When the online store should work at a loss and what does that have to do with «dead horse»?
In one of previous posts we talked about the pricing rules for small online shops. But some exceptions to the first rule - profitability - were left «behind the scenes». And today we will talk about those cases when there are reasons to sell goods at cost or even at a loss.
The buyer’s psychology
There are products every retailer deals with that act as a litmus test for the buyer: by these prices a consumer determines the overall store pricing policy. As an example, the cost of high-end (and/or, on the contrary, inexpensive and popular) smartphones, widescreen TVs, etc. – such items are the most «sensitive» to price changes and called KVI (Known Valued Items).
If prices on such items in your store are higher than a competitor's, the buyer may take it as «everything is expensive here» signal and close a browser tab. So, before it happens, it is necessary to identify them and keep their prices at the appropriate level (as well as items in stock in sufficient quantity), even if you have to operate at a loss.
Typically, part of these products are no more than 5% of the store assortment, so it is hard enough to fall at a huge loss with KVI-products (especially if you have cross- and up-sell set up on your site, carry out systematic work with the customer database after each purchase, etc. Or if your online store is integrated with the Competera Price Intelligence solution).
Achieving strategic goals
The second exception – and the need to work at a loss – in order to achieve certain strategic goals for the company’s promotion on the market. Most often cases of use are:
- market share increasing, when the goal is to take a share of the competing online stores and an increase in sales, which will lead to costs decrease. As a result, the overall revenue and profits will increase too;
- setting up brand image, in a way that customers will perceive the brand as «the best prices shop ever»;
- reputational benefits – it's all about reputation, which provides favorable conditions for further cooperation with suppliers;
- launching a new product to market, when the product is sold at cost or at loss, but shortly, when awareness increases – product cost will also increase.
An old proverb says: «When the horse dies, get off». By following this advice, you can expand the list of the «profitability rule» exceptions in another case - when applying it to C-products (check ABC-analysis for details). If these products occupy a useful warehouse space, it makes sense to sell them with a negative profit to make room for the A- and B-products.
Author: Alexander Galkin, Competera.