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Profit margins determine whether businesses sink or swim and this is especially true in the hypercompetitive ecommerce industry.
So what can retailers do to improve profit margins?
There are a myriad of barriers that online retailers face and it can be difficult to respond adequately to them all.
The top five price related issues that they must address are: increased price competition, consumer price sensitivity, the need to protect the brand’s price image, increased price transparency, and improving return on inventory investment.
It may seem like a daunting task to address all of these issues, but a solid pricing strategy can do just that.
Standard profit margins for retailers can vary widely, but generally are between 20 and 50%. Improving profit margins is on the top of the list for retailers and pricing strategies are central to reaching that goal.
Only 27% of retailers said that their pricing strategies were effective, while 62% said that they were somewhat effective, and 11% said they were ineffective. How can retailers overcome these issues and optimize to increase profit margins?
These five tips can help them make it happen...
1. Automate as much as possible
Repricing manually requires a hefty budget and lots of time. More resources than most online retailers can or want to devote.
Why not automate it, along with other functions that are essential for retailers? Automating can reduce operating costs significantly and increase productivity.
2. Increase average order value with discounts
The key to providing great discounts is making it enough so that the shopper feels like they’re getting a deal.
The relative price is much more important than absolute or nominal price. Retailers need to use psychological pricing to optimize for profit.
While it may seem counterintuitive at first glance, discounts can increase profit margins for retailers if they make the minimum purchase higher than their average sale.
Most shoppers (73%) are influenced by discounts. Free shipping is another great way because consumers don’t want to pay for shipping and can justify spending a little bit more to get it for free.
3. Manage inventory
In order to sustain sales, all retailers must manage their inventory effectively. Running out of a product should be avoided at all costs because 77% of shoppers will leave your site for a competitor.
Inventory is highly correlated with profitability. There is a 77% correlation between overall manufacturing profitability and inventory turns.
4. Customer service
Customer service is incrediblty important for online retailers because sometimes things go wrong, but many companies don’t have physical stores in which disgruntled customers can get immediate support.
The way that call centers and email support handle issues makes consumers more or less likely to purchase from that retailer again.
Companies like Zappos that provide excellent customer service are able to command higher prices.
The majority (66%) of shoppers are willing to pay more for great customer service because they know they’ll be taken care of no matter what happens.
5. Dynamic pricing
Pricing strategy is essential to improving profit margins. Dynamic pricing is a new and effective pricing strategy for the retail industry that allows businesses to have flexible pricing.
There are many external factors that retailers must be able to react to, such as: competitor pricing, site traffic, conversions, seasonality, and more. When retailers include dynamic pricing in their pricing strategy, they are able to better keep up with market fluctuations.
Doing this manually is a pain and 40% of retailers are planning to use cloud or SaaS solutions to implement a dynamic pricing strategy.
Dynamic pricing, when automated, helps retailers react quickly which is essential given the frequency of price changes. Industry leaders like Amazon and Wal-Mart reprice their products anywhere from about every 10 minutes to 50,000 times per month.
Other retailers are playing follow the leader, with 36% of retailers planning to start using pricing software in the next 12 months. Retailers are catching on because there is a huge opportunity at hand, as revenue can increase up to 8% and profits can see up to a 25% boost when using dynamic pricing.
What are some other ways that retailers can boost profit margins? Please comment with any ideas or examples.