In its second-largest acquisition, Amazon buys the company for $970 million.
Retailers juggle strategies, margins and customer expectations as the Internet changes the rules of product pricing.
A family decides it’s time to buy a flat-screen TV and narrows the choice to make and model. The teens head to the local big box store and report back that night on the price. Mom discovers a lower price on the same retailer’s web site. Dad finds the lowest price of all at an Internet-only consumer electronics retailer. When he logs on the next day to make the purchase, he discovers the price has dropped, further undercutting the store price, the price on the store’s web site and the prices of several competing e-retailers.
Same manufacturer, same model, practically the same day, four different prices, and the family wonders, what gives? In a word, it’s the web, or more specifically, the web’s ability to shine a bright light on aspects of retail pricing strategy formerly less visible to consumers. Take a family of four swapping notes on prices they’ve found, multiply by many millions of consumers price-shopping on comparison shopping sites and checking multi-channel retailers’ web prices before hitting the stores, and retail pricing becomes a whole new ball game.
Buoyed by an operational cost structure that doesn’t include supporting stores, Internet-only retailers attract buyers in part with product pricing that can be correspondingly lower. And web-based price shopping has heated up the competition to a white-hot level in areas such as consumer electronics. Some analysts-and some retailers-believe lower prices offered by web-only retailers in highly competitive categories such as consumer electronics are serving to commoditize those products and drive prices down across the board (see story, page 43).
Change the channel
Internet price transparency also is creating challenges in cross-channel pricing for multi-channel retailers. A chain retailer’s web site may boast lower prices than its stores because of e-commerce’s lower operational cost structure. Conversely, the retailer’s cost in offering the same product in store may be higher because of stores’ underlying cost structure. The retailer may have many other reasons for different pricing, but these are of no interest to consumers who want the same price from the same retailer, no matter the channel.
“It’s not clear to the customer why a price should be different within the same retail organization, so there is pressure on retailers to normalize pricing within their own operation,” says Chad Doiron, retail strategist in the Internet practice of Kurt Salmon Associates.
The challenge of cross-channel pricing doesn’t end there, for there are not only the web price and store price but also multiple store prices. Retailers have zoned pricing for years, offering the same product at different prices at different stores based on what the local market will bear. What was a small number of large pricing zones for a retailer with a national store presence has become a large number of small zones as retailers get more sophisticated price optimization and markdown tools. This is one reason it’s possible to find a dollar price difference in a gallon of milk at two stores in the same grocery chain in the same city.
“The objective is to maintain as much margin as possible. But when you have the Internet and its single price for the entire country, it becomes difficult to have a standard pricing practice across all channels,” says Rob Garf, research director at AMR Research Inc., which specializes in supply chain and enterprise technologies. “The online channel is butting heads with retailers’ strategies on zoned and regionalized pricing.”
“This is very much at the front of retailers’ minds now,” Doiron says. “How do you adjust prices so they are normalized when you’ve got all these cost considerations?”
Trying to reconcile the downward pressure of the web’s price transparency with the need to preserve margin is sending retailers down several paths as they juggle pricing strategies, operational demands and consumer expectations in search of a solution.
Page the manager
One strategy is honoring online prices in stores. Some multi-channel retailers give store managers flexibility to give lower online prices to consumers who ask. If a big box store shopper asks for the online price for a product, he may get it. More stores now have policies that match store price with their own online price and sometimes even that of competitors, provided an item is in stock and doesn’t involve a mail-in or trade-in deal, says Scot Wingo, CEO of channel management services provider ChannelAdvisor Corp.
“Some retailers are caught off guard by this,” observes Jim Okamura, senior partner at retail consultants J.C. Williams and Co. “They don’t have a clear policy for which is the ‘real’ price. More retailers could be a little more explicit if they are honoring the online price.”
J&R; Electronics Inc. once maintained different prices on its web site and in its Manhattan store, but not any more. J&R; found that customers regularly shopped the site and then expected to see the same price in the store, which wasn’t always the case. “Having the different pricing wasn’t a good experience for them. Some national chains may get away with it, but it wasn’t right for our brand,” says executive vice president of e-commerce Jason Friedman.
If different channels or circumstances are attached to different prices for the same product, retailers can’t be too clear in communicating that to customers. “In some cases retailers say this is an Internet-only or store-only price, so they are at least setting the expectation for consumers that this is a specific price,” Garf says.
Some retailers communicate this with a sentence-in greatly reduced type size-on their home page that store and web prices may differ. Others like Circuit City Stores Inc. go the opposite direction, highlighting price guarantees with a home page link to a Frequently Asked Questions page that spells out pricing policies in detail.
A smidge different
Comparing prices between channels is one thing; comparing them among retailers is quite another. Many consumers use comparison shopping sites-another factor driving increasing price competition-to examine retailers’ prices for identically branded products. This practice becomes murky, though, when weighing products exclusive to different retailers.