Why Should Walgreens Get Bad Rap For Good Pricing Differentiation?

Walgreens (at the corner of Happy & Healthy) can't be too happy with headlines last week, when CNN Money, Time, Huffington Post, MSN.com and many others took Walgreens to task that customers might be paying too much at Walgreens, based on a National Consumer League (NCL) survey.  The survey compared prices on 25 items in 485 stores within 4 major cities at Walgreens, CVS, and Rite Aid. Walgreens & CVS charged different amounts for the 25 items in different stores, and the price variations were greater at Walgreens than CVS, while variations at Rite Aid were minimal. The survey said that the same item could cost as much as 55% more depending on which Walgreens location you choose. (Headlines included: Are some Walgreens Stores Gouging Customers? Which Drugstore Chain Is Most Likely to Overcharge You? There's Ridiculous Variation In Prices At Different Walgreens). I am concerned that the headlines and articles in these media generally excoriated Walgreens without giving any credence to the drug chain or any retailer's competitive pricing strategy, which is called price differentiation (or price discrimination). 

The NCL and the media "expected that a retailer is going to have the same prices within a chain.” I would like to know where they learned that -- and does that mean that we in the competitive retail business have some educating to do about pricing, competition, and doing business?

Each store needs to capitalize on its specific competitive differentiation. Retailers know that the cost of doing business varies from location to location. And that dynamic price optimization analytics help to understand the competitive elements. Each chain decides how they want to compete; the elements typically involve store locations, store layouts, product selection, service levels, prices, prescription drug management, and other factors.

You can also get into a discussion of what "convenience item" means. It is worth something to the shoppers to have a store that is easy to get in and out of, and they will usually pay a little more to avoid going to a less convenient store. For example, if customers buy orange juice and coffee in Walgreens when they come in for a competitive item, like diapers, they are probably doing so out of convenience -- and will pay more for the convenience products.

If you went into a store that offered sushi, smoothies, wine, and manicures in addition to the usual selections of cold medicine and shampoo, (i.e. in one of Walgreens' flagship stores in Manhattan), you wouldn't be surprised to find prices more expensive than other nearby locations, would you?

A positive commenter wrote: "Walgreens is doing a good job of segmenting their customers and using their analytics to guide their pricing moves, and it is working. I suspect if the price differentiation was causing them to lose market share, we would see much poorer results, or they would stop doing it."

In a statement released to CNN Money, Walgreens spokesman Jim Graham confirmed that prices among locations are not consistent. In fact, variable pricing is part of the retail chain's business model. "Costs can vary from one location to another, even when they are a few blocks apart in dense urban areas, based on the store's cost of real estate, its hours of operation including whether it is open 24 hours, labor costs and the number of customers it serves each day, among other factors," said Graham. "We strive to be price competitive with nearby competition, and we believe our pricing reflects that."

Bottom Line For Your Bottom Line:

Are misleading headlines and stories in order when Money Media (and the consumer) believe…erroneously… That Retail Chains Have To Charge The Same Price For The Same Product In Every Location?

I am surprised that advocacy groups would be surprised to learn that drugstores (or any retailer for that matter) charge different prices within the same city.

I am more surprised that the "Money Media" didn't understand price differentiation, easily falling into a rant against Walgreens instead of protecting the retailer and explaining that that's how business is done. I find the word choices, "overcharging" and "gouging" particularly egregious as not at all synonymous with "charging more."

Finally, Walgreens wouldn't be becoming the largest global retail pharmacy chain if they didn't know what they were doing. "Walgreens is smart if they are analyzing their data and competitive prices to determine which products need to be low price leaders in which stores, and increasing prices on other items where they have room to do so…I applaud those firms who apply rigorous analytics to their pricing strategy, said Scott Francis in his note, Walgreens Pricing: Differentiation Is Smart.

"It’s funny that the NCL picked midtown Manhattan to display the worst of Walgreens’ price discrepancies, because midtown Manhattan is not midtown Manhattan if prices aren’t arbitrarily expensive," wrote another supporter, Sydney Lazarus in SpendMatters.

In the meantime, some customers get it while others don't. In the comments to one of the articles: ...All companies do it (charge variant prices)… the cost of rent and other factors vary from location to location… that's why they call it shopping… if you actually shop around you find the best prices… but if you want/need the convenience, you have to pay for it.  

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Gilon Miller, CMO

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Gilon is a seasoned marketing, sales and business development executive with over 15 years of experience in the software and Internet business. He is the Founder and CEO of GuruShots. Previously, Gilon was the CMO of Upstream Commerce, VP of Marketing at iMDsoft and Director of Global Marketing at SAP. He earned an MBA at the MIT Sloan School of Management and a BS in Electrical Engineering from Tufts University.
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