IT’S TIME FOR RETAILERS TO STOP PRICE MATCHING: How to reclaim shareholder value

IT’S TIME FOR RETAILERS TO STOP PRICE MATCHING: How to reclaim shareholder value


For the past 10 years retailers have felt the full brunt of aggressively competitive pricing in a format of convenience and instant gratification commonly referred to as Amazon. The shareholder value that has been lost in the wake of this new business model has been significant and up until now many retailers have been accused of being willing to acquiesce in the onslaught and accept allowing their iconic brands to be reduced to merely what used to be. This sad state of affairs is entirely unnecessary. Traditional retailers need only to use data at their disposal to unlock literally billions in shareholder value. 

Since 2006, the selected retailers discussed in this report (contained in the table to the right that has been floating around the web for months) have lost over $100 billion in market capitalization. Retailers can either continue to admire the problem or aggressively address it and reclaim wealth for their shareholders. This discussion will explore the latter option and will cover how retail arrived at a point of existential concern, current thinking about what can be done, and a new strategy with high level “how to” steps. 

Spoiler alert: “Price Match” as it exists today is bad for business and retailers should stop doing it.

How did we get here?

The company we now know as Amazon was founded in 1994 and sold its first book on-line in July 1995. By 2006 the company was generating $10.7 billion in revenue and had market capitalization of $17.5 billion. By 2016 Amazon’s on-line business model had become the bane of traditional brick and mortar retail’s business model and was being blamed for everything from declining revenue to depressed market cap for storied retailers like Best Buy, Target, and Sears. Between each company’s stock price peak in 2006 and close of business on Friday, August 4, 2017 Amazon’s market cap had increased over 2,500 percent to $475 billion making it the 4th most highly capitalized publicly traded company in the US, trailing only Apple ($749B), Alphabet ($629B), and Microsoft ($528B). Indeed, Amazon’s Market Cap is higher than Best Buy, JC Penney, Kohl’s, Macy’s, Nordstrom, Sears Holdings, Target, and Walmart combined! 

During that same 10-year period those retailers suffered a combined market capitalization decline of 59 percent with JC Penney, Macy’s, and Sears all suffering a 70 percent or more collapse in shareholder value. Although the behemoth from Bentonville, Walmart, staved off a general decline in shareholder value, it was able to muster an increase over 10 years of only 15 percent, a 1.4 percent annual growth rate. 

From 2006 and 2016 average revenue for those retailers (other than Walmart and Amazon) in the above table decreased by 3 percent. Revenue at Walmart increased 54 percent and revenue at Amazon increased by a whopping 1,170 percent. Granted the starting point for Amazon was low ($10.7B) compared to where it wound up, but in 10 years revenue at Amazon grew its revenue to $136 billion – impressive. 

Meanwhile, average cost of revenue at Best Buy, JC Penney, Kohl’s, Macy’s Nordstrom’s, Sears (including K-mart), and Target was outpacing revenue generation. Average cost of Revenue at those retailers decreased by a slight 0.3%. However, recall the revenue decline discussed above and the root cause of the problem begins to come into view. For comparison Walmart’s revenue growth outpaced it’s cost of revenue by 5 points.

To be fair, not all non-Walmart retailers in the chart suffered a decline in revenue. But all did experience faster increase in cost of revenue than in revenue or a flat delta between revenue and cost of revenue.

All this manifested itself in an average 7 percent decline in gross profits for non-Walmart retailers, a 7 percent increase in gross margin for Walmart and a stunning 51 percent increase in gross profit for Amazon. 

So here we are before 2017 holiday and mainline retailers are facing declining revenue, declining or flat cost of revenue, and declining gross profit.

What can be done?

