Price erosion: What it is and how to avoid it
Over time, a product’s price is likely to decline. Avoid losses by controlling price erosion. We explain how.
Maria Jose Guerrero
Price erosion is the continued fall in the price of a product over time, due to pressure from customers and competitors. When this happens, brands and retailers gradually reduce the price of certain items to compete with other companies, or boost purchases by the most price-sensitive users and increase demand. This erosion then leads to a decrease in the consumers’ perceived value of the product, and a lower profit margin for sellers and e-commerce. Thus, without a robust pricing strategy, prices can suffer significant depreciation. From Minderest, we explain how to avoid this.
Keys to avoiding price erosion
Firstly, it is essential to establish minimum prices for each product so that production and logistics costs are always covered, and to maintain a certain profit percentage.
It is also beneficial segment users based on their willingness to pay for different products. In this way, different product ranges can be offered at different prices to each user group. For example, when faced with a new competitor entering the market, it is possible to change the prices of low-end products without altering the value of high-end items. These items target a less price-sensitive market, thus protecting the company’s profit margin.
To create this range of higher-value products you can choose to improve the features or functionality of your items. For example, as we see with new smartphones on the market, or create value-added services linked to these items. Launching new products or services at a higher price allows you to extend your life cycle and reduce price and value erosion.
Importance of establishing a MAP pricing policy
For brands whose products are sold by third parties, establishing a MAP pricing policy is another way to avoid price erosion. This policy specifies the minimum advertised prices that sellers must respect. Its importance lies in the fact that a drastic drop in prices by a seller can lead to a devaluation of the brand’s value, thus affecting all its sales channels. A MAP pricing policy acts as a guarantee for brands, which can take action against those who fail to comply.
Pricing tools to set appropriate prices
When faced with queries about a pricing policy, the latest pricing software allows you to offer appropriate prices for each product based on the company’s own sales history and market reality: Demand and supply, competitors’ prices, current offers, etc. This price optimisation encourages the growth of e-commerce businesses and brands and guarantees to protect profit margins.
By continuously monitoring competitors’ prices, you can adapt and stay one step ahead, attract more users, and achieve better positioning. Price is still a key factor in the final purchase decision.
Find out how Minderest can take your business to the next level.
Contact our pricing experts to see the platform in action.
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