When it comes to pricing, the U.S. beauty category is one of the most intensely competitive categories online. Major retailers Jet.com, Walmart and Target are locked in an arms race with Amazon, each jockeying to be the lowest priced. In fact, as of Q2 2018, the average price difference for beauty products on Jet.com and Amazon.com was negligible; Walmart and Target had average prices only 3% and 5% higher than Amazon, respectively.
A leading beauty manufacturer found itself caught up in this intense price competition, losing valuable margin day by day—until it altered its promotions strategy, leading to an 87% bump in sales.
In 2017, two of the beauty manufacturer’s largest hair appliance brands grew sales by 100% versus the previous year. Despite this success, the brands faced major price compression toward the end of 2017. Of their 220 SKUs on Amazon, the top 10 products experienced a 10-15% decline in Average Selling Price.
By comparing their retailer promotional schedule against pricing data from Profitero, the company saw that promotional activities were a key factor eroding Average Selling Price. For example, a coupon offered by Target triggered automatic price matching by Amazon.com, which was then matched by Walmart.com. This activity resulted in a permanent price discount across the market.
This race-to-the-bottom pricing dynamic was further fueled by wholesale distributors. At the end of each quarter, the manufacturer would commonly offload closeout products on distributors, who would sell them at a discount through brick-and-mortar retail channels. Using Profitero data, the company learned that distributors were selling discounted products on Amazon.com, as well as brick-and-mortar, triggering reactive discounting by Walmart.com and Target.com.
The beauty products manufacturer decided to make Average Selling Price priority #1. First, they tightened up their distribution strategy—more carefully selecting the distributors they offered product to and establishing agreements not to resell on Amazon. Secondly, they stopped all price deals, like Deal of the Day, on top Amazon products and only ran coupon promotions, which did not trigger race-to-the-bottom price matching across other retailers. Finally, across all retailers they developed a strategy of only offering price discounts on exclusive products.
Profitero allows us to understand the total impact of promotional spending on our brands. Not only can we understand which promotion types and discount levels are driving the most volume, we can also track potential negative affects on Average Selling Price, which erode margin. Without this critical information we wouldn’t be able to maintain the 100% growth on Amazon we are seeing year over year.
—Director of eCommerce, leading U.S. beauty manufacturer
This Profitero customer overcame “race-to-the-bottom” pricing dynamics through its effective use of online promotions. In Q1 2018, the Average Selling Price for the brands’ products increased 14.6% compared with the same year-ago period. As a result, those products saw 87% year-over-year sales growth in Q1.