When retailers compete on price, they really pay for it
Retailers continue to cut prices to drive traffic into stores. But experts contend they can't compete on discounts forever, meaning merchants must get creative to survive and advance.
In many ways, a retail price is the settlement of an argument. Whether at centuries-old Middle Eastern bazaars, Saturday morning flea markets or digital-age eBay auctions, “haggling” is the process that unfolds on the way to reaching the number that works for both buyer and seller.
In modern retail, there’s little overt haggling in the aisles, but the argument is still being had just the same—and customers are winning it. Faced with expanding omnichannel opportunities, new bargain hunting tools and an ongoing wage gap leaving many middle- and lower-income consumers with little financial flexibility, retailers continue to compete on price to drive traffic into stores. But according to a recent RSR Research pricing report, they're not fulfilling other critical business objectives—like customer satisfaction and loyalty—that the intense price competition is meant to foster.
Just 40% of retailers believe their pricing strategies build customer loyalty, down from 45% in 2015, RSR found. A mere 23% believe pricing is driving bottom line results, down from 32% last year, and only 35% percent of retailers believe they have a strategy in place to manage prices and promotions effectively across all channels.
“Consumers may be sensitive about price, but no retailer, not even the lowest-priced retailer, can win on price forever,” RSR partner and report author Paula Rosenblum said in a statement.
Retail futurist Doug Stephens agrees. “Nothing can kill a brand faster than ill-conceived discounting,” Stephens told Retail Dive in an email. “It's problematic on a number of fronts. You either train your loyal customers to cherry-pick products on sale or, worse, lead them to believe that you’re not competitively priced day-to-day, leaving the door open to competitors.”
But despite recent moves by Amazon to scale back list-price comparisons and price-match refunds, as well as another by Wal-Mart to end advertised-price matching in 500 stores nationwide, retail stalwarts continue to depend on low prices to attract customers.
"Price is always the single biggest hammer in Wal-Mart's toolkit," Keith Anderson, VP of strategy and insight at e-commerce analytics firm Profitero, told Retail Dive in an email. At the same time, Profitero research tracking Amazon, Jet, Wal-Mart and Target from October 2015 to January 2016 found that Amazon was the price leader in six categories, with Jet a close second.
Cutthroat pricing strategies and tactics are a race to the bottom, experts contend. “When you can no longer compete on convenience, product, service or customer experience, price becomes the final lever,” Stephens said. “And you pull that lever at your peril.”
The differentiation difference
Decades ago, well before Amazon’s great e-commerce disruption, Target learned the perils of competitive pricing firsthand. Frustrated by its perennial place in the shadow of Wal-Mart’s “always low prices” bulwark, Target initiated a price war, recalls Mark Cohen, professor of retail studies at Columbia University and an employee of Target’s parent company at the time.
Things didn’t go well. According to Cohen, Target was blindsided by Wal-Mart’s willingness to forgo profits: While Target attached “limit six per customer” signs on drastically reduced items, for example, Wal-Mart was willing to ship in bulk to other retail operations that found price-war items tagged below wholesale prices.
Target soon conceded defeat, Cohen said, and immediately began to contemplate other ways to compete—a process that resulted in its now-signature “cheap chic” efforts, pioneering the idea of collaborating with upscale designers for mass market goods.
Target's pivot illustrates that retailers who can't combat Wal-Mart's immense scale and Amazon's efficiencies (and internal subsidization by its highly profitable cloud-computing business) can compete by appealing to customers some other way. Target-like product differentiation is one extremely effective tool for persuading customers to buy something at your store rather than a competitor with lower prices, experts say.
“Price has emerged as a bigger-than-life issue that is enormously complicated," Cohen told Retail Dive. "How do you put an assortment into a 200,000-square foot plain vanilla box that is inviting, engaging and happy, and makes you want to come back? You have to do it with merchandise and with merchandise presentation.”
Convenience is another differentiator. That's why the most conveniently located gas station has the highest fuel price, why dollar stores in high-traffic areas are beating far-flung Wal-Marts, why Amazon is pushing same-day delivery and why brick and mortar is experimenting with buy-online-pickup-in-store services.
Brick-and-mortar retailers also need to take the utmost advantage of their stores, transforming and elevating the traditional shopping trip. For example, bookseller Barnes & Noble recently said it would bring table-service restaurants featuring food, wine and beer to four concept stores, while Wal-Mart is bringing more “retail-tainment” like autograph-signing events with bull riders and their bulls to its stores.
“I know that there are two parts of retail that cannot be duplicated on the internet: one is food and dining, and the other is entertainment," Nick Egelanian, president of retail development consultants SiteWorks International, told Retail Dive.
Some experts argue this so-called "experience economy" represents the future of physical retail, arguing that success or failure will depend on merchants' ability to engage customers on a more profound, emotional level. According to a PwC survey published last year, 52% of millennials said their holiday spending would be experience-related, compared to 39% for older consumers.
“We have to start to measure the success of physical stores in a much different way. It can’t be as quantitative as it was in the past. It must be more qualitative," Lee Peterson, executive vice president of brand, strategy and design at customer experience consultancy WD Partners, recently told Retail Dive. "Did customers have a good time? Did they engage with the brand? Did they receive great customer service? People are buying goods in stores less and less often... Stores have to become something.”
