What is the price of instant gratification? Dynamic pricing to increase margins…

Sudhir Holla, Senior Vice President, Ugam,

Price Match!!
We match the online prices of our competitors!!
Retailer XYZ announces a price-match strategy!!

Headlines like this have become common.

“Six billion data points, 200+ retailers, 9 of the top 25 retailers.” This is how most of our sales pitches at Ugam are made. We offer retailers the ability to look at competitors’ prices and match them; in a number of ways Ugam provides the engine behind many of the above headlines.

However, if you ask me, “Is price-matching the right strategy to use?” the answer will be a resounding “NO”. Very often I see margin opportunities lost due to price matching, which is usually a strategy of a race to the bottom, with that race being won by the retailer who has the better negotiating power with the supplier and the lower costs. Where does this leave the brick & mortar retailer with all the investments they have made in building a store infrastructure? Unfortunately, losing the game. But, there are ways to win.

Proper dynamic pricing requires a close look at many variables, including instant gratification. According to the upcoming State of Retailing Online 2014: Key Metrics & Initiatives (created in combination with Forrester) “Half of consumers would be willing to pay a premium of 1% to 5% to get products immediately rather than waiting for an online order to arrive.” This is worth considering when trying to find extra margin points to skin. Instant gratification and other variables are discussed in the paper Unlocking the Potential of True Dynamic Pricing, but here is a deeper look.

The Price of Instant Gratification
Let’s take the example of Product A being sold online for $49. As a brick and mortar retailer, what price should you use? Is it necessary to price match? Let’s assume for purposes of this discussion that the product in question is a competitive product in high demand.

Consider the Big Hugs Elmo priced at $49 on Amazon. There is a segment of customers who would be willing to pay a premium for getting that item immediately at the store. So if a Target or a ToysRUs is trying to match Amazon’s price, aren’t they leaving margin on the table? Why not offer the customer the choice of picking it up at the store at a premium or be able to get it at the Amazon price if they are willing to wait for 2 days? Makes sense from a supply chain sense. There is of course the question of whether consumers will like the fact that the retailer is providing a different price online vs. the stores. Let us look at it the other way: Is there value that a retailer is providing by holding inventory closer to the consumer? If yes, is that service not worth a premium? For consumers who want the product immediately, it is worth paying the premium would be my hypothesis.

Consider a different item. A washing machine. The segment of customers who would be willing to pay a premium for getting that item immediately at the store would be a minority. In that case, should a Sears or a Walmart even have store shelf space for that item? Wouldn’t it make sense to use the store truly as a show-room and have ecommerce delivery as the default.

Let us look at a retailer who seems to be taking advantage of the value of instant gratification – AliExpress (part of Alibaba). Listed below are a few products and the comparative prices and lead times between Amazon and AliExpress.

What is the price of instant gratification? Dynamic pricing to increase margins…

Can you see the pattern? There is a trade-off between price and lead-times as well as a trade-off in supply chain costs. For Aliexpress there is no inventory holding costs in the US. The products are held in a warehouse in China and are shipped to the US. The lower supply chain costs are translated to lower costs for US customers.

These trade-offs exist for brick & mortar retailers in the US as well. Typical stock-out, markdown and loss prevention costs at a store are in excess of 25-30%. The cost of shipping a product directly to a consumer and bypassing the store adds an additional 6%. Wouldn’t the cost of operation be lower if the product were to be sold directly online? Doesn’t it make sense for that lower cost to be leveraged for higher margins in certain cases?

Given show-rooming, wouldn’t the space in a store be better leveraged for products that have a high instant gratification premium?

I believe that given what is happening in the market in terms of democratization of prices a retailer needs to identify areas to skim margins. The skimming of margins comes through the use of strategies like this which cut across different organizational divisions at a retailer. Easier said than done…I know. Lots of change management…I know. However, do brick & mortar retailers have an option?

The Author:
Sudhir is focused on leading Ugam Solutions’ drive towards actionable insight solutions for the retail industry. He comes with a wealth of knowledge of the retail industry, having over 18 years of consulting experience helping leading retailers improve their digital commerce and supply chain performance. Sudhir has previously worked with Accenture and Infosys, where his last role was to establish and lead the multi-channel commerce practice.


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