purchase, we\u2019re less reluctant to add some accessories to the cart.<\/span><\/p>\n In the long run, we\u2019re saving less than we think we do.<\/span><\/p>\n That should remind you, even the simplest strategy can work wonders if you plan it right.<\/span><\/p>\n Alright, so Amazon nails this strategy, but how do they have such great control over their positioning?<\/span><\/p>\n Amazon pioneered the use of <\/span>AI<\/span><\/a> and machine learning in the retail sector, and it was a turning point for all retailers.<\/span><\/p>\n Long gone were the days these industry leaders manually set prices\u2014that was not even possible with their gigantic assortments.<\/span><\/p>\n And their use of these dynamic pricing algorithms influenced the industry as a whole.<\/span><\/p>\n Harvard Business School Professor Alberto Cavallo studied the frequency of price changes in the US retail market between 2008 and 2017, and two of his findings are truly illuminating.<\/span><\/p>\n First, this \u201cAmazon effect\u201d as Cavallo calls it has been shaping the dynamics of the competition by forcing small retailers to change their prices more frequently.<\/span><\/p>\n Source<\/span><\/a><\/p>\n Seeing Amazon change prices often, small businesses realised that they have to be more flexible to make sure they\u2019re not left behind the competition.<\/span><\/p>\n Because they knew online prices are transparent. And shoppers easily compare prices on multiple stores to see where the cheapest offer is.<\/span><\/p>\n So in a sense, competing on price was not an option, it was a necessity.<\/span><\/p>\n But of course, such a shift to technology on such a scale had carried its risks.<\/span><\/p>\n In 2000, <\/span>Amazon faced a backlash from customers<\/span><\/a> who bought the same DVDs at different prices. Interestingly, the reason they\u2019ve paid different prices was that they used different browsers. This was not fair in any circumstances, and there was no way the company could legitimise what they did.<\/span><\/p>\n In an interview with The Associated Press, Jeff Bezos apologised to affected customers:<\/span><\/p>\n \u201cWe’ve never tested and we never will test prices based on customer demographics. What we did was a random price test, and even that was a mistake because it created uncertainty for customers rather than simplifying their lives. The policy we put in place two weeks ago removes that uncertainty.\u201d<\/span><\/p>\n Cavallo\u2019s second finding shows that retail chains used to charge somewhat different prices across the country, but later were forced to go with a unitary pricing structure. Because online prices are transparent.<\/span><\/p>\n So how do you build a <\/span>market-oriented<\/span><\/a> dynamic pricing strategy that allows you to compete with giants like Amazon, but not alienate your customers in the process?<\/span><\/p>\n You really should stay away from demographic segmentation when it comes to pricing. It works well in so many areas of marketing, but just not pricing.<\/span><\/p>\n Instead, use dynamic pricing software<\/a>\u2014or have people build one for you\u2014that uses competitor pricing data, your costs, and target profit margins when setting a profitable price.<\/span><\/p>\n Set dynamic pricing rules like:<\/span><\/p>\n You can also use currency units if you\u2019re not comfortable with percentage calculations:<\/span><\/p>\n This way, you\u2019ll be able to compete with other stores\u2019 offers without compromising profits. But more importantly, you\u2019ll position yourself just as you want.<\/span><\/p>\n Meaning, regardless of competitors\u2019 price changes, you can match or beat their prices\u2014or more expensive, depending on your pricing strategy.<\/span><\/p>\n Have you heard about Best Buy\u2019s expansion to the Chinese market?<\/span><\/p>\n Not your fault if you haven\u2019t, because that was a story cut short.<\/span><\/p>\n In 2006, Best Buy entered the Chinese market. But the giant couldn\u2019t compete with the regional players, because it was impossible to match or beat their low prices.<\/span><\/p>\n Considering price is a top priority for the consumer, that doesn\u2019t come as a surprise.<\/span><\/p>\n Source<\/span><\/a><\/p>\n And that\u2019s how their China adventure ended.<\/span><\/p>\n What\u2019s striking in this story is that even a giant like Best Buy, despite their years of experience, can fail to put up a risk-free plan before taking such an important step.