Every holiday season we see retailers pull out all the stops to attract customers. The biggest consumer electronics retailers—Best Buy, Wal-Mart, Target Corp. and Staples Inc. have all pledged to match their rivals’ prices as in years past. Best Buy has called price matching table stakes for competing during the holidays. “The game has changed, price is off the table” says Best Buy’s CEO, who has been very vocal in their efforts to eliminate price as a decision factor. He wants customers to make their purchases based on other value added services that Best Buy offers like ship-to-store, Geek Squad customer service, etc… But the growing phenomenon of “show rooming” – where customers evaluate products in stores, have their questions answered by the educated retail staff and then buy the product for cheaper online – has negated any efforts from Best Buy to differentiated themselves through their service in store. Companies like Amazon, with a pure online presence stand to benefit most from show rooming. In order to combat it, companies like Best Buy are now matching even online prices from Amazon – starting a price matching war with a uniquely positioned competitor.
Amazon has a couple of advantages that other retailers/e-tailers don’t.
- Additional profit streams from other lines of business. And with it comes the ability to stomach losses in the near term.
- Amazon’s ability to innovate around their services to create differentiation
Amazon’s innovation can be seen in programs like Amazon Prime or in delivery like the Amazon Air. Amazon Prime has increased customer retention and spending. And Amazon Air has the potential to disrupt product delivery and may be the key to solving the “last mile” problem all retailers face. Mere price matching with Amazon is going to put competitors on a path to self-destruction. We’ve seen how a single-minded objective to win customers on price drove Circuit City to bankruptcy and nearly pushed Best Buy to bankruptcy too. If retailers want to successfully compete with Amazon, they need to figure out what it is that adds value to their customers – either customer programs (like Prime) or unique delivery (like Air).
Originally published in the Holden Advisors December 2013 Newsletter.
Ashwin Somakumar 