Retailers have struggled with the existential question of “what should we do” for over a decade and so far, it does not appear as the solution has been discovered. That is not to say there has been a lack of innovative ideas. In addition to almost every retailer expanding their sales floor onto the web, which has become “table stakes” there have been efforts and suggestions to:

1.    Redouble the customer service in stores to provide an incentive to shop in the store suggesting that customers do not require the cheapest price and that there is value to the brand. This does not imply prices do not need to be competitive. Customers are not demanding the cheapest price, but they do require a good deal. 

2.    Allow on-line purchases on the retailer web-site and pick-up the item in the store later in the day in an effort to get closer to immediate gratification. The important similarity between this and the preceding suggestion is neither are driven by item price. 

3.    Abandoning the current business model altogether, move totally on-line, and become a market-place where others can sell their merchandise on your site. Essentially the brand becomes a destination similar to a Mall brand rather than a brand that is unique to the store. (The market place idea is essentially the model to which Amazon has been evolving and the model Lending Tree used for selling mortgages when it was founded 20 years ago in 1996.)

4.    There are many others, but it is not necessary to list them here. 

All of these are good ideas. Suggestion #3 is interesting and potentially the direction for some retailers. However, a dramatic change in business model such as this will take time to develop and is not a proven path for the larger retailers discussed here. Today’s stakeholders probably prefer a more immediate solution that will return profitability in the near term while this evolution occurs. Suggestions #1 and #2 are intriguing in that they both suggest drivers to a buy decision that do not include lowest price as it primary driver. The power of something other than price being a driver is good news for retailers looking to reverse their downward spiral in revenue generation. 

What should retailers do now?

Retailers should STOP PRICE MATCHING. Or at least stop outsourcing the decision to change a price to the floor associate that has priorities other than your P&L. Obviously, there are times when reducing a price is the correct thing to do. Among those times where a price match may be appropriate include:

1.    The product is vastly overstocked and not likely to sell out.

2.    The product is not selling at the marked price.

3.    The product is going on clearance within a week and the price to match is more that the planned clearance price.

4.    And others.

However, agreeing to reduce a selling price cannot be exclusively because it is available somewhere else at a lower price and a customer asks for it. Imagine how popular a floor associate will be when he learns that a television is on the web at $200 below the cost of the model hanging on your wall and makes that known to everyone that is looking for a television. And if the model television that your associate is discounting has been exceeding sales projections, you have created a profit leak that you designed by always price matching. The same thing happens with technology, make-up, fashion, and many other categories.

Be smart. Make an informed decision on when to match a price and to what degree the price should be reduced. Let’s stick with the television example. If that television is exceeding your sales targets, why should the price be reduced at all? If you know the customer and they have met a certain purchase threshold perhaps you would be willing to respond to a price match request with a high value, high margin item, like cabling, but to offer a $200 discount to everyone that walks through your door is taking money out of your shareholders (and your associates) pockets. 

Or what if the television is selling slowly but inventory is low and the item is still moving. Why race to the bottom on price? Offer a $75 discount and let them take it home from the store now. Or alternatively you can offer a $125 discount and free delivery in three days and ship it from a region or store where sales are slow and the items are overstocked. 

This is particularly useful in sporting goods where seasons may end at different times in the calendar year. For instance, rounds of golf are still being played in November in North and South Carolina. And its year-round in Florida. In Chicago, not so much. So, when a price match for clubs in Pinehurst, NC or Orlando, FL is requested and there is an overstock of sticks in Northern Illinois – the path should be clear. Be Smart.

How do you execute this?

1.    Ground yourself in guiding principles

a)   Many customers continue to have a preference for stores. TimeTrade.com found, in recent survey research, that fully 85 percent of customers say they prefer to purchase in stores as opposed to on-line. 

b)   PwC’s annual consumer survey also found that 73 percent of shoppers said they browse on-line and then purchase the products in-store which has become commonly referred to a webrooming.

