Retailers juggle strategies, margins and customer expectations as the Internet changes the rules of product pricing
By Mary Wagner
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.
For example, consumers can’t buy precisely the same model of some products at Lowe’s and Home Depot because manufacturers produce a slightly different version for each retailer. “By doing that, manufacturers, in concert with retailers, make it harder to do price comparisons online,” says Wingo, who expects to see more of the same in categories such as consumer electronics.
Offering private-label merchandise is a similar approach. Web-based competition is commoditizing the auto parts and accessories category, and J.C. Whitney & Co. is counteracting this pressure on margin with private-label merchandise. “Our Internet margins are lower than our catalog margins in part because of competitive pricing on the Internet. We need to have techniques to try to equalize this, and private label is one we use,” says Geoffrey Robertson, vice president of e-commerce. “We have had tremendous success with our private label brand. We can offer superior products at dramatically reduced prices while maintaining good margins.”
Retailers always have sought market share through differentiation, but consumers’ ability to price-shop on the web has made this even more of a necessity. One way retailers are approaching the issue is by integrating differentiation into the business model in how a retailer delivers an experience wrapped around a product; for instance, the way an online grocer enables consumers to select a delivery time window or a big box retailer offers an order-online/pick up-in-store option. “These could be called services but they are really more about restructuring the business model to create a differentiated offer and a differentiated customer experience,” say Fred Balboni, retail industry leader in IBM’s Global Business Services consulting arm.
Hone the range
With the easy comparison of prices on the Internet exerting downward pricing pressure, retailers need not offer the lowest price to get customers; but they do need to hang with the pack in terms of price on widely available products, experts say.
“It does create the need to operate within a certain band of pricing, but there is no fixed rule on what that band should be, other than customer response setting the limits,” says Okamura of J.C. Williams.
Category commoditization driven by online competition has J.C. Whitney pursuing a tiered pricing strategy overall. The prices it sets online and offline, and how close to or far from competitors’ prices they are, are based in part on product availability. “We have a set of products we are going to go to the mat on and take the leadership position in,” e-commerce chief Robertson says. “Then there is another set of products offered at a price offset by good services we have. Then we have other products you can’t find anywhere else—we still offer great value, but you can behave differently around that,” he says.
Researcher Garf believes more retailers may take yet another approach to the whole pricing conundrum created by the need to reconcile online and offline prices and the web’s easy access to price shopping. And that is to attach different prices regardless of channel based on an individual consumer’s purchase history. The technology to support access to a central database of customer multi-channel transaction data already exists. Retailers can apply analytics software to such data and create business rules on what prices or promotions are applicable to individual customers regardless of where they’re closing the deal. Recent AMR Research data shows 68% of retailers with loyalty programs are looking to revamp them during the next 12 months with moves in this direction. The trend is moving from discounts for everybody to individualized prices, with “a real sea change” in pricing and promotions strategies, Garf predicts.
Others see a different endgame in some retail categories, with pricing issues raised by the web moving retailers not toward customer-specific, individualized pricing but instead toward a one-price-fits-all strategy. “On some products we’ll see more and more commoditized pricing. We’ll see national pricing increase—catalog, Internet, call center and store—as we become more and more connected,” Balboni contends. This doesn’t mean retailers cease one-day promotions to clear merchandise in whatever channel, he adds.
However retailers resolve price issues created by the advent of the Internet as a sales and marketing channel, it’s clear the Internet is here to stay as a key factor in any pricing strategy, whether consumers close a purchase online or in store. “The Internet has made the consumer king,” Garf says. “In the past, consumers lived in an environment set by retailers. Now retailers live in an environment set by consumers.”
mary@verticalwebmedia.com
A great time to be a consumer
While comparison shopping sites aren’t the only way consumers can compile price information from different retailers, they’re one of the easiest. Ask some retailers what they think about the sites and they’ll say it’s a great time to be a consumer.
Given the sites’ ability to deliver huge numbers of shoppers to online retailers on the one hand and increase downward price pressure on the other, some retailers view them as a necessary evil. “As prices are getting lower, ad fees are getting higher,” says J&R Electronics Inc. executive vice president of e-commerce Jason Friedman. “Retailers are left out in the cold.”
The assertion that the Internet commoditizes some product categories, thereby lowering prices, finds support in some research. U.K. market research firm GfK tracked the online and in-store prices of a digital camera. From an equal in-store and Internet launch price in March 2005, come April 2006 the offline price had fallen 16% while the online had fallen 22%.
Some comparison shopping site executives don’t believe their businesses have caused price drops in competitive categories across the board. Kamran Pouzanjani, CEO of PriceGrabber, says that historically, prices in consumer electronics always have dropped as technology becomes more widespread. What Pouzanjani does believe is comparison sites such as PriceGrabber may be affecting pricing by shortening product lifecycles because they get information on price drops or new models to consumers more quickly.
“Eventually prices move down, but with the Internet consumers see it because we gather that information and show it to the world,” he says. “Then some merchants see it and start reacting because they also get knowledge faster. The Internet and sites like ours have compounded the speed of it.”
Kervin Henry, business group director at GfK, says the Internet likely will continue to increase in importance in retail. For this reason, he adds, “decreased product lifecycle on the Internet means the key to survival is getting the product and price mix absolutely right.”
