Pricing is not the only motivation for "Showrooming"

Ahh, the ever evolving landscape of retailing! When we think of retailers today, we think of them in the context of both brick-and-mortar and online. One of the challenges faced by retailers today is "showrooming" - the practice where consumers, shoppers and buyers evaluate merchandise in the stores only to make the purchases online later (or on the spot!). This would certainly hurt the retailer if the online purchase is in fact with an online competitor.

There was an interesting article by Barbara Thau on this topic. In this article, based on a study by location analytics company placed.com, Bed Bath and Beyond and Petsmart are identified as retailers most prone to showrooming. Toys R US and Best Buy are also at the top of the list.

The common perception is that online pricing is unbeatable. That may true in many cases. The fact that these (and other) stores have online presence mitigates the pricing aspect to a certain extent. There are a number of other factors that influence shopper buying behavior - in store or online that are critical for retailers to offset showrooming.

• Implement Price Parity: Retailers can price comparison shop and offer 'comparable pricing' in store along with the benefits of an in store purchase.
• Offer Alternatives: Markdown and clearance prices can be advertised in store and offered online.
• Focus on market basket: Offset demand lost to online competitors with affinity and impulse purchases in store.
• Enhance Customer Service: Human interaction that can handily beat the online shopping experience.
• Enhance/Implement Loyalty Programs: Have a compelling lotalty program for customers.
• Level the Price Playing Field: Negotiate with manufacturers to get end of lifecycle product inventory as opposed to letting them flood the online marketplace.
• Re-direct Traffic: Re-evaluate pricing and parity considerations between in-store and online to have consumers showrooming to your own online store.
• Provide Enduring Value: Implement or enhance ease of returns and post sales service. The value of simply dropping a product off for a full refund on the spot is a more attractive proposition that the process of printing return mailing slips, packaging, mailing and waiting for the refund.

Among of the retail product categories, some categories obviously more susceptible to "showrooming". When we look at the categories represented by these retailers, there are several charecteristics that come to mind -

• Purchase frequency: When I was working with a major petfood manufacturer on shopper insights, we observed a major shift by consumers toward bigger packaging and fewer trips to stores that coincided with rising gas prices. This trend may very well be here to stay. Economic conditions may lead to a trial online purchase and could very well lead to repeat purchases of these categories of products. 
• Need to touch and feel the product: I find it hard to buy a pillow online without being able to feel it. Shopping online for toys with kids does not create the same euphoric experience of a Toys R Us store.
• Product dimensions: I'd rather have a large package of tissue paper rolls delivered to my doorstep than try to cram it in the trunk of my car. The already assembled desk looks great in store but If I have to assemble it anyway, I'd rather have it delivered.

I saw a news item on Verge that an Australian retailer, Celiac Supplies' a specialty (gluten free) food store, is charging customers/shoppers AUD$5 in an effort to curb this practice of showrooming. The $5 is refunded or credited back to the customer upon purchase. Gluten free merits and debate aside, this is an interesting move on the part of the store. I would imagine that regular shoppers wouldn't mind the charge but what does this do to a first-time visitor to the store?

Showrooming is certainly here to stay. However, pricing is not the only motivation.

Link to Forbes.com Article: http://www.forbes.com/sites/barbarathau/2013/03/01/why-bed-bath-and-beyond-petsmart-should-fear-showrooming-more-than-best-buy/

Link to Verge Article: http://www.theverge.com/2013/3/26/4148564/australian-store-charges-customers-a-5-just-looking-fee-in-bid-stop



 

Quadruple your sales...with a price cut

PlayStation Vita Sales Skyrocketing After Price Cut
I was fascinated to see this article (link below) and learn that weekly sales for the PS Vita handheld gaming device have quadrupled since Sony introduced a price cut in Japan. Apparently, according to a subsequent report, the sales may have in fact reached 6 times the volume in the week subsequent to the price cut. It is expected that price cuts will follow in the rest of the world. 

The handheld was introduced in Dec 2011 in Japan and unveiled to the rest of the world in Feb 2012. The price cut, introduced on Feb 28th 2013, was 20% from ¥24,980 to ¥19,980 (roughly $250 to $200).

