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Break down silos in ecommerce to drive performance

eCommerce Inventory Optimization Tips — How to Use Data to Buy and Sell the Right Products

In eCommerce, proper inventory planning and management is at the heart of all success. Your inventory is your lifeblood. You’ve paid money up front to carry products, and that money doesn’t come back until you’ve sold them. That means that ensuring that you are buying and storing the right products in the right quantities is critical.

Holding inventory ties up a lot of cash. It is estimated for every $1 sold by retailers, $1.43 is sitting in inventory. Still, the industry is growing and, as a result, companies are storing more products than ever. US-based warehousing has grown 6.8 percent in the last five years. Those products that sit on your shelves for months aren’t doing you any good. In fact, their purchase is limiting your ability to spend money on other areas of your business.

If you sell products that have an expiry date like food or makeup, inventory optimization and management are even more important. Dead stock that can’t be sold post-expiry date not only is a waste of the money that it took to purchase the product but also costs you money to dispose of.

Even products that don’t expire still cost you a lot in storage costs. Warehousing is often leased at variable cost, meaning that the cost can fluctuate based on the products that you store. When you overbuy products or stock products that won’t sell, the storage costs will go up.

Here are a few tips for optimizing your inventory management:

Categorizing Your Inventory

One of the most effective ways to improve your inventory management is to institute policies that help with the categorization of your inventory. By breaking down your inventory into categories, you can improve your warehousing and implement effective shipping practices.

Start by sorting your existing products into three different inventory categories:

  • Productive inventory. Productive inventory is comprised of products that are moving quickly. These products should be stored in an area that is easily accessible and close to your staging area.
  • Slow moving inventory. These are products that are selling, but not as rapidly. These products may require more analysis to determine if they are worth further investment.
  • Dead Inventory. Dead inventory is comprised of products that aren’t moving at all or make very rare sales. These products are unlikely to be purchased again and may even require disposal to make room in storage.

When you have an idea of where all of your different products fit into this framework, you can better organize your warehousing to ensure that your fulfillment operations are effective. The most popular methodology is to keep your most popular products near your staging area.

Here’s an example:

Source: EazyStock

To optimize your inventory and fulfillment practices, you have to have the data on hand to make the decisions that allow you to streamline your operations.

Implement First-In, First-Out

If you haven’t already, it is absolutely critical that you implement “first-in, first-out” as a standardized practice in your fulfillment and inventory management operations. This refers to ensuring that your oldest stock is always shipped first, not the newest stock. Obviously, this is most important when we are talking about perishable products or any product with an expiration date.

First-in, first-out is also important for non-perishable products as well. Over time, unsold items will have wear and tear from being jostled around in storage. The packaging and design can fade or change over time. You don’t want to end up with products that have been sitting in the back of storage for so long that they are unsellable.

Of course, if you are already working with a warehousing and fulfillment company, they should already practice first-in, first-out. If you aren’t sure, you should get confirmation.

Data-Backed Contingency Planning

Inventory management is tough. There are always going to be unforeseen situations that can make proper inventory management difficult. For instance, if you were to see an unexpected spike in sales for a particular product and incidentally oversell your stock, do you have a plan in place? What happens if you miscalculate the inventory of a particular product? What happens when a manufacturer runs out of a product while you still have a list of orders to fill?

These are the types of scenarios that seasoned eCommerce professionals are used to dealing with. The unexpected. The best thing that you can do for your business is to try to plan for these scenarios by implementing contingency plans for as many possible scenarios as you can.

Evaluate the risks of different events. For instance, a manufacturer discontinuing one of your most popular products unexpectedly presents a much larger risk to your business than a sudden slowdown in sales. To mitigate this risk, you should always have contingent suppliers ready to fill the gap. Identify the products and partnerships that are most vital to the ongoing success of your business and start there.

The Importance of Regular Inventory Auditing

Regular auditing of your inventory is necessary to have confidence in your operations and use data to make smart purchasing decisions. Most eCommerce companies rely on a combination of software solutions and warehouse reporting to know how much product that they have in stock. But, mistakes can be made. Larger eCommerce operations are more at risk than smaller companies and should institute policies to ensure the accuracy of their data and protect themselves against the risks we spoke about earlier. According to a study from GS1 US, retail inventories are accurate just 63 percent of the time.

