Although in-store retail spending jumped significantly this past holiday season over last year, rising a healthy 5.5 percent according to MasterCard, that number was overshadowed by a 15.4 percent increase in online spending. It was the first time that online spending accounted for more than 10 percent of all gift purchases. Even before the holidays, brick and mortar retailers were suffering. When Best Buy reported disappointing third quarter results in early December, analysts attributed the poor numbers to increased competition from online retailers, and Best Buy’s stock dropped 18 percent in one week.
The conventional wisdom is that consumers will pay a premium for the convenience and service provided by brick and mortar stores. Yet one writer at The Harvard Business Review notes that as online retailers’ growing market share attests, that wisdom isn’t holding up. “I went online to buy a TV that a Sears associate helped me select, and I saved $150,” writes retailing blogger, Rafi Mohammed. “As the sliding value of Best Buy shares confirm, too many shoppers aren’t willing to pay a premium for sales associates, in-person demonstrations, or the ability to get a product right now. The current retailing model, which expects consumers to pay this premium, is starting to look broken.” Still, Mohammed thinks change is in the air. “It’s time for a new system in which manufacturers help compensate physical retailers for the value they bring to the sales proposition,” he says. “They can do that by offering brick and mortar retailers lower wholesale prices than their web counterparts. I call this discount the Physical Store Equalizer, or PSE. Retailers’ pitch to manufacturers to try to gain this discount should be straightforward,” Mohammed says, noting they should say something along the lines of, “as a brick and mortar retailer, we add value and generate higher sales of your product. Our stores increase your brand awareness, provide a venue for people who want to touch and feel the product before they buy it, whether they buy it from us or online, and our sales staff helps educate your buyers. We bear costs for these services, so it’s impossible for us to match online prices of your product. To be fair to us, we require a wholesale price that is 10 percent less than what you are offering web retailers.”
This strategy focuses on a key pricing principle that all B2B and B2C companies need to practice, Mohammed says; that is, to articulate and charge for the value that you provide. Faced with a Physical Store Equalizer, manufacturers will have to decide whether the value provided by a brick and mortar retailer merits the smaller margins, and the potential backlash from Internet retailers.
Rafi Mohammed is a pricing strategy consultant and author of, “The 1% Windfall: How Successful Companies Use Price to Profit and Grow.”