Price matching is a known margin killer. Yet, the fear of losing in-store sales to on-line competitors has retailers aggressively implementing discretionary price-matching policies.
In the past, all sellers had very similar cost structures. Store hours and location convenience played a significant role in consumer behavior. In order to utilize price-matching, a consumer had to:
A. Be aware that a better price existed
B. Jump through a number of hoops to prove it
C. Prove that the competitor was within the local trading zone
Not only was this process inconvenient, but the difference between prices was generally small. As a result, price matching was widely offered by retailers, but rarely employed by consumers. This was a win-win scenario for retailers because they could appear competitive without actually taking much of a loss. However, the internet would change all of that.
Technology has empowered consumers. Price matching no longer favors retailers. Today price shopping is not only practical, it has become valuable. Price spreads among sellers, both on-line and off, are no longer in the 3-5% range, but often in the 30-50% range. Now price-shopping an item is easier than ever thanks to advances in Comparison Shopping Engines such as Amazon, Rakuten, and Overstock. In the internet age, the store is located right in the palm of the consumer’s hand, and the store never closes.
Consumers flocked online to shop and retail stores grew quieter. Declining sales pressured retailers to rethink their price-matching policies. With consumers clearly willing to walk out the door, a few retailers began to offer price-matching internet sites. This allowed consumers to have the best of both worlds. Now they could get the benefits of on-line pricing along with the convenience of “have it now” retail delivery.
Retailers that offered internet price-match guarantees really had delivered an exceptional customer experience. Naturally, once consumers discovered this, they began returning to those stores. These successes made internet price-matching a competitive necessity and forced other retailers to follow suit.
A number of retailers achieved their goal of increasing sales this season. Thus, the internet price-match policies were initially regarded as a great success. Unfortunately, as the financial results were released this January it appears that the incremental sales did not generate any incremental profit. In fact, some retailers actually saw their profits shrink. To make things worse, rolling back these programs will be very difficult, as consumers have now begun to expect internet price-matching.
Clearly price matching to generate sales, but without the consideration of profit/loss impact is not a sustainable strategy over the longer term. The key to a retailers’ profitability going forward will not be a function of “me too” pricing, but rather merchandising a product assortment that appeals to consumers, but has limited internet price competition.
The first retailers to make this transition away from discretionary price matching will be the retailers of the future. Those that don’t, will face a monster of their own making.
David Coleman is the CEO and Founder of Brandoogle (brandoogle.com). Brandoogle works with retailers and brands to develop strategies that help them achieve their pricing goals with a proprietary suite of software and services. He can be reached via e-mail at email@example.com.