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The Internet makes price comparison—and price matching as a away to grab market share—easier.
To consumers, one of the great benefits of shopping online is easy price comparison. To retailers, that’s one of the great challenges.
The Internet gives consumers hundreds if not thousands of outlets-from the biggest to moms and pops selling at eBay-where they can buy goods. And that much competition drives prices down.
No retailer knows that better than Jenson USA, an online seller of bicycles, bicycle parts and accessories. “About three years ago we saw sales decline a little bit, then at the beginning of this year we experienced a 15% decline,” says Michael Cachat, president of Jenson USA.
Cachat thought the decline might be related to consumers’ ability to easily find lower prices elsewhere. Jenson had a price-matching policy and when Cachat looked into where lower prices were coming from, he found a lot of sellers on eBay. “We knew some of our competitors were selling on eBay and when we looked at the competitive feedback, we found tens of thousands of listings at eBay,” Cachat recounts. “Many were selling at a severe discount and a lot of people were buying from them.”
Clearly, Jenson USA’s 3-year-old price match service wasn’t doing much to keep customers in the fold. “We knew we had to get more aggressive with our price matching to compete against eBay,” Cachat says.
The price-competition problem Jenson USA faced is the same problem that most online retailers face by the very nature of the medium in which they compete, says Mary Brett Whitfield, senior vice president of Columbus, Ohio-based consultants Retail Forward Inc. “There are so many things that are transparent to the consumer now,” she says.
Consumers’ embrace of the Internet is forcing retailers to act. “A decade ago, it was not so easy for the consumer to price bikes at a number of retailers,” Whitfield says. “The process is 100 times easier now, so consumers do it all the time. It’s raised the bar for retailers. It’s incumbent on the retailer to do something.”
Many retailers offer the kind of price match that Jenson offered, but as Jenson found with its declining sales, it’s not enough. And so in April, Jenson undertook a more pro-active price matching program. The keystone of the program is a link that ties a customer’s report of a lower price into Jenson’s ecommerce database.
That link allows the company to respond to a customer report of a lower price almost instantly. Under the old system, price match requests did not become part of Jenson’s database, meaning every time a customer entered a price, a customer service rep had to research it first to make sure it was an actual, generally available price. Then the rep would get back to the customer. Often, the response time wasn’t fast enough. But often the rep was duplicating research that another rep had already conducted, but that no one knew about because there was no data repository where the results of the research resided.
Now every time a customer enters a price and the retailer offering it, a rep researches it immediately and if it’s legitimate, it goes into the database which communicates with Jenson USA’s enterprise management software, CWDirect from CommercialWare Inc. The next time a customer enters that offer, it’s automatically honored because the information is in the database already. The price match policy does not change the base price of the products; it simply lets future users-including call center reps-know that the price is valid. Results were almost instant: In the first month after the new price match system was implemented, sales went up 18%, Cachat says.
While the price match has been successful in increasing sales, it has had several other effects. Not surprisingly, it has reduced margins by one point from 31% to 30%. But it’s also rippled throughout the rest of the 20-person company. For starters, Jenson now employs a staffer whose job is to ensure the database is current, meaning checking prices constantly to make sure the offer is still live. “It’s a laborious process,” Cachat says.
In addition, sales forecasters and buyers have to be kept informed about what’s creating sales. “If a competitor runs a sale because they have too much of something, all of a sudden we could be selling a lot, too, and that throws our forecasts off,” Cachat says. “It’s created a lot more complex problems.”
Erasing erratic histories
Now sales spikes can be flagged and forecasters and merchandise buyers can click to view the marketing database and to obtain insight as to whether the spike was created by price matching activity. “We had to change our forecasting models to weed out erratic sales histories,” Cachat says.
In addition, Jenson has to manage the relationship with its vendors when it discounts prices. “Vendors such as Shimano spend a lot of money promoting their products through different media channels to build the value of the brand in consumers’ eyes,” Cachat says. “We don’t want to devalue their brand and shoot all those marketing dollars into the ground.”
At the same time, however, a retailer can’t sit by and watch its business dissipate because someone is selling at a discount-authorized or not. “As a retailer, we have to compete against other prices, whether they’re on the web, in a catalog or in a store,” Cachat says. “And so we tell the manufacturers that we’re just matching our competitors’ prices and put the problem back on their plate.” He notes that some manufacturers have used what they’ve learned from Jenson to cut off retailers who were discounting.
In spite of the challenges and diminished margin, price matching can be beneficial to an organization, and not just in saving sales, Whitfield says. Information from a price matching database can be an important part of crafting a strategy, she says. For instance, price-matching information could indicate that certain prices need to be permanently adjusted. “If frames are x% of your business, but 2x% of your price matches, then you probably need to take a good look at the base price on frames,” she says.