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David vs Goliath: How Retailers are Competing with Amazon’s Pricing Strategy

The Amazon marketplace has become a staple not only in the world of e-commerce but all forms of retail. The company is ranked as one of the top 10 retailers in the world, and its revenue is greater than its next nine online competitors–combined. It’s even expanding beyond the internet and opening a brick and mortar store in New York City. Its innovation and efficiency have placed it at the top of the online retail industry, and retailers of all kinds feel the ripple effect.

Amazon’s business model is incredibly beneficial for shoppers, offering low prices and fast, free shipping has made it a first-stop for most consumers. However, its remarkably low prices are taking a toll on its competitors. Many stores that were once leaders in the world of retail are now struggling to keep up, and many believe this is because of Amazon.

Unbelievable Prices, Incredible Service

It’s a regular occurrence in capitalist economies. Firms that demonstrate more efficient and innovative practices become leaders, and those who can’t keep up are pushed out of the market. However, Amazon’s practices have been so overwhelmingly efficient that many have claimed them to be unfair to the competition. Many have even drawn comparisons between Amazon and Standard Oil, accusing Amazon of monopolizing the online retail industry.

Amazon’s tactics and success draw a thin line between itself and Standard Oil, but the discussion on whether the term “monopoly” can be applied to Amazon can be saved for a later time. However, what is evident beyond debate is the power Amazon possesses and how it is using it. The company has become more and more powerful, and its recent push to move retailers out of the market only further exemplifies this power.

Target

Target was one of the first retail giants to feel notable effects of Amazon’s low prices. In 2012, the retailer announced it would stop selling Amazon’s Kindle, despite the tablet’s success in its brick and mortar stores (it was the best selling tablet Target had on Black Friday 2011). Why would Target do this? Well, it felt its stores were being used as showrooms for the online giant. Amazon would undercut Target’s prices of the Kindle, and advertise the lower price on their website. Since ⅔ of shoppers use their phones while shopping, they would see this lower price through Amazon’s Price Checker app, buy it, and give Amazon their business instead.

Wal-Mart

Another retailer to do this was Wal-Mart. Later in 2012 the company, whose greatest point of differentiation is its affordability, announced that it too would stop selling the Kindle. It denied that the removal was due to increased competition from Amazon, but many analysts disagree.

Amazon’s low prices have sparked retailers such as Wal-Mart into action. The retail giant recently announced that it is considering matching Amazon’s prices for the holiday season, and it appears that Wal-Mart has already gone above and beyond its claim. In a recent study, Kantar retail revealed that Walmart.com’s prices are now 17% less expensive than Amazon’s, and 5% less expensive than Wal-Mart Supercenters. This is a sign that brick and mortar retail just won’t be able to keep up with online retailers. This price cutting is resulting in price wars across the industry that are too drastic for some retailers to keep up with.

Sears Corporation

If you’ve been around for the past twenty years, you should be familiar with Sears. It has been one of the largest retailers the world has ever seen. Unfortunately, what comes up must come down. To say the retailer has had a wild ride is an understatement. The retailer has been unable to keep up with the internet boom and reported its 9th straight loss in the 3rd quarter of 2014.

These losses are taking a toll on the company. More recently, the company reported closing 100 Sears and Kmart stores along the East Coast, putting thousands out of jobs before the holiday season. Amazon’s prices are too low even for retailers the size of Sears to keep up with. The prices are so low that Amazon’s prices often cut into its own costs, providing a notoriously low profit margin that would put most retailers out of business.

What Retailers Can Do to Compete

Despite removing products from their assortment or losing profit, there are still ways for these retailers, as well as smaller ones, to compete with Amazon. One service offered by Amazon that other retailers should consider is free shipping. At least 41% of retailers plan to offer free shipping this holiday season, including Target, who has advertised free shipping on all purchases through December 20th. Customers will appreciate the service and it will add value to your brand.

Another way retailers can compete is through dynamic pricing. Dynamic pricing is a strategy that allows retailers to reprice their products according to fluctuations such as a change in demand and competitors’ prices. Manually changing prices is impossible for retailers with a vast assortment, so many use repricing software to keep up. Amazon is known for changing its prices every 10-15 minutes, and other retailers are following suit by investing the time and money into tools that will reprice in real time but won’t cut into your profit.

The world is experiencing a massive shift in the way consumers purchase products. In 2014, online shopping’s convenience and low prices are making it the ideal choice for many consumers. Amazon’s e-commerce revolution is pushing retailers out of the market, but it’s not too late to push back. Its practices are innovative, but retailers can take cues from Amazon’s data-driven strategies to inform and improve their own.

Contributing Writer: Brian Smyth

Arie Shpanya

Arie is the former COO, Executive Chairman, and Co-Founder of Wiser, a dynamic pricing and merchandising engine for online retailers and brands. He has extensive experience in business development with a focus on eCommerce (eBay and Amazon), and is a guest blogger on Econsultancy, VentureBeat, and more.

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