Problems of Price Matching: Why Retailers Must Use Quantitative Data To Set Best Prices

With holiday results in -- and Q4 reports to substantiate the fact that there were minor sales increases vs. greater costs -- it seems that investing in price matching has been a folly for most retailers. As I wrote in a recent post: 9 Future Retail Competition Trends … Holiday retail sales for 2013 showed gains of only 3.8 percent while predictions were for a 3.9 percent uptick from 2012.   Not stellar figures, and at what cost to retailers?

The main reasons for price matching, it should be said, are to make sales; also, to not lose the sale to a rival; and, of course, to get the customer "in", so she will buy more. But at what cost? What impact have highly competitive pricing and promotions strategies had on retailers' bottom lines?

(Retailers who price matched) "really paid for this with lower profit margins,” according to analyst Pam Goodfellow of Prosper Insights & Analytics. (Retail Touch Points: Holiday Results Call Price-Matching Policies Into Question). 

Best Buy kept its word to offer their customers competitive prices… "But this investment in pricing came with a higher-than-expected cost, and we now estimate our fourth quarter operating income rate will be 175 to 185 basis points lower than last year,” said Best Buy CEO Hubert Joly.

According to Joly, Best Buy’s negative holiday revenues were due to: The aggressive promotional activity during the holiday period; supply constraints for key products; significant store traffic declines; and a “disappointing” mobile phone market.

Target, despite double-digit online growth and mobile sales increasing by more than 100% for the holiday period, closed off the holidays with less-than-stellar results across the board -- Q4 2013 comparable sales declined by approximately 2.5%, (Retail Touch Points).

Another interesting phenomenon of the past few years is called "The Black Friday Myth,” where "deals" on Black Friday turned out to be higher in comparison to the rest of the holiday season! (See Upstream Commerce 2011 blog post: Did Walmart, Best Buy & Amazon Cop Out on Special Pricing On Black Friday and Cyber Monday? 

So, in view of the above: Do retailers have the energy and reserves to keep returning to price matching? Here's what several industry experts had to say about focusing on price matching:

* It may have a negative impact on brand perception and loyalty.

* Although retailers “did okay” in terms of their top-line sales, they had to “give away more margin than they planned.”

* Price matching is a crapshoot for both the consumer and retailer… "Price is a moving target and it breeds fear, uncertainty and doubt.”

* Price matching wreaks havoc with short-term margins.

* Offering a price match guarantee is detrimental to some retailers' brand promise, i.e. it adversely impacted margins of those who don't normally position themselves as low cost leaders…

* Price matching for those who don't normally position themselves as low cost leaders alienated their core shopping demographic.

* While price matching can be effective for some retailers, some made the mistake of cutting labor too thin and not hiring up enough in advance of the holidays.

What Should Retailers Do?

* Retailers need to focus on differentiation, whether it’s through service, products or loyalty rewards. Many, many strategic pricing consultants say, competing on price alone is “a race to the bottom.”

* Differentiate based on service and assortment and experience; and make the path to purchase easier.”

* Retailers who don't aspire to have a low-price positioning should avoid price matching altogether.

* Retailers more and more need to alter prices in real- or near-real-time.

* “Every business should customize the way they compete and use dynamic pricing.

* Dynamic pricing enables merchants to make better decisions based on market conditions and consumer demand.

Bottom Line For Your Bottom Line

Price is one component of the retail experience that is in a constant state of change. Retail is about creating unique customer experiences where customers perceive pricing to be fair, but not necessarily the lowest.

Retailers must apply quantitative approaches to the datasets of their own company; apply quantitative methods for measuring and monitoring discounting policy; use quantitative and managerial tools for restraining discounts.

Most important, retailers must learn how to improve profitability.

"A key factor in winning in today’s retail environment is in how effectively the information asset is utilized." (RSR).

The only way to know is to do quantitative analysis. That's where pricing and assortment intelligence solutions come in.  

 

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Mauricio Barberi, CMO

About Author

As CMO of Upstream Commerce, Mauricio leads all branding, marketing communications, public & analyst relations, web presence, social media, demand & lead generation and sales enablement programs. He has over 20 years of experience in B2B technology marketing and product development. Previously, Mauricio was SVP of Global Marketing at TradeCard (acquired by GT Nexus), a leading innovator in Cloud-based supply chain management solutions for large retailers and manufacturers; SVP of Worldwide Marketing at CGS, a $200 million software and services provider, where he revitalized the BlueCherry suite of software solutions for the retail & apparel sector; SVP of Marketing at Mobius, a NASDAQ-listed digital archiving and records management company; and VP of Marketing & New Products at C3i, a CRM services firm and Siebel partner. Mauricio earned an MBA from Harvard Business School and a S.B. in Mechanical Engineering from Massachusetts Institute of Technology.
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