Price Transparency: How to Address the Paradigm Shift in Retail — (Part 3 of 3)

Author: Martin Mehalchin
9 / 27 / 2012

In Parts I and II of this series, we discussed why price transparency is of increasing importance for retailers and identified common pitfalls for retailers to avoid as they respond to the challenge of price transparency. In Part III, we conclude with our recommended strategies for responding to this changing retail landscape.

Recommended Strategies

Rather than ignore it or try to fight it, retailers need to adjust right along with their customers to this new age of price transparency. Ultimately their customers will be armed with prices from their competitors while they shop, including the low margin online-only retailers. So what is a primarily brick-and-mortar retailer to do? First and foremost, it is up to the retailer, no matter how small, to stay abreast of market prices through a pricing service or simply skimming the internet. In order to stay in-tune with changing customer preferences and needs, retailers need to be armed with at least the same information that their customers have available. Second, retailers need to add customer-perceived value to their products and services that justify a higher price than an online-only retailer. To add-value successfully, we recommend six strategies:

1. Offer Exclusive Product

After house brands gradually evolved through the 20th century, they have exploded in the 21st. House brands offer built-in protection against showrooming, as there exists no direct SKU-level equivalent at another retailer. Retailers from Sephora to Macy’s to Supervalu have increased their private-label penetration in recent years due to higher margins and anticipated competition in national labels. And Target is known for their designer collaborations offering unique, limited-time creations. For small retailers, it becomes even more critical that they stay close to their customer needs and offer hard-to-find, limited stock items. In the day and age of abundance and unlimited choices, uniqueness is a factor that customers will pay for.

2. Take Advantage of Multi-channel

Rather than fighting to keep customer dollars inside their brick-and-mortar stores, some retailers are using their online channel to build the value prop of shopping in-store. For example, Nordstrom sales associates are now equipped with mobile POS devices that give them access to the company’s entire inventory, including Nordstrom.com, for expanded selection and finding out of stock items. By offering free shipping on all orders, regardless if ordered online or in the store, Nordstrom is truly becoming channel agnostic‖ and is opening all doors to their customer. As a Nordstrom executive explained: “Shipping costs are something that have been known to stop customers in their tracks….We have tried to break down those barriers as much as we can.” (Bloomberg New, 3/9/12)

Wal-Mart is also pushing their online store as an extension of the in-store shopping experience. For example, it now coaches its employees to actively guide customers to visit Walmart.com on smartphones for products that are out-of-stock, and is currently investing in an initiative called Endless Aisle, which makes this process automatic. “We are living in the age of the customer, and you can either fight these trends that are happening , showrooming is one, or you can embrace them,” said Joel Anderson, the chief executive of Walmart.com for the United States. “We have a lot of assets, but they’re only assets if you embrace the trends of the customers.” (New York Times, 7/4/12)

And as customers get more tech savvy, retailers don’t even need a sales associate to direct them to the extended selection of their online store. Smartphone shoppers can be encouraged to use Quick Response (QR) codes that direct them to the online offering. Out of stock? Not the color you’re looking for? Scan here and shop our online store. By actively using the online channel to overcome hurdles that often drive consumers to sites like Amazon, retailers are keeping their sales dollars in-house and providing great service by letting their customer decide how they want to shop.

3. Add Value by Giving

The paying price is only one factor that impacts the perceived value when customers are considering purchasing a product. Some obvious benefits, such as a generous return policy, perks with purchase (like free tailoring or annual cleaning of an appliance), and personalized service, justify paying a little more. But customers also take into consideration other factors that aren’t so obvious. Factors such as company charity giving, community involvement, and environmental responsibility, help customers justify spending money. In the end, shoppers like shopping, so anything that helps them feel like they are giving in addition to getting (like TOMS shoes one-for-one shoe donation) ups the value of a store or product for a large portion of the population, especially younger generations.

