Help! I'm Facing Price Erosion!
Are your prices being undercut by online resellers? When those resellers lower their prices, they’re usually quickly followed by other resellers, which often results in a domino effect. Before you know it, profits are plunging as you face price erosion.
As margins decrease, resellers turn to the manufacturer, asking for lower prices so those margins can be maintained.
Price erosion has long been a problem for brands. However, online marketplaces like eBay and Amazon have lowered the barrier to entry, making it easy for third-party sellers to list any products they like. Sellers are encouraged to list the cheapest prices possible and are rewarded with prominent placements at the top of the listings on those online marketplaces.
This can lead to a vicious price war. For example, if your overhead cost is $100 for a product and you sell it for $150, you’ve covered your cost and have a margin. But if another company buys that product for $100 and sells it for $125, they still have a margin, without the costs of any brick-and-mortar locations. Since you’re aiming to have the lowest prices, you’ll likely also need to sell your product for $125. However, your costs are the same, so the next time you order, you’ll negotiate a cheaper wholesale price.
This allows you to beat the other retailer, who will simply price match or undercut you again until you have zero margins left.
So how do you combat price erosion? One option is to join the Amazon Brand Registry. The program was designed to protect brands with registered trademarks, and you’ll have greater support from Amazon, access to the Amazon Buy Box, and protection from product hijacking.
When your brand is registered with Amazon, other sellers must have permission from you before they can sell your products. Wherever you’re selling your product, make sure you have a MAP Minimum Advertised Price for each product. Then, limit your distribution to authorized sellers who sign a contract stating that they won’t sell your products for less than your MAP.
Ideally, this should happen before you begin selling a new product online. Limiting the businesses that can sell your products will help you keep a better watch over the entire network, and spot resellers who shouldn’t have your products listed at all.
Not only will this help you prevent price erosion, but it will also help you protect your brand throughout the online marketplace.
Another option is to begin using product serialization. This means that you’ll stamp or print a number on each of your products, so your warehouse can easily track them. This makes it simple to identify any leaks, and customers can check if they have a legitimate product. While this will initially take some time and money, you’ll likely regain the costs as your margins are better protected.
Maintaining the integrity of your brand and pricing can be difficult and time-consuming. If you’re currently facing price erosion, get in touch today to learn how we can help.