Even online retail, a segment synonymous with low prices, must also deliver differentiated experiences, says web psychologist Liraz Margalit of digital customer experience solutions startup Clicktale.
“When we sit in front of the computer, it’s a screen, and we’re not so emotional," Margalit told Retail Dive last year. "The online store needs to provide us with some kind of experience, to create these feelings. It’s not explicit marketing, but an opportunity to connect with our emotional, sensual selves.”
Scarcity and quality are key
Product sameness and atmosphere sameness have turned a lot of merchandise—beyond typical “fungible” goods that are mostly the same among brands—into commodities. While sellers of commodities have little control over prices, the laws of supply and demand do, so making moves to limit supply and drive up demand can change the equation. Target, H&M and other retailers have all fueled consumer frenzy with limited-edition designer releases that swiftly sold out. But that approach can be tricky, too.
“Scarcity only works when you have unique items that people can’t get anywhere else,” Nikki Baird, Rosenblum's partner at RSR Research and an author of the recent pricing study, told Retail Dive in an email. “It does no good for Macy’s to be tight on its Uggs inventory if Dillards and Amazon have a ton. And unless people absolutely have to have Gap khakis, it does no good for Gap to be careful about inventory if people are more than happy to get Dockers instead. So scarcity does help—if you have something everyone wants that no one else has. That’s why Lilly [Pulitzer] worked for Target. And frankly, they would’ve stocked more, but Lilly couldn’t do more than what they did.”
Differentiation and scarcity are what brand equity brings to retailers. Or, as marketing expert Bernadette Jiwa puts it, "Product minus Meaning = 'Commodity.' Product plus Meaning = 'Brand.'"
Similarly, Goldman Sachs retail analyst Heath Terry recently told CNBC's "Squawk on the Street” that retailers with strong, resonant brands, like Ralph Lauren and Nike, can escape the trap of "sameness" that turns even jeans and sneakers into commodity items. "Being a brand gives you a lot more leverage with customers," Terry said. "Abercrombie, Bed Bath & Beyond, Foot Locker, J.C. Penney, and Kohl's, a lot of those sell commodity product. Those are all things that can be sold on Amazon—those are all things that can be sold really by anybody online."
That doesn’t mean that retail success is limited to upscale endeavors. Egelanian notes that Trader Joe’s and Costco both offer highly appealing merchandise assortments and top customer experiences.
Baird agrees. “Quality and scarcity are indeed ways to change the conversation with consumers,” Baird said. “But services are another way–offering more than just the products. That doesn’t just mean services like what you would normally attribute to luxury brands, like personal shoppers or tailoring services or things like that. It could simply be wider aisles or nicer fitting rooms.”
There’s no chance of talking to retail experts about pricing without hearing about Ron Johnson, who as CEO of J.C. Penney in 2012 attempted to step away from the kinds of never-ending promotions vexing retailers today. Johnson halted the retailer’s practice of marking discounts upon discounts on tags, dumping inflated manufacturer-suggested prices in favor of lower everyday prices. That upset customers, who apparently liked the idea that they were getting a deal, even if nobody really paid that “original” price.
The problem is that Johnson changed the prices “but didn’t change the merchandise, and totally confused the customer,” Egelanian said. “Again, you better well know what you’re selling—whether it’s a commodity and price-sensitive, or specialty retailing.”
But retailers must know customers themselves better, too, Egelanian adds. What that means is "personalization," and these days that's all about using data effectively. Understanding what pleases customers, understanding what pleases customers at higher prices, and understanding what pleases your best customers helps in knowing when to drop a price (and for whom) and when to keep it steady.
So far, web retailers (which in many cases are really retail-focused tech companies) have been better at personalization than traditional merchants. RSR found that retailers are aware of the issue: 41% said a lack of dedicated IT has been a barrier to effective pricing practices, followed closely by lack of price, competitor and purchase data at 38%.
But there's no reason that brick-and-mortar or omnichannel retailers can't also leverage robust tech capabilites to capture data on customers in order to streamline personalization and merchandising. Target’s Cartwheel app is an example of a more traditional retailer customizing promotions to the shoppers who willing to engage with it, using technology that is also busy collecting data, Baird said.
When streamlining personalization and pricing strategies, though, data must be de-siloed so that retailers know what they do and don't have on the shelves, and so customers aren’t getting offers for something that isn’t available, Baird added.
“Retailers have tried to be more targeted in their promotions in at least two concerted efforts in the past that we’ve seen in our research, and each time they back off because they don’t have everything in place they need to have to make it happen,” Baird said. “Clean customer data, a complete picture of customer activity (so they’re not offering things you’ve already bought), but also a way to deliver personalized promotions to the right people… I’m not ready to say that third time is the charm, but there did seem to be a level of pragmatism among retailers in the research this year that we haven’t seen in the past, which is heartening.”
Bottom line: If sellers at the Grand Bazaar in Instanbul, the Rose Bowl Flea Market in Pasadena or anywhere else in the world goods are sold aren't offering anything much different than others do, they must find alternative ways to capture shoppers' attention, as did the now-famous London fishmonger who added "customer experience" to his argument by singing to prospective buyers about his "very, very good one-pound fish."
“You can’t hide from price,” Egelanian said, explaining that a retailer must have something “a little special in the product line, trustworthiness, product quality. You better stand for those things. And you’d better be spending a lot of time talking to your customers and understanding what’s profitable, and what isn’t.”
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