4. Get Local

One advantage that a brick-and-mortar store has over an online store is the physical location within a community, which in turn makes it easier to create an authentic connection with a customer. And actively becoming part of a customer’s local community (rather than a faceless chain store) can create loyalty and value to the shopping experience. Even within the mass coffee chain Starbucks, customers have “their Starbucks”‖ which can often be just a few blocks away from another. With this understanding, national chains such as Macy’s, Walgreens, and Trader Joe’s have localization strategies in the effort to make each store unique and become part of the community. But in order to win over the temptation of online pricing, retailers need to go beyond offering localized product – they need to actively reach out to their consumers and create a community that is specific to the area. For example, athletic retailer Lululemon’s success can be attributed, in large part, to the yoga community‖ they created in each store by partnering with local yoga studios and offering free classes in store. Consumers are sensitive to inauthentic attempts though, local strategies that come from corporate generally feel fake. So in order to really connect with the local community and create loyalty, the retailer needs to foster a philosophy of community outreach and connection by incentivizing store employees and encouraging creativity.

5. Provide a Loyalty Program

With a look into the travel industry (i.e. airline miles, hotel points), we can see that customers will choose to pay a little more in the short-term if they believe they are earning a bigger benefit in the long-term through a well-appointed loyalty program. A well-executed, easy to understand loyalty program can help brick-and-mortar retail stores retain customers and keep eyes from wandering looking for better deals. Safeway’s Just for U program, for example, offers individualized, loyalty-based pricing to participating customers through an online or mobile phone app (in addition to their Safeway Card discounts). Women’s apparel retailer Chico’s give a 5% discount when its members spend over $500, and reports that 90% of their sales come from loyalty program customers. Target provides a 5% discount on all purchases made with its Target Visa, and is considering a subscription service that would provide discounts to customers on products that they purchase regularly. Buying into the REI cooperative gives members special coupons and an end-of-year cash dividend based on the amount they spent the previous year. Although each of these loyalty programs are different, what is consistent is that they are easy for the customer, and provide enough reward that the customer feels there is more value in spending in one place than shopping around for deals. And almost always, the short-term profit loss experienced by the retailer from providing rewards is outweighed by the long term gain in customer spend.

5. Bring Online Information In-Store

Brick-and-mortar stores have the advantage of physical product and sales persons, while online stores have the advantage of customer reviews and an abundance of information. The value of a sales person’s knowledge & opinion is being replaced by product ratings, customer reviews, and the opinions of a social network. In order to feel fully informed, many shoppers research online before checking out products in-store, and this research often includes pricing information. But by using smartphones or touch screen technology, brick-and-mortar retailers could actively bring the abundance of online information in-store, and eliminate the need to research online before checking out the physical product. Imagine a camera store, that provides a smart phone application for its customers that would bring up all the online reviews of a particular product just by the scan of the bar code. Customers would be armed with product ratings, sales person guidance, and physical exploration of the product all in one place. Once they make a well-informed decision, they can walk out with the product that minute.

In the end, customers want information before making a purchase, and this need goes up based on the price of the item. Letting customers physically explore the product and get all the information they want in-store essentially kills two birds with one stone, and this convenience may give brick-and-mortar retailers added value justifying a higher price.

Conclusion

In this world of abundance and instantaneous information, it becomes even more critical for retailers to stay in tune with their customer needs and wants. Pricing transparency isn’t a competitive threat, it is a paradigm shift in how consumers shop. But by understanding what your customer values beyond the price ticket – whether it be uniqueness, convenience, perks, social responsibility, community, or information and offering it to them, what the price tag says is only the beginning of the customer decision.

For More Information

To discuss this article or to learn about Lenati’s retail solutions, please contact Martin Mehalchin at mmehalchin@lenati.com

About the Authors
Martin Mehalchin is a Principal with Lenati. He leads the firm’s Retail and Consumer practice and is a is a Brain Trust panel member on Retailwire.com He has dedicated his career to working with executives and managers to help them define their strategies and then translate those strategies into results.

Aura Cook is a Senior Consultant with Lenati. She has over 10 years of experience in multi-channel Retail specializing in strategy development, consumer insights, market research, merchandising, and business intelligence.

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