Retail’s Free-Rider Problem

Consumers want price transparency, but research suggests the ubiquitous price-match erodes the profits of brick-and-mortar retailers. Is there a better strategy?

Lee Peterson is executive VP, creative services, at WD Partners, a global design firm.

By Lee Peterson, WD Partners

If a sacred cow exists among retail strategists today, the price-match is undoubtedly it. As the weapon of first resort, it is the most obvious defense against the rapid rise of “showrooming” and the unbridled growth of online retailing behemoths like Amazon, ruthlessly cutting into retailers’ profits.

Best Buy’s holiday campaign promotes its “low price guarantee” and big-box retailers, including Target, Wal-Mart and Staples now match online prices all year long.

But is the price-match really the only way — or just the easiest way — to deter consumers armed with the power of price-scanning mobile devices from visiting stores to try stuff, but then buying online?

Indeed, whenever a single approach dominates across the boardrooms of an industry, there’s likely some herd-mentality at work. And that’s why the price-match deserves special scrutiny. A recent study suggests the ubiquitous price-match might not be all that effective in combating “showrooming.”

In the study, ‘Showrooming’ and the Competition between Store and Online Retailers, researchers tested three strategies for combating the increased use of brick-and-mortar stores as an “information channel” by consumers. They were:

A) Price matching;  

B) Making product matching harder between the brick-and-mortar store and the online retailer (i.e. creating store-specific bar codes to deter bar-code scanning app use or cater to local tastes at the store level); and

C) Charging customers for showrooming (i.e. upfront membership fee or parking fee).

Only the last two strategies may improve profits of brick-and-mortar stores, the researchers concluded. In the context of multichannel retail competition, there’s more incentive for brick-and-mortar retailers to cut prices than online retailers.

In other words, instead of operating as a sophisticated weapon, the price-match is a blunt instrument, possibly creating more problems than it solves. Granted, there are many reasons retailers have jumped on the price-matching bandwagon. The defense of market share for one. Or that age-old reason for explaining not just human behavior, but corporate behavior: Everyone else is doing it.

If instead of bolstering a retailer’s defensive walls against the encroachment of online retailers, shouldn’t they be focused on mounting more strategic responses, instead of just price?  

After all, showrooming is far from the biggest problem facing retailers, let alone a new problem.  Truth is, it isn’t exactly a new form of consumer behavior, just a fancy way of describing what economists have long referred to as the “free-rider problem.”

In a recent study, researchers warned of the rising phenomena, writing: “Free-riding erodes profits and is one of the most important issues that firms face in the multichannel era.” In fact, in one survey, 67% of respondents admitted to free-riding when shopping for durable goods.

Consumers aren’t acting in a malicious way by free-riding. As they’ve always done, consumers are simply trying to fulfill real needs, especially informational ones, on their path to purchasing goods. That’s why appealing to some mythic consumer conscience to deter the behavior doesn’t work either, according to a paper published in the Journal of Business Research. The researchers concluded that most consumers are untroubled by such behavior since there are “forces beyond their control” at work.

For consumers, it’s an understandable sentiment. But for retailers, the knee-jerk capitulation to “forces beyond their control” might be spelling disaster for future profits. For starters, it’s going to take far more than a price-match to remain relevant in today’s market.

Various solutions — celebrity endorsements and even the complete embrace of showrooming — have been touted as solutions. Casey Carl, president of Multichannel at Target Stores, even went so far as toa call showrooming the “greatest opportunity for retailers.” Granted, he qualifies the superlative: “We love showrooming — when Target gets to book the sale.”

Target is right to give up any efforts at getting consumers to give up the power of price transparency. Yet, truth is, despite the hand-wringing and ensuing price-war showrooming has created, few consumers do it consistently; with only 6% “fully committed to showrooming,” according to another recent study. Other studies suggests that the free rider problem in practice isn’t as bad as it sounds in theory; it all depends on how retailers react to it.

Considering this, if the now ubiquitous price-match diminishes profits, as research suggests, it’s time for retailers to mount a more sophisticated response than the price-match to stay relevant against the fast growth of online competitors. As I’ve argued before, in our age of dematerialization, consumers value the shopping experience more than the actually act of buying.

So, yes, consumers expect stores to operate as information channels, but consumers desire far more from a store experience than the ability to conduct price comparisons. In fact, in a recent survey of 1,700 consumers, price comparison ranked 4th in appeal among Millennials and 3rd in appeal among Boomers.  Across all generations, what did shoppers consider most appealing and most influential over their buying habits? Instant ownership, touch and feel and exclusive products and bargains.

And those are three things Amazon still can’t do.

Lee Peterson is executive VP, creative services, at WD Partners, a global design firm.

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