Private equity firm Apollo Global Management will take Rackspace private in the all-cash deal.
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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.”
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.”