A few steps that any company can take to improve their inventory auditing include:

Physical Inventory Auditing

The practice of physically auditing all of your inventory at once. If you’ve ever worked in retail, there is a good chance that you have been asked to help audit the stock within a store or storage facility at some point during your tenure. At least once per year, all eCommerce companies should to a full physical audit of their current inventory. Of course, this is disruptive to business and tedious, but it is impossible to make the right decisions if don’t have confidence in your inventory data. The only way to be certain of your data is to count your stock.

Spot Checks

Spot checks are an excellent, less disruptive way to make sure that your data is accurate. Many eCommerce companies do inventory spot checks on a quarterly or bi-annual basis for their most popular items. A spot check is simply choosing a product, counting your stock, and comparing that number to what you have on file. Spot checks can be a great way to evaluate the accuracy of your data and effectiveness of your systems throughout the year without having to disrupt business for a full physical audit.

Cycle Counting

Some eCommerce companies opt for cycle counting instead of a full physical inventory audit. In cycle counting, rather than a full count at the end of the year, the process is spread throughout the year. On a daily, weekly, or monthly basis a different product is checked on a rotating schedule to ensure that the data is accurate. Higher value items can be checked several times throughout the year as mistakes in their data for these items present a larger risk to the business.

Accurate Demand Forecasting

Ultimately, effective inventory management relies on accurate demand predictions. You can’t know how much of an item you need to stock without having some idea of how many sales you can expect in the future. In some cases, accurate demand forecasting can be very difficult. In others, like seasonal items, a rise in demand can be reasonably predicted and prepared for.

There are many aspects of a business that affect the future sales of a given product. The trends within the market itself play a large role. The growth of your company also provides insight into future sales. But, there are many decisions that are made on a day-to-day basis that can result in fluctuating sales. For instance, something as small as deciding to list a product on your homepage can result in a sharp spike in sales. Promotions and discounts need to be coordinated with warehousing and inventory management staff.

Product advertising tools can give you a further boost. Giving your Product Marketing team access to inventory turnover rates and stock levels allows them to apply advertising pressure to the products that need it—things that are selling too slowly, or which are close to an expiry date.

Coupling your product advertising and inventory management makes sense. Why? Because you can focus on advertising products that have the biggest positive impact on the business as a whole, rather than just the products that are easiest to sell.

Companies that take this into account can expect their inventory management to be more efficient. Product advertising should take stock levels and turnover rates into account. At the very least, companies should open the lines of communication between the two departments—so that they can begin working together to find optimal inventory balance.

Today there are more tools than ever before to help eCommerce companies with demand forecasting and inventory turnover management. In fact, many choose to automate the process entirely as automation can provide more accurate results than trying to establish it by hand. Most companies use a combination of automated software solutions and traditional techniques to forecast the demand for their products.

Inventory Optimization is at the Heart of eCommerce Success

Ultimately, the success of any eCommerce company comes down to how effectively they can store, sell, and ship their products. The largest eCommerce company in the world,  Amazon, places a lot of focus on streamlining their inventory management and warehousing practices. 79 percent of companies with high-performing supply chains grow faster than their industry average.

Effective inventory management and optimization helps eCommerce companies ship products more quickly, save money, and free up funds for investments in other areas of their business. Taking the time to refine your fulfillment and tracking practices can help your whole operation to run smoothly and be more effective. In addition, coordinating inventory clearance efforts with your marketing department can help you manage the flow of goods through your warehouse.

At Crealytics, our team of retail experts help companies break down the data silos between Inventory and Marketing, resulting in a smoother to path to inventory management and increased profitability.


How Product Advertising Can Improve Inventory Management

In eCommerce, both product advertising and inventory management play vital roles in the health of a company. Often these vital components are treated as separate processes, but companies have a lot to gain from unifying their product advertising and inventory management operations.

Companies with both physical and online operations are quickly seeing the gap between the two close as processes become more unified. Traditionally, when you want to move inventory, there are a number of merchandising strategies at your disposal. However, companies often overlook how their online product advertising could serve a similar purpose.

Forward-thinking companies can use their online product advertising to help them move excess inventory. Basically, this method includes increasing advertising on overstocked products to help them sell more quickly, or reducing advertising on understocked products that can sell well without an advertising push.

