As my first post, I thought I would discuss an issue that I have come across throughout my career: multichannel or omnichannel. There is little knowledge it seems within the corporate world of the difference between the two and its implications on retail pricing strategy. Therefore based on my research here is a summary of my findings:
According to the results from the Retail Systems Research report, retailers are facing a wide variety of strategic business challenges in determining the cost of products across channels, which include (1) Customers’ increased price sensitivity (67%); (2) Amplified pricing aggressiveness from competitors (51%); (3) Increased price transparency (47%); (4) Need to protect a brand’s price image (42%); and (5) Need to provide consistency in price across channels (27%). Consumers are utilising a larger variety of channels to browse and buy nowadays in retail. According to Google consumer barometer, 86% of consumers do both online and offline research before purchasing. It might be a retailer’s worst nightmare that a consumer stands before a product, contemplates a purchase, and pulls out a smartphone to see if a better deal is available elsewhere. So managing pricing coherently across channels is a particularly tough challenge for brands that are distributed via multiple channel
1. Understanding multi-channel and the pricing dilemma
Multichannel retailing is the set of activities involved in selling merchandise or services to consumers through more than one channel (Levy and Barton, 2009). All multi-channel retailers are motivated by improving their financial performances, which includes: (1) low-cost access to new markets, (2) increased customer satisfaction and loyalty, and (3) creation of a strategic advantage (J. Zhang et al, 2010). The proportion of multi-channel shoppers has gone up in recent years (Wallace et al., 2004). A recent analysis of online retail sales by Experian indicates that multi-channel retailers accounted for over 59% of internet sales, compared to the 31% garnered by retailers who sell online exclusively.
2. Multi-channel retailing benefits and challenges
The growing popularity of multi-channel retailing can be attributed to the benefits received by the consumers as well as the retailers. The greater utilitarian value of online stores in the context of information search and price comparison has been hypothesised by Noble et al. (2005). Multi-channel retailing offers plenty of benefits to retailers. According to Kumar and Venkatesan (2005), the benefits provided by multi-channel customers include:
- Improved customer perception
- Increased sales
- Higher share of wallet
- Greater profits
- Better data collection
- Enhanced productivity
According to a research done by eConsultancy. The multi-channel challenges for retailers include:
- Understanding customer behaviour across channels
- Adapting to change
- Operational costs per channel are different.
- Different competition per channel
3. Complexities of multi-channel pricing
The main dilemma for retailers are most products stores are a more costly channel than online, and retailers cannot be competitive in both if this is not reflected in pricing. Amongst academics and practioners, there is a clear schism on agreeing the best pricing strategy for multi-channel retailers. Firms have to strike a delicate balance between consumers’ expectations of prices in different channels and the cost structure of each channel (Grewal et al. 2010). There are two school of thoughts and a hybrid solution:
- Different retail price per channel for the same product
he main argument in this scenario is that e-tailers (pureplayers) can pass their economic advantage on to shoppers in the form of a substantial price discount, whilst multi-channel retailers basing their pricing strategy on brick-and-mortar operating costs are becoming uncompetitive in the online channel that is delivering 10 times more growth. Therefore, having an adaptive channel pricing structure would enable the retailer to remain competitive and maximise profitability in all channels.
This is supported academically by some of the studies specifically focused on the price competition between online retailers and brick and mortar retailers. For instance, Smith et al. (1999) analysed that online prices are 9-16% lower than traditional brick and mortar prices. Dolan and Moon (2000) studied the pricing and market making on the internet and found that it is optimal for the multi-channel retailers to use a different pricing mechanism on different channels. Tang and Xing (2001) found that price dispersion for pure play e-tailers is lower than price. Reduction in information asymmetry and buyer search costs has led to on average lower prices for products of comparable quality sold through electronic channels compared to traditional brick-and-mortar stores (Hughes 2006).
The cost structure associated with each channel is distinct. In general, a large component of the costs for direct channels are variable costs due to order picking, packing, shipping, processing returns, etc., while costs of brick-and-mortar stores are largely dominated by fixed costs. Therefore, from an economics point of view, direct channels should charge higher prices due to their higher marginal costs, whilst brick-and-mortar stores are more sensitive to the need to generate sufficient sales volumes to cover their fixed costs and thus should be priced more aggressively. This inherent difference in the cost structure puts the direct channels at odds with consumers’ expectations of lower prices in these channels.
2. Identical retail price per channel for the same product
Although scenario A makes financial sense, it does not take into account the customer’s perception and satisfaction into account. A product’s brand equity and price positioning can deteriorate when consumers see a product online at a discounted price versus in-store. Therefore, the argument in this scenario is that the multi-channel retailer should price the product at the same level irrespective of the costs and competition involved in either channels. This strategy has been branded “omnichannel” pricing. It offers:
- Consistent price information in all channels
- Ease the customer experience
- Remove barriers to purchase
As scenario A offers greater financial reward (optimise margins in each channel) and B higher customer satisfaction rate, we have seen an increase in multi-channel retailers implementing scenario A but self-matching in order to keep a good level of satisfaction rate. Self-matching allows a multichannel retailer to offer the lowest of its online and in-store prices to consumers. With such a policy, the retailer commits to charging consumers the lower of its online and in-store prices for the same product when consumers produce appropriate evidence (Kireyev et al, 2015). For example, Sainsburys, RadioShack, Best Buy, Target, Staples and Toys“R”US price-match their online channels in-store.
4. Importance of controlling your distribution channels from a pricing strategy point of view
Retailers have to address questions such as parity in pricing across channels, what markdowns and promotions to implement in different channels. It is crucial for retailers to decide on the right distribution channel and the level of control they want to assert. Pricing conflict is common, and it can jeopardise an entire strategy. Distribution strategy is influenced by the market structure, the firm’s objectives, it’s resources and of course it’s overall marketing strategy. There are three types: intensive, selective or exclusive. From a pricing point of view, only the exclusive channel grants brands a tighter control over the intermediaries’ price. It is very difficult to keep a tight control on intensive distribution channels, as we will see in the Lacoste case study, which could lead to disastrous consequences through huge price drops:
- Negative PR coverage
- Negative impact on brand positioning and perception
- More intense competition within the channel
However, Apple, is a very successful Brand in managing its intensive distribution channels, and they do so through price maintenance. Even though each product has a “manufacturer suggested retail price” (MSRP), each retailer is free to set its own sale price. Apple, however, extends only a tiny wholesale discount on its products. The company supplements its tiny wholesale discounts to resellers with more substantial monetary incentives that are available only if those resellers advertise its products at or above a certain price, called the “minimum advertised price” (MAP). This arrangement enables retailers to make more money per sale, but it prevents them from offering customers significant discounts, resulting in the nearly homogeneous Apple pricing we are used to.