Despite the price cut and the ensuing sales, I understand that PS Vita is still lagging expectations and 'isn't out of the woods yet'. Looking at the sales numbers of it's predecessor, I can see that the bar is set high.

The price cut and the subsequent sales spike behooves several questions -

Was the price too high to begin with?
The pricing has a precedent in the form of the Vita's younger siblings the PSP variants which sold over 71 million units worldwide. The PSP was launched in 2004 with a launch price of $200. So, the launch price for PSP Vita is roughly the inflation adjusted equivalent.

Should the price cut have come sooner?
The PS Vita sales reached 2.2 million units in late 2012, certainly not tracking the heights seen by the predecessor. The price cut induced sales frenzy does indicate pent up demand.

I think the answers are - Yes and Yes

I am sure there are a number of factors that cut into the forecasted demand for the Vita - the influx of smartphone gaming apps, competition from Nintendo 3, global economic environment to name a few.

There is a balance between healthy margins  (through a higher price point) and higher revenues (through higher sales volumes). With price sensitive tracking of sales numbers month over month, quarter over quarter, the price cuts could have come earlier. The price cuts need not necessarily come in a big chunk but incrementally over time. Given the overall sales numbers I am assuming that the monthly and quarterly numbers do not compare favorably to expected demand.

We can see that it is indeed possible to quadruple sales with a price cut! There are certainly other questions as well - How long with the sales sustain? Hopefully enough to bring the Vita 'out of the woods' while providing enough guidance and data points on pricing for the next version.

Happy Pricing (or price cutting)!

Link to article: http://www.forbes.com/sites/davidthier/2013/03/06/playstation-vita-sales-skyrocketing-after-price-cut/

 

A Blueprint for Value Pricing

Key questions pricers everywhere are looking to answer -  

• How much will my prospective buyers pay?
• Is this price too high? Is this price too low?
• How can I market to reach the buyers? Especially those who think the price is too low?
• How often should I change the price?
• Should is everyday low price or should I price and then discount? Or both?
• How should I bundle? What is the bundle discount?

I believe most of the pricing managers, strategists and tacticians answer it well but continue to pursue the questions nevertheless. It is indeed an exhilarating pursuit. Here's one example of how these questions are being addressed.

Recently, I had the pleasure of visiting the 'American Girl' store. Wait, don't jump to any conclusions....yet, it was with my wife and 7 year old daughter. Leading up to the visit, there was much hype and hoopla about the American Girl dolls and the store itself by my daughter.  As responsible parents do, we established an incentive program (a.k.a parental bribe) for her to earn a trip to the store. My expectations were along the lines of Toys r Us and Barbie and I was in for a surprise.

At $140 for a doll, paperback book and accessories I started to feel a little light headed. Thankfully, that was a bundle 'special' and $5 less than buying them individually. Well, I am exaggerating, it is $129 + taxes for a total of about $138. The doll was taller than the typical Barbie and the accessories fit in a box slightly larger than a pack of cigarettes.

Pehaps induced by the light headedness, my mind began wondering about pricing as we wandered around the store soaking in the experience. The place was jam packed with excited girls (and light headed parents?). The service was extraordinary. The store itself was setup to be a world of fantasy and giddy experience - there is a bistro with seating for the dolls, furniture for the dolls, clothing for the girls to match the dolls' clothes and, accessories galore for the dolls and, a spa for the dolls! There is also a library full of books. The books, however, were not for the dolls, understandable since the books are kinda big for the dolls unlike a brunch table seating, custom furniture, clothese or a teeny salon chair. They should think about really small paperback and hardbound books. Dolls reading books would set a great example for the girls. Anyways, the books are about the dolls. All in all, this is an ecosystem centered around the dolls that girls in America must have. It dawned on me that it is the quality, value and the overall experience that establishes the price. While it is hard to quantify the value of a 7 year old's joy and thrill, I imagine it is really, really high. Our dear daughter was of course thrilled to bits and did not spare any superlatives - best day of her life, best present ever, best parents in the world and so on. So, for $140, it was money well spent. 