Let’s take a more in-depth look at some of the specific ways in which product advertising and inventory management are beginning to converge in eCommerce:

Connecting Product Advertising and Inventory Management

Bridging the gap between product advertising, merchandising, and inventory management can have a huge impact on a business. Typically, advertising funds are spent on the products that generate the largest returns. That’s been a standard advertising practice for decades. But, that doesn’t necessarily mean that your advertising budget is being spent on the right products. By pairing your product advertising and inventory management you can focus on advertising products that have the biggest positive impact on the business as a whole, instead of the products that are easiest to sell.

eCommerce companies that embrace this union will find that they are more efficient at managing their inventory. Sometimes, products may sell well online, but don’t need to be advertised for the current stock to sell out. Product advertising must take stock levels and turnover rates into account. Advertising something that is going to quickly run out of stock often provides little to no net benefit. At the very least, companies should open the lines of communication between the two departments so that they can begin working together to find optimal inventory balance.

Data silos and misused metrics between the advertising and merchandising departments can waste large amounts of money. In a guest article from our founder Andreas Reiffen on Search Engine Land, he details how 40 percent of ad budgets are spent on products that will run out of stock within three weeks. On the other hand, only 21 percent of budgets are allocated to products that will not sell out within a three-month period.
While it may seem advantageous to focus on returns in product advertising, the bigger picture that includes inventory management shows that companies may want to re-think the product advertisements that they pay for. Moving products that would otherwise be sitting on shelves is a net positive, while moving products that were sure to sell on their own provides little benefit, regardless of individual returns.

Why Focusing on ROAS Is Counter-Productive

Source: Kissmetrics

Product advertising success has long been dominated by one metric, Return on Advertising Spend (ROAS). This is a measurement of the total revenue created after advertising costs have been subtracted. While ROAS is an important metric (although not as important as Lifetime Value, as we pointed out in a previous blog post), it is not the best long-term choice. Shifting your focus toward lifetime value can help companies change their way of thinking from short-term gains to long-term growth.

Customer lifetime value (CLV) is ideal for measuring the long-term contribution of your advertising budget, while ROAS focuses primarily on the profitability of a specific advertisement. ROAS doesn’t take into account future purchases that a customer will make once they have become familiar with your company. The goal should always be to improve measurement and gain a deeper understanding

Our research shows that advertisers that focus their efforts on long-term revenue goals make about 5 percent more revenue in the first year than those focusing on short-term goals.

When ROAS is the only thing taken into account when deciding what products to advertise, inventory problems can arise. Advertising a product with low inventory just because it has the best ROAS can cause stock shortages. This can actually result in a net loss for the company when they don’t have the product on hand for future customers. Often it is more beneficial to advertise products that have a poor sell-through rate, as they need the most help to move your inventory. If a product was going to sell out without advertising in a few short weeks – why focus your ad dollars on that product?

Using Dynamic Pricing to Manage Inventory

Source: Wiser

In a previous post, we covered dynamic pricing. In that post, we covered how dynamic pricing can be used as an effective tool in inventory management Having dynamic pricing systems in place allows companies to quickly react to changes in inventory and roll pricing changes out across all channels.

With automation, your product prices can automatically react to changes in inventory. In fact, A.I. will allow for your dynamic pricing systems to react weeks ahead of time, averting potential shortages and other inventory crises’ that would have been difficult to manage.

As the inventory of a particular item begins to fall, companies can increase prices to reflect this fact and ensure that there are no item shortages. When an item has been overstocked, pricing can be lowered to ensure that the inventory is sold at a reasonable rate. If more storage space is required, larger items can be sold to open up more warehousing space. In the long run, dynamic pricing strategies in product advertisements can give eCommerce companies helpful tools for improving their inventory management operations.

A New View on Product Advertising

For product advertising to become an effective tool in inventory management, organizations need to change the way they think about advertising. For decades, the only metric that advertising was judged by was its return. If an advertisement generated a net positive return, it was seen as beneficial regardless of the wider organizational implications that giving the product an advertising push may have resulted in. Often, it may be more beneficial to ensure that slow-selling products receive an advertising push but generate a lower return.

Of course, this requires communication and collaboration between departments. Without that communication, it is impossible for marketing and advertising departments to know what changes need to be made to facilitate improvements in merchandising and inventory.