<\/span><\/p>\n But don\u2019t worry, because there is a safe path to expanding your business to markets abroad.<\/span><\/p>\n Once you find the right products to sell<\/span><\/a>, the next step is understanding the dynamics of the competition.<\/span><\/p>\n First, start by identifying your competition\u2014direct and indirect.<\/span><\/p>\n Direct competition refers to companies that sell what you sell: identical brands and models. Indirect competition is the stores that sell close substitutes.<\/span><\/p>\n Keep in mind, what\u2019s considered as alternatives for each other depends on the characteristics of a market. Take the consumer electronics market for instance.<\/span><\/p>\n Now, if you\u2019re selling iPhones in the US market, you probably don\u2019t consider Huawei smartphones as close substitutes for your products. Even if all smartphones have similar technologies, Huawei is not an important player in the US smartphone market due to government sanctions.<\/span><\/p>\n What if you stick with the same <\/span>marketing strategy<\/span><\/a> when expanding to another market?<\/span><\/p>\n Before anything else, you\u2019ll miscalculate the size of your target market for not considering Huawei\u2019s market share.<\/span><\/p>\n Source<\/span><\/a><\/p>\n You might think the Huawei example is too obvious for anyone to overlook. But not everything might come to your knowledge without an effort.<\/span><\/p>\n So, you\u2019ve found out who your competition is. What\u2019s next?<\/span><\/p>\n If possible, start tracking competitors\u2019 prices several months before you officially enter the market.<\/span><\/p>\n Doing this will tell you several things:<\/span><\/p>\n Is there competition on price (in 95% of the cases, the answer will be yes)<\/span><\/p>\n Who offers the most competitive prices (which gives you an idea about their cost advantages\u2014or the lack of it)<\/span><\/p>\n How frequently they make a price change<\/span><\/p>\n What kind of discounts they offer<\/span><\/p>\n How do they behave when entering a new market (will reveal the best practices in that local market\u2014penetration pricing, for one)<\/span><\/p>\n We\u2019ll talk about why these are crucial to know before entering the market. But let\u2019s go over the three ways of monitoring your competitors\u2019 pricing moves.<\/span><\/p>\n If you\u2019re planning to sell several products that can be found in just 15 other stores, perhaps manual tracking is the way to go.<\/span><\/p>\n Otherwise, you\u2019d waste too much time.<\/span><\/p>\n Manually tracking 20 products on 15 competitor stores takes nearly four hours.<\/span><\/p>\n And by the time you\u2019re done, there’s a good chance that your competitors will make a price change. Don\u2019t forget that Amazon changes prices every ten minutes.<\/span><\/p>\n One alternative is using price tracking software. This means automating the process, letting the engine handle this never-ending task.<\/span><\/p>\n Pricing software brings you accurate and up-to-date price and stock availability information. Although often perceived as more expensive, using software is much cheaper than manual tracking. Because the hidden cost in not using any automation is the time you spend inefficiently.<\/span><\/p>\n Last but not least, you can have someone build a price tracking engine for you.<\/span><\/p>\n If you need extra functionality that can\u2019t be found in existing tools, build an engine tailored to your needs.<\/span><\/p>\n Just keep in mind that software needs maintenance so it\u2019ll come with monthly maintenance fees.<\/span><\/p>\n So, one way or another, you started tracking competitor prices. What\u2019ll you do with the data? How do you make it useful?<\/span><\/p>\n One reason Best Buy failed was that they underestimated their costs.<\/span><\/p>\n The giant wasn\u2019t able to offer competitive pricing due to their high costs, and their policies didn\u2019t help either.<\/span><\/p>\n<\/p>\nDynamic pricing is fair, price testing based on demographics is not<\/span><\/h2>\n
<\/p>\nDynamic pricing in a fair way<\/span><\/h3>\n
\n
<\/p>\nKnow a market before entering<\/span><\/h2>\n
<\/p>\nIdentify the competition<\/span><\/h3>\n
<\/p>\nStart monitoring their prices from early on<\/span><\/h3>\n
\n
Manual tracking<\/span><\/h4>\n
Price tracking software<\/span><\/h4>\n
In-house engine<\/span><\/h4>\n
Adapt and survive<\/span><\/h3>\n