An Exclusive: Reasons Why Online and Instore Retail Prices Should Be the Same

Upstream Commerce had the privilege to interview Chris H. Petersen, PhD, Retail Research Expert and Founder of Integrated Marketing Solutions, about his recent article: "Should retail prices in stores be the same as those online?" In the article, Petersen concludes that "consumers have already decided the answer to this question by expecting and getting the same product prices in store and online. He says the retail store, in essence, has become an omnichannel distribution point as much as a point of sale; the new omnichannel frontiers are customer-service centric; item price is no longer a differentiator; and, in order to retain customer relationships, retailers are offering "click and collect" (i.e. the customer pays online prices if he/she is in the store and collects the good there). Thus, "Click in store" and "two hour delivery from store", according to Petersen, "have become the new benchmarks of customer satisfaction."

Upstream Commerce: Please describe some of the differences between online and in-store retail: 

Chris H. Petersen: Online and in-store retail were each founded with distinctly different business and operational models. In the beginning, there were only stores. Retailers continued to refine operational efficiency to get goods at the lowest cost on the shelf. Brick and mortar stores factored in advertising, marketing, promotions and markdowns in order to entice enough customers through the doors to purchase the stock that was shipped to stores. Not to mention the labor cost of staff in stores. And stocking enough inventory for immediate purchase from the shelf was another substantial store operating cost.

UC: Why would store retailers want to charge more?

CHP: Many retailers are still trying to justify a higher "store shelf" price versus an online price. There is a business rationale: If you want that specific product from our shelf, it will cost a bit more because we had to ship it here, and we have to support our people in store in order to not lose a sale.

UC: What are some of the differences, and perhaps, advantages, of eCommerce?

CHP: First, eCommerce was founded on an entirely different business model than stores. Second, in eCommerce, inventory is held at central distribution points, not shipped to stores. eCommerce doesn't have expensive store leases or operating costs. Third, it is quite inexpensive to add "long tail" SKUs to a website to grow revenue.

Ecommerce, however, is not without its own unique costs for massive distribution centers, infrastructure and systems. For example, the delivery of purchases ('the last mile to consumers'), is significantly more expensive than shipping in bulk to retail stores.

UC: How does omnichannel transform the retail model and metrics?

CHP: Historically, brick and mortar stores' POS (Point of Sale) systems measured sales transactions at a price point, at a place called "the store". Today's "store" has become where the consumer can now decide to order, purchase, and take delivery. Price is still important to consumers, but they now use their smartphones to benchmark pricing options online beyond the store shelf.

Furthermore, current research shows that omnichannel consumers who shop more than one channel with a retailer...

  • Shop with the retailer more often (more trips to store and more clicks online).
  • Purchase significantly more in their shopping carts.
  • Are 40 – 60% more profitable than customers that just shop one channel.

Petersen continues: Consumers now decide how closely store prices must match a retailer's online price. If the store price is perceived as 'too high' the consumer will use 'click and collect', or worse yet, abandon that retailer for another.

Therefore, enlightened omnichannel retailers are already adopting a strategy of matching even competitor's online prices in store. They realize that a slightly lower product price is insignificant when compared to the highly profitable market basket of add-on sales and services, which are much higher in store than online. 

UC: Talk to us about the boundaries of omnichannel:

CHP: The boundaries of omnichannel are rapidly evolving, creating even greater consumer expectations, a critical question in countries like the UK, where online now accounts for as much as 40% of sales in some categories. A number of retailers in Europe are now enabling customers to:

* "Click in Store" for products in stock and take them along or have them delivered at home that day.

* "Fast Track" by clicking online for at home delivery that night for products in the store.

* "Speedy delivery" of in-stock store items in two hours or less.

Petersen further notes: The financial model for these latest omnichannel models now often includes a minimum shipping fee for the convenience of speed, i.e. consumers who have the need for speed seem more than willing to pay to have the product delivered the same day.

UC: Which channel -- online or stores -- is cheaper to sell through?

CHP: One metric of 'cost to sell through' is a composite index of all the costs related to merchandise, marketing, operational, general and administrative costs. In Europe, typically called "OPEX" (Operational Expenses). On the annual reports that US retailers must file, there is a line item for Sales, General and Administrative (SG&A) costs. Both are metrics of "operating costs" as a percent of revenue, excluding capital costs.

Furthermore, If a retailer's website can approach long tail efficiency of ecommerce similar to that of Amazon, it should be possible to sell at a lower price through ecommerce. Or said another way, "prices would need to be higher in store to generate the same gross profit via GMROII."

But operating costs are only part of the story, Petersen continues: "Online has better Gross Margin Return on Inventory Investment (GMROII)."

UC: Please give us an example

CHP: Comparative financials of US retailers indicate that a pure eTailer like Amazon has an SG&A very similar to a large national retail chain like Best Buy. So based only on SG&A, item prices could be theoretically the "same" for stores and online.

Despite having millions more SKUs, Amazon turns inventory significantly faster than retail store chains, generating more GMROII.

So, on the basis of GMROII, pure eCommerce can afford to have cheaper prices by virtue of not needing to generate as much gross margin per individual SKU, since there is much less inventory and holding costs to achieve the same sales volume."

Many retailers are still trying to justify a higher "store shelf" price versus an online price, Petersen states. There is a business rationale: If you want that specific product from our shelf, it will cost a bit more because we had to ship it here, and we have to support our people in store. 

UC: So What's the Bottom Line?

CHP:

  • Today's consumers expect to shop AND purchase anytime and everywhere.
  • Consumers expect and can get the same online price in store and take the item home in minutes. 
  • If the price at the store is higher, consumers can simply whip out their smartphone in the aisle, order the product at the cheaper online price, and simply go over to collect the goods at the "Click and Collect" counter! 

"Consumers have already voted that online and store prices are/must be the same, so game over," says Petersen. "Now it's up to the retailers to make it work."

END

Editor's Note: Petersen's original question: Should Retail Prices In-Store Be The Same As Online? was discussed by RetailWire's BrainTrust this week. Here was our (Upstream Commerce) response to the question:

"Although the answer on the surface (that prices should be the same) seems clear, this is still a thorny question. Retailers MUST have a way to cover their costs or it’s a race to the bottom with themselves! To avoid this, retailers have to not only offer prices that cover their costs, but consider what their competition is doing — another extremely important facet of the price strategy / price optimization picture."

Finally, thanks Chris for the excellent interview:

Chris H. Petersen, PhD, CEO of Integrated Marketing Solutions is a strategic consultant who specializes in retail, leadership, marketing, and measurement. He has built a legacy through working with Fortune 500 companies to achieve measurable results in improving their performance and partnerships. Chris is the founder of IMS Retail University, a series of strategic workshops focusing on the critical elements of competing profitably in the increasingly complex retail marketplace.

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Naomi K. Shapiro

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A seasoned market communications specialist, Naomi headed public information for several academic and professional associations and was the founder and CEO of award-winning agency, Creative Brilliance Strategic Marketing Communications. She created and published Brilliant Ideas for Publishers Magazine and authored popular newspaper trade reference, The Brilliant Book of Promotions, Sales Tools & Special Events. Simultaneously, Naomi savored the world as an adventure travel writer that included trekking on glaciers, fishing with saltwater crocodiles and swimming with piranhas. Naomi holds her M.A. from the University of Wisconsin, including participation in a unique industry-science-technical writing program.
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