How to Compete on Price Against Large Companies

Traditional wisdom is that smaller ecommerce merchants can’t compete against larger ones concerning the prices of their individual products. That might not be necessarily correct. We recently spoke with Rodrigo Carvalho, founder and CEO of BlackLocus, a pricing-intelligence support. He says smaller merchants should keep a general pricing strategy, while knowing 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 little merchants, they normally have thousands of products that they take on their shop. Oftentimes they have a couple of niche items which drive the majority of the profitability, but they also have a fantastic product mix in their shop which enables them to cross-sell, and gives an impression they are like a huge store with a great deal of products.

“What we discovered is that a good deal of small merchants do not often adjust prices. A price is set when they include the item in their store, and it just stays the same manner for months, sometimes years. When we use BlackLocus in their product catalogue, we find that about 30 percent of the products were under priced.

“It was quite surprising when we began looking at that info, and one reason we think this happens is because while the larger merchants are shifting pricing or adjusting prices, the smaller ones just keep their prices stationary, and as cost of goods sold increases, they do not necessarily adjust to keep up with the competition.

“And we found out — for market items that the tiny retailers carry — we discovered that it is also important for the merchant to know a little bit about the price elasticity for all those items, because oftentimes there aren’t many people selling those market products, and occasionally it’s possible to increase prices with hardly any effect on your conversion rate.”

PEC: How can a merchant understand that? Just by testing?

Carvalho:“It is an art and a science. By doing some A/B testing, adjusting prices. Not too much, but a little bit at a time so that you can begin discovering how it impacts your conversion rate and determine an appropriate price for the item.”

PEC: Walk us through a hypothetical strategy a small merchant could use on pricing matters. Let us assume a smaller merchant sells cooking supplies. Assume there are far larger companies that take the exact same or quite similar cooking supplies. What is the pricing plan in that situation?

Carvalho:“The first thing you must do is know what products you are carrying that are grossly overpriced or under priced. So when you have thousands of products, it is important that you understand like how far you’re from the competition. Running a competitive analysis on your merchandise variety to adjust prices so you are closer to the competitive price — we found that to be extremely crucial for the online retailers.

“The next part is to look at conversion prices. If you go to your Google Analytics and you look at conversion rates for every one of your products, you will find those which have very low conversion prices. Sometimes the picture is bad. Sometimes with the name and description there is something wrong there. Occasionally even the add to cart button isn’t working properly.

“Those are a few of the things which could be causing the low conversion rate, but it might also be price. It’s important to study the competition and understand that your price relationship to them to determine if that’s causing the low conversion rate. And the same for high conversion products — you should try and understand what things are contributing to this high conversion rate, and how do you replicate that?”

PEC: Does your company, BlackLocus, facilitate that sort of competitive testing and analysis?

Carvalho: “Yes. We permit you to see how much your competitors are charging for the very same things that you sell on a class level. Small retailers typically compete on product categories, and that’s usually driven by search. Search is enormous, of course, for ecommerce. So you’ve got a few keywords which are driving traffic to certain categories and then those key words which are associated with the class will somewhat define your competitive landscape.

“You mentioned a cookware provider. If you sell knives for instance, you might sell a bread knife or a steak knife. For each category there are particular keywords which are driving people to the products in this category. You want to be certain that you’re not competing against Amazon, but competing against another market retailers that are rated high for those search terms.”

PEC: Can you counsel smaller merchants to always be more affordable on price, or to match price on their opponents? If a smaller merchant were a BlackLocus customer, do you advise that customer to match Amazon’s price?

Carvalho: “Not necessarily. It really depends upon the retailer’s strategy. By way of instance if you would like to expand — if you’ve got the cooking equipment and you need to enlarge on the knives class, perhaps you are going to start competing slightly more heavily on price on this particular category just because you would like to get market share. You would like to help with your search positions, your keywords. But it depends. It truly goes by strategy , and also having something such as a loss leader — using products that you understand that are bringing visitors to your shop and then making certain those are correctly priced and understanding people, sometimes when they purchase those productsthey buy other things with them.”

PEC: How does competitive analysis work?

Carvalho:“In BlackLocus we are constantly crawling the net and we identify the rest of the retailers which are selling the exact products that you’re, and we tell you . So you don’t need to tell us who your opponents are. We tell you who they are and we tell you that you know who you should be focusing on.”

PEC: Tell us more about BlackLocus.

Carvalho: “BlackLocus is a web platform. We’ve got the objective of helping online retailers to better price their goods. When a merchant signs up, they tell us the goods. They give us a feed for their product catalogue, and we crawl the net. We find everyone that’s selling the identical solution, then we work together to make a pricing strategy.

“So, what exactly does that mean? In the platform we’ve got a way to permit retailers to set principles. By way of instance, you have your cookware web shop and for the knife kind you would like to be competitively priced against, say, Knives.com. So you set up a rule saying: ok, each time that Knives.com changes their prices for certain goods, and my price is over knives.com by 10 percent, let me know.

“We’re tracking the data on a continuous basis and if the rule is broken it triggers an alert, and we ship weekly digest emails with all of the alerts that were triggered from the system. The users log in, and this way they do not need to go through the thousands of goods which they have. They know which ones to concentrate on and then when they enter the specific products that they have an alert on, they could see the competitive landscape. They could see how they are positioned against the competition and they can change their prices either up or down to meet their strategy.

“We started the business in the end of 2009 from Carnegie Mellon. Basically, the foundation of the business was based on product fitting that’s a very, very hard problem to do since we are crawling the data and will need to be certain we’re comparing apples to apples on a scalable way. It is extremely complicated. We worked very closely with the machine-learning section to put this in place, and we have very substantial 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’ve got over 55 customers.”

PEC: How much does this cost?

Carvalho: “It depends. It varies by the amount of products that we’re tracking, the amount of users which are utilizing the system. We usually give custom quotations to our customers and we work with small retailers all of the way to large retailers.”

PEC: Where does the title BlackLocus come from?

Carvalho:“Locus is a psychology term from’internal locus of control,’ meaning that the activities that you take now will define your future tomorrow, and Black is profitability. So with BlackLocus, we provide intelligence. We give predictive analytics into the retailers so that they can take action now to become profitable in the future.”

PEC: Give us an example of a customer that has used your services to great outcome.

Carvalho:“There is 1 retailer that had a great looking site. They had all the marketing things set up. They have significant traffic to their shop, but their conversion rates were not performing as large as they wished. When they signed up for BlackLocus and we began running the analytics on their products, we discovered that their things could qualify into two unique buckets. 1 bucket was their items which are what we call commoditized products, where a number of other retailers sell the identical item. The other bucket was market products that not too many men and women carry those products — they had quite substantial search ranking for those products.

“When we began looking at the breakdown of every of the various buckets, we noticed that the commoditized products which they’ve were priced significantly higher than the competition, and we helped them fix the prices so they were more aggressive. However, they didn’t necessarily begin selling more of these products. What happened was that after clients started going to their shop, they found those products — where they could compare prices — and the perception of being an over-price merchant went away. And for the one of a kind items, the more market products, we helped them grow prices 35 percent without changing the conversion rate they were getting on them.”

PEC: what sort of products were included there?

Carvalho:“It was motorcycle gear.”

PEC: Anything else?

Carvalho:“I hear a whole lot of people saying in the media that smaller online retailers should not attempt to compete on price. I completely agree with that. You shouldn’t attempt to be fitting prices against the larger retailers. But, it’s extremely important for even the tiny guys to be certain they have a pricing plan, and to be certain their prices are somewhat aggressive. They can see important changes in profitability and margin by simply adjusting prices alone. We see it happening.”