Tuesday, August 24, 2010

Companies Trying to Regain Control of Pricing

8 tactics that companies are using to limit bargain hunters from finding their deepest discounts.

Note: I’m a deal shopper, and this shows that if you know how to shop on the internet, you’re in control.

Here’s what companies are trying to do to regain control of pricing.

In the beginning... manufacturers had control of pricing. Manufacturers were considered "upstream in the food chain". Intermediaries (sales channels, distributors, retail outlets) were considered "downstream" links, generating lower margins. Today, no single product supplier can compete against local specialists in all geographies. So, a big switch has occurred - product manufacturers and service providers get disintermediated.More about that trend here:


Manufacturers are now trying hard to reverse that trend. Until recently, not many people knew what those prices were. Keeping them under wraps is a key part of how companies maintain pricing power. Well, the secret is out. Now, thanks to the Internet, consumers are able to figure out those prices. And that is creating huge headaches for the companies.

Online shoppers today aren't just buyers; they're also product reviewers, technical consultants and scouts for legions of fellow shoppers hunting for bargains. Many use Web sites where links are posted for online coupons and cash-back offers—deals that some companies didn't intend to circulate so widely. Others go to sites where people discuss how to find the lowest bids acceptable on travel-service auction sites. Even shoppers for big-ticket items like cars get an edge from sites that reveal prices paid for new and used cars.

Further assisted by search engines and so-called shopping bots that find the lowest prices for any number of products, shoppers today have unprecedented power to buy products at the sellers' rock bottom. But if they come to expect such prices all the time, companies could see their long-term pricing power erode and profits slashed.

Here are 8 tactics that companies are using to limit bargain hunters from finding their deepest discounts.

1. What are people saying about you?

Shoppers find the lowest prices in different ways. Some cruise coupon and special-offer sites, like RetailMeNot.com and fatwallet.com. Many users of travel-auction sites like Priceline.com and Hotwire.com first visit BiddingForTravel.com or Betterbidding.com for bidding strategies and other tips.

Firms can search such Web sites and discover ways in which consumers are taking advantage, perhaps by combining discount offers or coupon codes. Companies have various options for discouraging such activities, including canceling codes or revising coupon or discount policies.

Finding out what people are saying about a company, its products or prices, can show that prices are too low. Monitoring online sales in real time helps, too. If sales of a product jump 100-fold in five minutes, it would be wise to analyze the transactional details and possibly stop further sales until you know what's going on. A price increase may even be in order.

2. Embrace, but try to limit, the bargain hunters

The object of each of these tactics is not to eliminate deep discounting. Fire sales are obviously necessary sometimes. With that in mind, companies will find a receptive audience on the Web sites that cater to bargain hunters. They just need to set some limits. They can offer coupon codes that are only usable a set number of times, for example, or discounts for a limited time and available only to users of the sites. This way a company can better manage how much of its product it will sell at the deepest discounts. Dell Inc., for one, regularly issues coupons at deal sites, but the coupons can only be used a fixed number of times.

3. Escape the commodity trap

When sellers market products with additional features or services, they force buyers to focus on the value of the package rather than on the costs of each piece. This helps reduce price transparency. Packaging, or bundling, a product with other products and/or services, makes it difficult for buyers to ascertain the specific cost of each single item within the bundle.

Questions to Ask Yourself

1. Does your company deal in products or services whose value is highly perishable or time-sensitive?

2. Do you offer online coupons or have multiple discount strategies that can be used by unlimited numbers of consumers?

3. Are your resellers sometimes discounting your goods without your authorization or knowledge?

4. Is your company unaware of what's being said on bargain-hunting and other shopping-related Web sites about its prices and products?

5. Do you make last-minute offers at cut-rate prices without full appreciation as to how that might undermine your established pricing schemes or your brand image?

If you answered yes to any of these questions, your company may need to reassert control over its pricing power by pushing back against the increasing ability of online shoppers to obtain your lowest acceptable prices. Selling unlabeled, marked-down merchandise through an intermediary is one strategy, as is bundling the goods with additional offerings so that the base value you've assigned to the products is less clear.

These approaches move consumers away from markets that are strictly price-oriented. The relationship that an automobile buyer develops with the dealership that also provides maintenance is one such example.

4. Control the sales network

Sometimes discounts are initiated by independent retailers, without the input or approval of the product's manufacturer. The more control a company exerts over its sales network, the less vulnerable it will be to such practices. Bose Corp., for example, a Framingham, Mass., maker of audio products, says it has a policy of announcing to resellers the minimum price for certain Bose products. A Bose spokeswoman says the company will "refuse to deal in a product with a dealer who fails to resell at or above the announced price."