I could see that that the marketing machinery was working well also. At checkout, with the slightest prompting for how we heard about the store, my daughter was quick to say 'at school, from her friends...', my wife added that we already get the 'magazine' (a.k.a. the catalog). For my part, I gave out my email, address and phone (for any doll emergencies, you never know) along with the credit card. I get the feeling that, while this is indeed a one stop shop it is also the beginning of a long term relationship. I was certainly relieved with the assurance that the information will not be given out to anyone else. I wonder how that works with their future stores in the making - American Teenager, American Lady, American Woman, American Mom and American Grandma. They know where I live, so I am sure they will keep me posted.

The upsells offered courteously at checkout were not really upsells but must-haves like a $8 hair brush for the doll. Surely, we wouldn't want Saige (the doll of the year!) or Josefina to go unkempt. It made my head hurt trying to compute the benefit of getting the $8 brush now versus  - the probability of a future trip with much, much higher basket value and how much of the doll's hair will a human hair brush really pull out. I couldn't do the computation mentally and in a bit of a daze I declined the upsell. Stay tuned for how well that worked out for me. While I could not detect any disappointment on the sales person's face or a hard sell, I wondered if there incentivized on upsell or annual store revenue or both? Either way, I am confident they can expect great bonuses and a merry Christmas.

At this point, I should mention that I have committed a sacrilege of sorts with multiple references to 'dolls' above instead of their given names. These are more than dolls. They are playmates, friends, confidantes and constant companions for 6+ year olds on their journey of discovery and growing. They are a bargain at $129 or $140 or whatever the price is.

Your thoughts and comments are welcome!

 

Affordability & Pricing: What matters and what doesn't?

Greetings! Welcome to my first pricing post.

There was an interesting article in USA Today (February 26th, 2013) that talks about the affordability of cars in 25 major North America metro areas based on the average income.

Interest.com, an offshoot of Bankrate.com, has a guideline for the affordability of cars based on family income. It is the "20/4/10" rule. Pay a down payment of at least 20%, keep the loan to 4 years or less and ensure the monthly payment does not exceed 10% of a household's gross income.

While the article focuses on prudent consumer budgeting and spending, it also has interesting ramifications with regards to car pricing.  You can check it out to see where your city ranks in terms of affordability of cars. According to the rankings, the city of Washington DC has the highest affordability with an average purchase price of $31,940 and a payment of $628 per month. Tampa ranks last in this list of 25 with an affordability of $14,516 and a monthy payment of $282.

24 of of the 25 major cities have an affordability estimate that is less than the average sales price of the cars which is over $30,000 roughly a $2,000 increase from a year ago. This indicates higher transaction pricing (even with attractive incentives being offered). Certainly, dealers and manufacturers factor in the incomes in various cities and other related demographics and attributes that influence car prices.

Affordability aside, car sales in 2012 increased 14% compated to 2011 to about 14.5 Million. There were many new and desirable models released in 2012. Car sales forecast for 2013 looks upbeat. Automotive market research firms J.D. Power and LMC Automotive state that the February 2014 auto sales are trending 7% higher than February of last year. LMC Automotive has revised their forecast of automotive sales to be 15.3 Million revised upward by 0.2 Million from their earlier forecast.  This is inline with other industry forecasts including Lacey Plache, Chief Economist at Edmunds.com who expects 15 Million and Lonnie Miller, Vice President, Marketing & Industry Analysis, at R. L. Polk who forecasts 15.4 Million also and expects the industry to break the 16 Million mark in early 2015. While these numbers are still well below the breakthrough sales seen between 2000 and 2007, they are a vast improvement over the subsequent period between 2008 and 2011.

So, when it comes to pent up demand affordability does not appear to be a key factor. At least at a macro level. Prevailing demand conditions dictate pricing power.

• A healthy demand relieves price pressure.
• With relieved price pressure, incentive and promotional spending can be better managed.
• Introduction of new and/or updated products adds fuel to pent up demand.
• Luxury and desirable automobiles can trump affordability.

Link to USA Today article - Study: Have new cars become unaffordable?
Link to J.D. Power, LMC Automotive article - Auto Sales Remain Strong, Automakers Keep Lid On Incentives
Link to Edmunds.com forecast - Edmunds.com 2013 Auto Sales Forecast: 15 Million
Link to R.L. Polk forecast - Autos in 2013 and Beyond - Industry Trends to Watch

Your thoughts and comments are welcome!