Rafi Mohammed

Is Target's Price Matching Policy a Mistake?

Posted on January 15th, 2013 (0 Comments)

Reprinted from the Harvard Business Review website. 

Target recently announced that its brick and mortar stores will match prices offered by major online retailers such as Amazon, Walmart, and Best Buy. Initially rolled out as a holiday promotion, this policy is now in force year-round. Simply visit any Target store with proof (a print out) of a lower online price and they'll match it.

This policy touches on one of the biggest strategy questions that brick and mortar retailers are facing today: should in-store prices be the same as those on their web site? Should the price of a Keurig single-serve coffee brewer, for example, be the same on Target's web site as at its Somerville, Massachusetts store? Some believe prices should be the same — on the grounds that this consistency is important to maintaining a company's brand.

I disagree: a retailer's in-store and online prices should differ. First, can we stipulate that pure-play Internet retailers — Amazon for example — have significantly lower cost structures than brick and mortar stores? That makes it close to impossible for a chain to set the same product price both on its web site and in physical stores that is competitive with an Internet-only retailer and still yields a profit. Also, keep in mind that the number of viable competitors and prices of rivals differ in each selling environment. The online market is more competitive: web rivals tend to heavily discount, and it's easier for consumers to check prices (as well as purchase) from online competitors. As a result, a retailer's online prices should generally be lower than those at its brick and mortar stores.

It may be a reach to think of having different prices — an in-store one and another on the web — for the same product. The key is to view in-store and web shopping as two different service options and to let customers choose which works best for them. After all, gas stations charge different prices for full vs. self-serve gasoline, and airlines set a premium to book a reservation by telephone compared to the web. Why can't brick and mortar retailers follow a similar strategy? Charging an in-store premium for some products may be more viable for some products (less expensive impulse purchases such as clothes) than others (expensive appliances, for example, where the purchasing process often starts online and customers will see the lower price).

Won't customers simply seek the lowest price by purchasing online? Without a doubt, to continue growing, brick and mortar retailers have to aggressively focus on boosting their web selling capabilities — because many customers are turning to the web. That said, consumers still patronize stores: Target's 2011 revenues were close to $79 billion, predominantly from in-store sales. The fact is hybrid retailers (brick and mortar/Internet) don't have a choice — they have to set different prices. A single price set to be competitive with web rivals will be a money loser for in-store sales. Conversely, a single price that is profitable for in-store sales will likely be too high to effectively compete with web rivals.

Returning to Target's price matching policy, it's a mistake to match the prices of online rivals. Sure, it curbs "showrooming," the practice of customers checking out merchandise at brick and mortar stores and then ordering at a cheaper price from an online retailer. But Target is giving away too much value: this move is akin to offering full-serve gas at self-serve prices. Matching online prices devalues the brick and mortar shopping experience as well as encourages customers to first search online and then doubly benefit: pay online discounted prices and reap the advantages of brick and mortar shopping.

Target should instead match prices of online rivals with a comparable "apples to apples" service: order from Target.com. If a customer sees a lower online price, Target will match only if ordered from Target.com. Some variations that take advantage of a retailer's physical store presence can also be offered: discounted two-day shipping (pick-up) at a store, for instance. Brick-and-mortar retailers shouldn't offer the best of both worlds by providing in-store shopping benefits at online prices. It encourages a consumer behavior that is destructive to brick and mortar stores in the long run.

So what do you think? How should a retailer that sells at both brick and mortar stores and on the Internet set prices? Should Target stores match online rivals' prices?

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