Beyond the inventory improvements, these changes facilitate a long-term view of product advertising and a focus on CLV over ROAS, which will provide better results. The next time that you set up a meeting with your ads team, considering bringing in inventory managers to discuss how the two can work together to create processes that benefit both departments.

Get in touch to learn more about how Crealytics can help you break down the silos between Product Advertising and Merchandising to achieve a more unified eCommerce strategy.


The New Price Elasticity Model Everyone Should Be Using

The traditional understanding of Price Elasticity focuses on the influence of product price on sales of a particular product. But price also strongly impacts Google Shopping performance – which is used by most online retailers to acquire new customers and maximize Customer Lifetime Value through repeat purchases. Because of this connection, price decision makers and marketing campaign managers need to start looking at an extended model of Price Elasticity that also accounts for the impact of price changes on advertising cost and performance.

“Pricing is the most effective profit lever.”

This statement from Robert J. Dolan made in 1996, holds true now more than ever. Price’s impact on business is much bigger than just on sales volumes and margins. Prices have become a fundamental part of online advertising, not just on Google, but also on other PLA based ad networks.

In terms of Product Advertising success, price plays a huge role in two places:

  1. Frontend: Prices (and price changes) have become a major visual element in online ads.
  2. Backend: deep within the auction algorithms, prices and their competitiveness are important criteria for Google and other PLA based networks to select which products to show – and how often.

Let’s take a look at each of these in depth to see how exactly price changes affect Product Advertising success.

Visualizing prices in ads is just the tip of the iceberg

The rise of feed-based advertising has made it easier for customers to compare prices than ever before. Google constantly experiments with how to visualize prices, price slashes, and promotions:

Example: Price slashes, price drops, special offers. Image courtesy of Merkle.

These experiments show just how important price has become as a visual element to Google and those who shop there.

Algorithms decide which products to show based on price

It should come as no surprise then that Google takes price into account when deciding which products to showcase in the paid search results (Google Shopping) and in what order. Crealytics has conducted research on the role of price in Google Shopping, and the results show that competitively priced products perform significantly better in terms of traffic acquisition than those that are more expensive:

This information leaves retailers with two important levers to operate when trying to increase sales through Product Advertising: Product Price and Product Bid (MAX CPC). In order to drive more sales, a retailer can either increase advertising budgets, decrease product prices, or a combination of the two.

The example below shows two scenarios that explain when pulling each of these levers independently.

While increasing advertising spend can significantly increase the number of impressions and sales, it pales in comparison to the performance uplift we get from lowering the price. Ideally, both levers would be used in combination.

Should next generation pricing decisions consider sacrificing product margin in return for more and cheaper advertising clicks and subsequent conversions?

In order to make sense of both effects, we propose an extension to the current understanding of Price Elasticity of Demand.

Elasticity of Demand

Traditionally, Price Elasticity of Demand researches how the sales of a product are affected when raising or lowering its price. Elastic basically means ‘responsive’:

Lower / higher price refer to market average price. More sales / fewer sales refer to sales make with market average prices.

But, the traditional model of price elasticity does not measure the impact of a price change on advertising performance for online retailers, e.g. the advertising costs incurred to acquire a new customer and to sell products.

Elasticity of Product Ad performance

When managing Google Shopping campaigns, we observed the following phenomenon:

We, therefore, propose to extend the model to include the secondary effects of advertising. It is similar in that it helps to explain the impact of price change on advertising performance.

Benefits of the new Price Elasticity model

Online advertising is a decisive instrument for new customer acquisition and for customer lifetime value optimization through repeated purchases. As Google Shopping and other PLA based ad networks use product prices as an algorithmic signal, prices do have a strong influence on product ad performance in terms of total reach, cost and conversion. Alas, the traditional Price Elasticity model is blind to this kind of impact.

We believe that better price making decisions can be made by breaking down data silos to understand and include the impact of price changes on advertising performance. Armed with that knowledge, companies can stop focusing on departmental efficiency metrics and start to optimize for enterprise level profitability.


Understanding Price Elasticity in eCommerce

Choosing the right price for each product can be a difficult task. Following our last post on dynamic pricing, it seems important to cover price elasticity, which plays a huge role in price optimization in e-Commerce. If you’ve ever taken an Econ 101 course in college, you have probably calculated price elasticity. Determining the price elasticity for your products allows you to run better tests and make informed pricing optimization decisions.

