How Online Price Wars Are Threatening Brands

Online retailers are in a price war – each trying to outdo the other by offering consumers the lowest price in the market. But as Profitero has documented, Amazon refuses to be beaten. Whenever Walmart, Target or any other retailer lowers their price, Amazon automatically drops its price too. While great for consumers, this aggressive price discounting is destructive for brands.

Inevitably, products are priced so low they become unprofitable for Amazon to stock and ship, and could wind up being labeled as CRaP (Can’t Realize any Profit). This designation makes products ineligible for Amazon Marketing Services, Subscribe & Save, and ultimately could lead to delistment. Much to their surprise, many brands’ highest-selling products are getting labeled as CRaP, a death blow to their online sales.

Pricing at the mercy of machines

Manufacturers often wind up on Amazon’s CRaP list not through their own fault, but because online pricing has become too automated for its own good.

In this real example below, a rogue Amazon third-party seller has dropped price below the minimum advertised price (MAP) set by a manufacturer. Walmart sees this price drop, and thinking it’s the new everyday price on Amazon responds with a promotion to match the new lower price. Amazon’s price bots in turn detect Walmart’s promotion and match it as the new everyday price, not realizing the price violates the manufacturer’s price policies or that Walmart’s promotion is only temporary.

It becomes a destructive game of follow the leader.

How can brands take control?

Brands have to act both in the short term and long term to protect their item profitability. Short term, they need to detect MAP violations as soon as they occur, and swiftly and consistently hold third-party sellers and other retailers accountable.

Brands must also gain better visibility into pricing dynamics, in general. Many brands have price monitoring solutions in place for a few of their large retailers (Amazon, Walmart, etc), but everyone is discounting and promoting. This means any retailer could trigger Amazon’s price bots. In fact, we frequently see Target and Jet.com move price first.

Long term, brands need to rethink item profitability. One strategy is redesigning products so that they’re smaller or require less packaging, thereby making them less costly for Amazon to stock and ship. Another strategy is developing products that cost less to make and therefore have more of a margin buffer when prices inevitably drop.

In fact, some manufacturers we work with are developing new brands that are sold exclusively at Amazon and appeal to value-seeking buyers. Because they’re Amazon exclusives, other retailers can’t lower the price to trigger a price war.

For more insights, view our on-demand webinar Online Price Wars: What’s Happening, and What You Can Do.

(Also check out Recode’s article for more ways brands are fighting back.)

How Profitero can help

Through daily monitoring of price changes across retailers, we help brands know WHEN their prices are dropping, by HOW much and WHO dropped first.

With these facts:

  • Amazon teams can better understand and manage their online margins and know sooner which products are at risk of being labeled as CRaP
  • Legal teams can better pinpoint their MAP violators and enforce policies
  • Brands can work to educate their retail partners on price dynamics in the category and help them avoid destructive “follow the leader” pricing activity

Want help managing your profitability? Contact us today.