c)    TimeTrade.com also found that even the uber-connected and digitized millennials prefer in-store experiences and according to TimeTrade.com 92% of consumers age 25 to 34 said they plan to shop in stores as often, or more, than they did in 2014

d)   There is no escaping that showrooming is real. Gallup has reported that retailers lose 1 in 10 shoppers due to showrooming and Forbes has reported that showrooming costs retailers a least 5% of their revenue. Moreover, PwC’s annual consumer survey found that 68 percent of U.S. respondents say they intentionally browse products in a store before purchasing them on-line. 

e)   Sales lost from walkaways can be reversed through being smart retailers. Retailers need only to provide a reason to buy.

f)    Your customers are not dealing with you only to get the cheapest price and that your brand has value to them. What is it worth to your customer for a return, if necessary, to be handled locally?  Blindly responding to any and all price match requests reduces the value of the brand.

g)   You own your pricing strategy and that under no circumstances will you allow your competitors to dictate at what price you’ll sell your merchandise. (And for that matter decide that your 17-year-old, 11th grade, part-time associate that is more concerned about his geometry test tomorrow than your P&L tonight will not decide how much shareholder money he will give away to make a sale.)

2.    What CFO and CMO level required sign-off is needed for a price match

a)   We are taking the decision to change a price out of the competitors and associates hands and giving it back to the CFO and CMO.  For each item on which a price match is requested these example parameters should be instructional:

  • If merchandise is selling faster than planned will you match a price? 
  • If the item is selling as expected, are there other stores or geographies where the item is not selling and a discount to move it may make sense. 
  • What, if any, are the interim steps between full price match and declining to match should be tested? 
  • Will you offer other non-case incentives like cables or installation, or assembly?
  • Does the discount violate any minimum margin rules?
  • Will you allow price reductions for anyone or will the requester be required to give you information about them as they would do in a loyalty program?
  • Many others.

b)   One of the huge side-benefits of this smart decision making is the amount of data that will be generated from this customer interaction. Retailers will be able to make smart decisions about what types and value of offers customers are willing to accept and use that information to optimize shareholder value.

3.    Infrastructure:

a)   Near real time access to web to determine all pricing available for each product on which price matching is being requested.

b)   Real time access to business rules developed from decision making process from above.

c)    Ability to dynamically change a price.

d)   Analytics to measure and manage price match. The key is to arrive at a price match market clearing price.

Imagine a solution that will add between 2.5 and 5 percent to your top line. (2.5 & 5 percent are half of the affect suggested by survey research. Forbes thinks it is much higher than 5 percent.) 

Brick and mortar retailers must not continue to allow their share price to be pummeled. Although showrooming is real, it is only a business problem and like all business problems it can be solved and once solved will support significantly increasing shareholder wealth.  There is a system and process development effort currently underway that provides a solution for this. Shop-on-Sight is a hand-held device that store associates will use to manage price match requests for maximum revenue and profit for the retailer. Alpha test are being planned now. 


darcy bevelacqua

I help Marketing and Sales Executives over 50 find new careers /jobs🔹Resume writer 🔹LinkedIn profile updates 🔹Interview Coaching 🔹 Networking 🔹Salary Negotiations 🔹Personal Branding 🔹Networking 🔹 Storytelling

6y

Price matching is a race to the bottom and destroys your brand value. The doesn't mean that there won't be times that reducing the price makes business sense because it drives the market basket, retains a valuable customer or helps you move merchandise that isn't selling. Using a tool like Shop on Site is worth a test for all retailers. It's a "smart" tool based on analytics that helps the store personnel be more effective and serve your customers better. Improving the customer experience should be the focus -not reducing the price.

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This is a growing problem, well described, and well addressed. I'd like to learn a lot more about how to build strength for retailers by helping them do what they do best, and not watch them compete against webtailers with the inevitable resulting decline. Could this be the right balance among being responsive to consumers' growing power, empowering employees to make decisions in the trenches, and intelligently figuring out when to, and when not to, match prices with low-overhead digital retailers.

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Richard Litner

President at Litner Consulting, LLC

6y

As a shareholder of several of these companies, I'd like to see them try new ideas to create shareholder value!

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