Much has been made about what appears to be a price war between brands, big box retailers like Walmart and Target, and online behemoths like Amazon. Brands are having the hardest time in memory fighting to keep their products profitable and on the shelves, both in-store and online, while retailers and online giants attempt to retain customers and grow the bottom line by offering products at the best price. Each side has valid arguments for actions taken but individual brands remain the most susceptible to the changing market and a “drive to the bottom.”
Who is winning the battle?
While calling the current ecommerce climate a “price war” might be a bit misleading, does it seem that way simply because the inherent nature of any competitive marketdrive efficiencies? And the most efficient side usually wins, right? This isn’t new by any means, but it has gotten much more complex. Before Amazon came around, brands were still complaining about pressure from giant retailers like Walmart to “lower their prices or else.” Walmart has a good argument for this, too. To keep shoppers coming into their stores that have the potential to move massive amounts of your product, they need to have the lowest price on a majority of their products. Walmart targets something close to 80%. If they don’t, shoppers go elsewhere. If a brand can’t lower prices far enough, it loses out on enormous distribution and logistics, something Walmart is great at. It’s as simple as that.
With the explosion of ecommerce platforms online, mainly Amazon, the market has gotten way more competitive. Brands are not only under fire from brick and mortar retailers like Walmart and Target, but now Amazon as well.
This is where it gets a bit more complex. Pressure from Amazon comes in the form of price matching products on other sites, not just the wholesale price, even sites/retailers like Costco who already receive huge bulk rate discounts. The algorithm employed by Amazon will not only find cheaper products on other websites to price match but it will go as far as discounting based on unit or volume. The unit/volume price match completely turns the table over on driving efficiencies because your 6 pack offered on Amazon could potentially be discounted to the volume price of a 24 pack. Furthermore, if your brand doesn’t have tight control over your distribution and other sellers are already beating your price online, you lose almost all control to set the price.
Want some more bad news? Target, Walmart, and Amazon are getting really good at building out private label brands. Dropping your product isn’t the only threat if you refuse or can’t lower the price any further. The real threat is losing the distribution AND Amazon creating a private label that is now a direct competitor. Private labels are something a ton of brands already deal with separately of the pricing issues, but battling both of these factors is a tall order.
Even if your products remain on Amazon, they will eventually fall below the profitability threshold, which Amazon terms CRaP or “Can’t Realize a Profit”. When a product is below this threshold, Amazon pauses any ads driving traffic there. Why would they want more traffic to a product they are losing money on anyway? This is a far bigger deal than most marketing professionals will admit. The amount of traffic to a specific product on Amazon has huge implications for how it ranks against organic searches within the site itself. When traffic from ads suddenly falls off the charts, be ready for your organic ranking to do the same.
What’s on the horizon?
Opportunity, that’s what. Any solution would need to solve for all of the following factors:
- Controlling the market price of your product in a war that’s driving prices to a bottom of which no one yet knows the depth.
- The potential to lose distribution against massive audiences by companies with increasingly efficient distribution channels.
- Serving ads against your products on Amazon and their associated organic rankings.
- The creation of a private label brand in direct competition to your own.
First, don’t just give up and give in to Amazon, even if that means convincing them to keep an unprofitable product by further lowering the price of a more profitable one. This might be a decent stopgap but isn’t a long term winning strategy. Second, think twice before pulling products completely from an online retailer or selling through them instead. One reason online retailers have become such giants is because they nail the shipping and distribution aspect of their business. Their efficiency here is something to lean on, not fight against. With the percentage of online orders made up of a single item rising, this will only become more important.
Re-imagining your product in a way that solves for all of the above factors may be the only long-term strategy with a solid chance of success. Consider having an online-only version of your product that is sized and packaged in a way that maximizes Amazon’s fulfillment and shipping requirements and drives the highest efficiency per unit/volume.
One brand ahead of the game is Tide, who began offering an eco-friendly box designed specifically for ease of shipping. Not only is the box “shipping friendly”, but they also designed a no-drop nozzle and upped the concentration giving the customer more laundry loads per unit.
A simpler strategy is to adjust the quantities you are selling. Look into what doubling the units per package or creating a bulk offering would do to the profitability and shipping costs. This is the time to bring in the product engineers and the logistics folks and see what’s possible. Getting creative with a redesign can lead you down a road that solves many of these problems, but can also transform your product long term. Celsius was bold in creating a powder form of its energy drink and it appears to be paying dividends. Without changing any of the important ingredients, Celsius lowered the volume/weight from 12 fl oz down to just 5.9 grams.
It’s time for a little strategery
The days of going it alone on the brand side are long gone for most. Any ecommerce strategy has to take into consideration what retail giants and Amazon alike are trying to achieve and working with them. These companies are shipping experts and have the distribution to back up the big talk. Amazon even recently leased 10 more planes to expand its fleet. With shipping leaders UPS, FedEx, and USPS all raising prices already in 2019, this is becoming even more important. This along with the growing percentage of online sales that are single products can completely sink a product’s profitability. It’s time to get creative with your product and design something specifically for the current market.