How online grocery pricing impacts e-commerce business

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How online grocery pricing impacts e-commerce business

By Sylvain Perrier, Mercatus - 10/15/2020

No one was prepared for the sudden influx of online grocery shopping this year. Since March, U.S. online grocery sales have grown steadily as consumers continue to pursue safe ways to get essential goods. While grocers responded to COVID-19 by increasing operational efficiencies to better meet the dramatic increase of online shopping, it also became evident that retailers needed to do more to address the new challenges created by the pandemic.

One key issue for grocers has been the resulting new pricing paradigm, which comes from high variable costs related to online orders. Compared to in-store transactions, online shopping costs more for the retailer to fulfill. From picking, packing and staging to getting the right order to the shopper, there’s a lot of required time, labor and resources that aren’t necessary for self-serve, in-person shopping.

Because of these added cost considerations, a grocer’s online grocery pricing strategy must be reevaluated. To be successful, grocers should align their digital pricing with how shoppers consider choices. They must also embrace a new pricing model that leverages an integrated online approach.

How Can Grocers Align Pricing With Shoppers’ Purchase Behavior?
A customer shopping for groceries in the store is usually on a different mission than someone shopping online. On average, the in-store shopper usually picks up five items or less in what is characterized as a “quick trip,” running an errand to get what he or she needs at the moment. On the other hand, the online shopper predominantly places orders for a “stock up” trip, adding 30 or more items to the cart — enough ingredients to make several planned meals for the week.

These differing methods of shopping also means that shoppers’ pricing sensitivity can vary. While in-store shoppers are likely looking for the best bang for their buck, online shoppers tend to value preference over price and are willing to pay a premium for speed, convenience, and these days, safety. Giving shoppers choices will ensure an improved grocery shopping experience that caters to their personal preference, where they can evaluate the trade-offs for themselves.

As online grocery shopping continues to grow, private label offerings will likely open new opportunities as consumers try to offset the cost of online shopping with more affordable products.

Private label brands are another significant growth area where grocers can offer lower prices, compete with brand names and increase shopper loyalty. Many consumers see private label products as a substitute for multinational brands. As online grocery shopping continues to grow, private label offerings will likely open new opportunities as consumers try to offset the cost of online shopping with more affordable products.

What Does an Online Integrated Approach Mean?
In a traditional framework, grocers build a pricing strategy by selecting the market, identifying competitors, building a basket of the most popular products and evaluating the right in-store prices and deals that will capture the most sales and profit.

An online integrated approach follows this same outline but adapts it to the e-commerce channel. The digital landscape varies from physical stores when it comes to setting digital shelf prices and how it compares to markup competitors. Grocers must adopt a unified and seamless outlook that considers all these elements to create a strong online presence.

This approach is also affected by the third-party delivery services that a retailer supports. According to Brick Meets Click, a customer who opts to use a third-party delivery service would be offered prices that were 7% higher than the retailer’s own service. It also found that shoppers pay over $18, or 12% more in total, when using the third-party service as opposed to the retailer’s service on a basket of 30 commonly purchased products. And shoppers are beginning to take notice, ultimately paying for shopping charges, fees for delivery or pickup and tips.

To accommodate, grocers are making changes to own more of the digital experience, close the opportunity gap and increase profits. For example, Texas-based grocer H-E-B is starting to replace Instacart shoppers with its own employees for in-store picking, continuing to serve shoppers through a more profitable model for the retailer.

It’s Time for Grocers to Adapt Their Online Grocery Pricing Strategy
With the continual rise of online orders, retailers must find ways to improve the profitability of their eCommerce platform by leveraging an integrated approach that supports today’s new realities. A sound strategy is one that allows retailers to re-examine assumptions about pricing and affords them the opportunity to offer a differentiated online shopping experience, which in the end, will place them well ahead of the competition.

Sylvain Perrier is president and CEO of Mercatus, Charlotte, N.C., an integrated e-commerce platform for grocery retailers.

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