Reprinted from the Harvard Business Review.
One of the biggest questions faced by brick-and-mortar retailers today is whether prices should be the same online and in stores. Gaining clarity on this issue is critical for traditional retailers to successfully compete in both environments.
Brick-and-mortar retailers have been struggling with pricing since Amazon’s inception, 23 years ago, so why is it so important to resolve this issue now? Well, the news for retailers keeps getting worse. Macy’s and Kohl’s both reported 2.1% declines in comparable store sales in November and December, resulting in 10% and 15% stock price drops, respectively. The Limited shuttered its stores and is now focusing exclusively on e-commerce. It’s clear that an increasing number of customers don’t value the experience of shopping in physical stores.
Brick-and-mortar retailers have a strategy problem. To avoid going the way of milkmen, they have to continue to: ramp up web operations; create new reasons — and value — for consumers to patronize stores; and limit physical locations to areas with populations dense enough to support stores.
Solving these problems will take time. But in the near term, rethinking pricing strategies can keep retailers afloat. The beauty of focusing on pricing is its immediate effect: Prices can be changed on Sunday evening, and new profits start rolling in on Monday morning.
Figuring out the right strategy involves answering two primary questions.
Should brick-and-mortar retailers set different prices in-store and online? If Amazon (or another web retailer) is not significantly stealing business away, it doesn’t make sense to slash online prices. Best to accept the minimal customer loss, maintain current prices, and be thankful.
However, if a web retailer is successfully poaching a sizable number of customers, it’s time to reconsider whether having identical online and in-store prices makes sense. Making this decision gets at the pricing dilemma faced by many brick and mortar retailers: If a company sets rock-bottom prices in order to compete against internet rivals, it will lose money on in-store purchases due to the store’s higher costs (employees, high rent locations, etc.). But if prices are set at what’s profitable for in-store purchases, web prices won’t be competitive. A one-price-fits-all-channels mandate can result in a disadvantage in one market.
Many retailers set different prices in different stores based on competition. Target is on record as stating, “Select items at an individual Target store can be impacted by prices on identical items at other nearby retailers. Therefore, it is commonplace that prices on selected items may vary from Target store to Target store within one metro area.” This makes sense, so why not extend the philosophy to online pricing? If the “store location” of “online” is more competitive, then discount prices there.
Retailers should view their online and in-store channels as unique services, much like gas stations offering self-service and full-service options. Relatively higher prices can capture the premium that some customers place on purchasing in-store. Web prices can be lower to compete against aggressive e-tailers.
Will discount web prices mean that everyone will purchase online? No. Many people choose to purchase in stores and pay premiums even though they can order from Amazon. In the third quarter of 2016, e-commerce accounted for 7.7% of all retail sales.
When in-store customers ask, should stores match their online prices? With different online and in-store prices, it’s inevitable that some consumers will show up at stores and request the web price. As a pricing strategy consultant, I’m loathe to give away in-store value by matching online prices. (This is akin to pumping a customer’s gas but charging the self-serve price.). That said, Wall Street is on edge about brick-and-mortar’s future, so much so that even modest same-store sales declines are viewed as apocalyptic. In this skittish environment, CEOs and their teams can’t afford any missteps. It’s usually best to match online prices. View it as incremental profit, and hope these customers make additional in-store purchases.
If price matching can be curbed to 10%–15% of a store’s sales, matching can also be viewed as a type of sustainable couponing strategy. It’s best for retailers to view price matching as a temporary measure and remain focused on providing more reasons for customers to shop in their stores.
Smartphones make it easy for customers to find lower online prices while they are in a physical store; this reality may make retail executives hesitant to set different online and in-store prices. The worry is that consumers will be put off by knowing that prices differ based on channel or experience. But this hasn’t been the case with airlines (prices differ if booked online versus over the phone), gas stations (self versus full serve), and retail (regular versus outlet stores).
In those industries, customers accept the price differences and choose what’s best for them. To succeed in the modern world of retail, executives need to embrace web and in-store as unique operations that cater to customers with different needs and price sensitivities.
Original Author – Rafi Mohammed. Pricing For Profit.