5. Ban online customers who repeatedly eat into your profit margin

Companies can identify who their least-profitable online customers are—those who repeatedly abuse return policies, for example—based on their transaction histories. One common abuse: A customer buys an item and uses it; then, if the store lowers the price while the first purchase is still within its return period, the customer buys the item again but returns it with the first receipt.

Online customers who frequently carry out re-buys and returns of this kind can be tagged by their delivery address or credit-card number and barred from further purchases.

6. Clear the market

Often makers of products like sports equipment or clothing are left with surplus inventory after the product's scheduled run or expected shelf life. Such products often end up being sold through secondary channels that offer steep discounts. But for the manufacturers, those discounts can cannibalize the sales of similar, newer models.

A lot of brick-and-mortar retailers deal with these kinds of issues by selling their surplus through outlet stores in out-of-the-way locations. But on the Web, of course, no such outlands exist. Thus, Web-based retailers that see an alarming increase in end-of-season discounting by independent sellers of their goods should consider using buy-back programs. Buying back old or obsolete material from the independent sellers, either to destroy it or ship it overseas, helps protect prices.

7. Offer discounts through intermediaries

If Marriott International Inc. were to sell its own cut-rate, last-minute hotel reservations, it might undermine its established pricing schemes and sales channels, essentially by telling consumers the lowest prices it's willing to accept. That is the reason intermediaries like Priceline and Hotwire come into play. They disclose the seller brand only after the search and haggling period, when the transaction has been approved.

While the travel business may be the best known user of this approach, other industries use similar tactics. Online discount retailers, for example, can be powerful sales channels for quality products whose labels are removed or replaced with those of the house brand. Some online discounters remove labels from apparel and refer to their makers only as "famous brands."

8. Reshape the search landscape

Sellers and their intermediaries can change how their sites work when it becomes too easy for bargain hunters to figure out which brands are available at what cut-rate prices.

Priceline, for example, sometimes moves to better protect the identities of its hotel-company customers when it sees that certain hotels are repeatedly getting high numbers of bookings in a certain market. This tends to happen when users have found a low rate and spread the word. A spokesman says the company is not out to discourage its users from getting good prices, but it must offer its hotel-company customers price protection at the same time. One way it does this is by redrawing the zones in which it groups its hotels, making it less predictable what hotel will accept a certain bid in any given neighborhood.

In one case, for example, Priceline saw large numbers of bookings for some of its high-end hotels at the lowest prices those companies would accept. Users of travel auction sites like Priceline can't see the names or the ratings of the hotels on offer. But some had figured out a strategy for getting the best hotels at the lowest rates, and that was exposing the pricing strategies the specific hotels were using.

Formerly, Priceline bidders who were familiar with a city would know that certain neighborhoods were unlikely to have four-star or five-star hotels. So, they would start by requesting a hotel with four or five stars in a neighborhood not likely to have such a hotel, and at a low price not likely to be accepted. The site allows users to rebid when a search turns up nothing within the parameters desired, and as long as the user doesn't change the dates of the desired stay. Thus, the bidder could keep adding zones to his or her search with a slightly higher bid each time until a zone was included that featured a high-end hotel. At that point, based on the earlier low bids—and sometimes bidding low amounts suggested on the advice sites—the bidder would have established a price at or near the accepted low.

Priceline's solution was to redraw its hotel zones to include properties of every star-rating in each zone, and to put more rooms on offer, making it less likely that a given search would turn up no results, thus allowing the bidder to have another chance. Clearly, the more rebids a user has, the more opportunity he or she has to find the rock bottom. But the more hotels there are in the group, the less likely it is that bidders will repeatedly get the same hotel following similar strategies.

For Further Reading

Designing the Right Product Offerings
By David S. Evans and Karen L. Webster (Fall 2007)
Companies create product versions from multiple components. The big challenge is how to take the available components and combine them into the product versions and product lines that will maximize profits.

Why the Highest Price Isn't the Best Price
By James C. Anderson, Marc Wouters and Wouter van Rossum (Winter 2010)
How to practice value-based pricing that boosts profits and promotes better relationships with customers.

From Niches to Riches: Anatomy of the Long Tail
By Erik Brynjolfsson, Yu "Jeffrey" Hu and Michael D. Smith (Summer 2006)
The Internet marketplace allows companies to produce and sell a far wider range of products than ever before. This profoundly changes both consumer behavior and business strategy.

from reports@wsj.com.

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