Reprinted from the Harvard Business Review website.
This blog post is part of the HBR Online Forum The Future of Retail.
Last year on Black Friday, I dropped by a local Staples store in Watertown, Massachusetts, to pick up a few office supplies. Surprised at the 40% off sale on many items, I ended up leaving with a lot of office supplies and wondering, "Gee, did Staples really have to offer such a drastic discount on products that I would have purchased in the future anyway?" This holiday season, many retailers are pondering a similar question: "Do we really have to give away so much margin?"
True, with a 9% unemployment rate, the snapshot of our economy is hazy at best. The resulting "have and have not" economy is shaping each retailer's pricing strategy. Walmart, for instance, is concerned about its customers' finances, while high-end retailer Saks Fifth Avenue is selling luxury items at full-price and recently reported a 5.8% gain in same store sales.
With a consensus that the worst of the lingering recession is behind us, those who are employed are feeling more secure, and there's optimism about future job growth. This is leading to more spending: Retail sales in October increased by 0.5%, continuing a five month trend of higher purchases. As a result, retailers are expecting a good holiday season. Kohl's and Macy's, for instance, are forecasting 2 to 4% and 4 to 4.5% growth, respectively, over the holidays. Walmart expects flat to a 2% sales increase.
In the past few years, uncertainty and fear made it necessary for retailers to chop prices. After all, if they didn't, customers would patronize rivals that were offering rock bottom prices. But this year the environment is different. Low prices will still be a key draw for customers, of course, but retailers are refraining from hitting their red-colored "giant discount" panic buttons.
Consider this year's Black Friday competition. Instead of slugging it out over big discounts, the jockeying is around "what time we open for the big sale."
Even Walmart is trying to raise prices with its newly rolled out (and heavily advertised) Christmas Price Guarantee. After making a purchase, if a competitor advertises a lower price on the same product between November 1 and December 25, the big box retailer will match it. Shoppers have to bring their receipt and advertisement to a store to receive the differential refund, which is made in the form of a gift card.
Price matching appears pro-consumer, doesn't it? It provides comfort to make purchases today because you'll be "covered" if lower prices crop up later. It also seemingly telegraphs a "we are so confident about our prices that we'll match our rivals' prices" message to consumers. All good, right?
In fact, price matching is a strategy to raise prices. Sure, there's a guarantee, but the onus is on the consumer. Only those who save their receipts, actively scan advertisements, and queue up at a service counter benefit from a price match. You have to be very price conscious to make these efforts. Thus, what's neat about price matching is that it enables retailers to set higher prices yet also serve thrifty customers (who identify themselves by jumping over multiple "we want the lowest price" hurdles). The bottom line result is higher effective selling prices.
If you were at the helm of a retailer this season, would you be drastically discounting or seeking a few more points of margin? Does the jockeying over opening times signal less of an emphasis on discounting? Am I jaded in my belief that price matching leads to higher net prices? Let me know what you think.