What is Price Elasticity?

It’s assumed that more customers will buy a product when it’s cheaper, and less will buy it when it is expensive. This follows the basic principles of supply and demand and nearly always holds true. But how many more people will buy when you lower the price? How many fewer people would buy that same product if you raised the price? The price elasticity of demand is a concept that answers this question.

Price elasticity attempts to show exactly how responsive demand is for a product, based on how it is priced. When contemplating a pricing change, understanding how elastic or inelastic your products are is critical. Elastic products are sensitive to changes in price. Inelastic products are not sensitive to changes in price and demand. Knowing the elasticity of products can help you to improve pricing tests and find your optimized price quickly.

Some products are clearly elastic, and show immediate and sometimes dramatic responses to changes in price. There are many reasons why a product may sell well at one price, but not so well at even a slightly higher price. Some of the common reasons why a product may be price elastic include:

  • The pricing change has placed the product above average market value. If you increase the price of an item above that of your competition, sales may decline. With some very elastic products, that decline may be substantial for even a modest price increase.
  • The item is non-essential. Non-essential items are typically elastic and sensitive to changes in price. With non-essential products, there may be a price point where consumers refuse to buy.
  • There are other substitutes readily available. If the price of the PlayStation 4 were to rise by $250, more consumers would opt to purchase the XBox One. When substitutes are available at lower prices, elastic products will see huge fluctuations in sales figures.

Now, all products are elastic to some extent. You’d be hard-pressed to find a product that doesn’t see its sales figures shift when prices rise or fall dramatically, but certain products are necessary to consumers regardless of price. Gasoline, for instance, is a popular example of a product with inelastic demand. When gasoline prices rise, the demand for the product may decrease slightly, but not by much.

How is Price Elasticity Calculated?

Here is the most common formula for calculating price elasticity of demand:

Price elasticity of demand = Percentage change in quantity demanded / percentage change in price.

Let’s use this formula in an example. Let’s say that a furniture company increased the price of a table from $300 to $360. This is a price increase of 20%. You would expect this substantial hike to result in fewer sales.

Now let’s pretend that this price change resulted in a change in quantity sold from 100 units to 70 units. The percentage of demand decrease is -30%. Now, using the formula let’s solve for the price elasticity of demand:

-.30 / .20 = -1.5.

In this example, the price elasticity of the table is 1.5. The negative is ignored and the absolute value is used to represent price elasticity. It is the distance from zero that we are interested in measuring. When a product has a higher price elasticity value, customers are more sensitive to changes in price for that product.

Testing Price Elasticity with Product Advertising

Product advertising is an excellent way to run price elasticity tests. Experienced eCommerce companies likely have a good idea which of their products are elastic and which are inelastic, but running tests can return some surprising results.

In fact, search engine product advertisements may be the best way to test elasticity. With an understanding of price elasticity, you can use that data to inform more tests to determine optimal pricing for your products. There are a few reasons why product advertising makes an excellent testing ground:

  • Fast results. Product advertising generates results much more quickly than waiting for customers to organically find your products and purchase them. You can quickly generate elasticity data by increasing your advertising spend on specific items.
  • Easily controlled variables. You can set specific ads to run at certain times during the day, week, or month. You can ensure that outside influences play as little role in the sales process as possible.
  • Automation. With tools, you can automate the testing of price elasticity and even price optimization among hundreds or thousands of products at a time. This data can provide huge returns and with automation, cost very little.

Discounting a product helps you to acquire more customers, but the question is where the optimal return lies. Let’s take a look at an example. Let’s assume that the product in this example has a per-unit cost of $50.

After testing a product’s pricing, you generated the sales figures outlined in the graph. At your highest price of $120, you generated 10 sales. At your lowest price of $80, you generated 60 sales. This is a 600% increase in sales. This example shows us that this product is price elastic, in that its sales are sensitive to changes in pricing. But which price point generated the most profits?

While discounts will certainly help you to acquire more customers or get rid of excess inventory, it also greatly decreases your margins, affecting your profits. So, based on the tests run in this example, which pricing level would be optimal? To figure this out, we have to look at the profit generated at each price point.

pricing-comparison-table.jpg

The test showed that the product generated the most profit at a $90 pricing. Of course, there are many variables that have to be considered before you can accept this as the true optimized price for the item, but it does provide you with an excellent starting point for further testing.

Factors such as the time of year, time of day, and traffic source all play a critical role in how products sell. eCommerce companies should do their best to control these variables. Product advertising allows you to control these variables and limit outside influences. Ideally, you should test items at different prices until you reach statistical significance to determine optimal pricing.

You can also factor in your Advertising Cost when you calculate Price Elasticity. Our tests have shown that as you raise your prices, you will need to spend more advertising budget to achieve the same impression volume. This additional budget should be another factor in your profit analysis.

Using Price Elasticity to Inform Optimization Testing

The real value in understanding the price elasticity of products in eCommerce is the data that it provides. Understanding how elastic your products are allows you to make better testing decisions for each product. Items with a higher elasticity will have to undergo a wider range of tests to determine optimized price, while inelastic (or less elastic) products have a much smaller potential pricing window.


What is Dynamic Pricing and Why is it Important?

Dynamic pricing is an e-commerce and retail strategy that applies variable pricing instead of the more typical fixed pricing. As more data is analyzed, optimal prices for items are calculated. The time between price changes depends upon the business and item, but can be as often as every day, or even every hour.

Dynamic pricing strategy isn’t a new thing. In the past, pricing was influenced solely by demand and supply in a locality. How many people want to buy the product? How much inventory of the product is currently available? Is the item perishable? Will the item be replaced by a newer version at any point in the near future? These are all the types of questions that play a big role in traditional pricing.

Dynamic pricing uses advanced data, including data from some of the previously posed questions. Dynamic pricing is often an automated process that looks at more than just the traditional factors.

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3 Reports to Optimize Your Procurement Strategy

Are you buying too much stock, stuck with deadstock, purchasing the wrong products, or pricing products ineffectively? In order to refine your procurement strategy, you should be tracking all of these aspects.

TradeGecko recommends these three reports (Yield Management, Inventory Turnover, and Merchandising Strategies) to help you increase efficiency and profitability, whilst allowing you to optimize your procurement strategy:

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Get the product price right for Google Shopping

New Crealytics feature: Price Advisor

Google Shopping takes product price transparency to a new level. Unsurprisingly, people tend to click on the cheaper product when the same product is sold by multiple retailers. This human tendency, means that Google’s learning algorithms will often surface the cheapest products first even if they don’t have the highest bid.

The result, is that if you sell the same brands or products as someone else, where your product price falls in relation to your competitors, heavily influences your traffic and conversion volumes. Product price becomes, next to the bid, the most important factor to attract shoppers on Google Shopping.

Right Price.png

Which product variant is a shopper more likely to click?

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How to determine price competitiveness in product advertising

As we covered previously, how your price compares to that of your competitors has a huge impact on the success of your Shopping campaigns. Price your products too high and Google will display them lower in the paid results or refuse to show them at all. Price too low, and you lose margins – a race to the bottom is never fun.

The key to a good pricing strategy is to identify a few high-impact products and make sure that they are priced correctly within the competitive landscape. To do this, you’ll need a way of measuring how pricing affects your Product Advertising efforts on Google Shopping.

Focus on products with a lot of impressions, since these products play a huge role in acquiring new shoppers, a few key price adjustments can have a dramatic effect. Sounds simple in principle, but the reality is slightly more complicated.

Here’s how you can identify which products you should be monitoring, how to do that monitoring at scale and how to derive actionable insights from the data you collect.

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The role of price on Google Shopping performance

Naturally, product price has an impact on everything in eCommerce, but when it comes to Google Shopping this impact is incredibly severe. A simple 5% increase in price produced a whopping 60% drop in clicks while keeping the bid stable. It certainly appears as though impressions and clicks in Shopping are very sensitive to pricing, more specifically how your price compares to all the similar products on Google Shopping.

For a deeper insight into what is actually going on inside Google Shopping, we analyzed a dataset of more than 15,000 Google Shopping client conversions across the German, UK and US markets covering several international retailers from the fashion, sports, outdoor and luxury sectors.

What we found shed a lot of light on how price affects Shopping performance and why. It also gave us some insights into what retailers can do to turn this phenomenon into a positive for their business.

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