Harvard Business School Working Knowledg e Archive

The Old Pillars of New Retailing - When the Price Slasher Turns Against You

6/4/2001
Maybe Crazy Eddie was a little crazy. Leonard Berry says that dirt-cheap pricing isn't a sustainable business model. Instead, you need to create value for customers in five interlocking ways, including treating them with respect, connecting with them on an emotional level, and making it easy to do business with you. The findings aren't rocket science—but they are unexpectedly difficult to implement, says Berry in this HBR look at retailing.

Connect With Your Customers' Emotions
Most retailers understand in principle that they need to connect emotionally with consumers; a good many don't know how to (or don't try to) put the principle into practice. Instead, they neglect the opportunity to make emotional connections and put too much emphasis on prices. The promise of low prices may appeal to customers' sense of reason, but it does not speak to their passions.

Many U.S. furniture retailers are guilty of ignoring consumers' emotions. Although the average size of new homes in the country has grown by 25% since 1980, furniture accounts for a lower percentage of total U.S. consumer spending today (1%) than it did in 1980 (1.2%). Making consumers wait up to two months to receive their furniture contributes to these poor results. How can consumers get emotionally involved in products they know they won't see for weeks?

Poor marketing also hurts the industry. Most furniture stores focus strictly on price appeals, emphasizing cost savings rather than the emotional lift that can come from a new look in the home. "We don't talk about how easy it can be to make your home more attractive;' says Jerry Epperson, an investment banker who specializes in the furniture industry. "All we talk about is `sale, sale, sale' and credit terms."

Quotation
The promise of low prices may appeal to customers' sense of reason, but it does not speak to their passions.
Quotation
—Leonard L. Berry

Great retailers reach beyond the model of the rational consumer and strive to establish feelings of closeness, affection, and trust. The opportunity to establish such feelings is open to any retailer, regardless of the type of business or the merchandise being sold. Everyone is emotionally connected to some retailers—from local businesses such as the wine merchant who always remembers what you like; to national companies like Harley-Davidson, which connects people through its Harley Owners Group; to catalog retailer Coldwater Creek, which ships a substitute item to customers who need to make returns before the original item is sent back.

One retailer that has connected especially well with its target market in recent years is Journeys, a Nashville, Tennessee-based chain of shoe stores located primarily in shopping malls. The chain focuses on selling footwear to young men and women between the ages of 15 and 25. Started in 1987, Journeys didn't take off until 1995 when new management took over. The chain has achieved double-digit comparable-store sales increases in five of the six years since then and is now expanding by as many as 100 new stores per year.

Journeys has penetrated the skepticism and fickleness that are characteristic of many teens. By keeping a finger on the pulse of its target market, the company consistently has the right brands available for this especially brand-conscious group of consumers. Equally important, it creates the right store atmosphere—the stores pulsate with music, video, color, and brand merchandising.

A Journeys store is both welcoming and authentic to young people; it is simultaneously energetic and laid-back. Journeys' employees are typically young—the average age of a store manager is about 25—and they dress as they please. Customers frequently visit a store in groups just to hang out; salespeople exert no pressure to buy. And everyone, whether they've made a purchase or not, usually leaves with a giveaway—for instance, a key chain, a compact-disc case, a promotional T-shirt, or one of the 10 million or so stickers the stores give out over the course of a year. The stickers, which usually feature one of the brands Journeys sells, often end up on backpacks, skateboards, school lockers, or bathroom mirrors. Journeys also publishes a bimonthly magazine, Dig, that is available in the stores, and it runs a Web site that seeks to replicate the atmosphere of its stores. The number of site visits explodes whenever the company's commercials appear on MTV.

Journeys works in large part because it has created an atmosphere that connects emotionally with the young people it serves. Other retailers should bear in mind that it takes more than a room full of products with price tags on them to draw people in.

Set the fairest (not the lowest) prices
Prices are about more than the actual dollars involved. If customers suspect that the retailer isn't playing fair, prices can also carry a psychological cost. Potential buyers will not feel comfortable making purchases if they fear that prices might be 30 percent lower next week, or if certain charges have only been estimated, or if they are unsure whether an advertised sale price represents a genuine markdown

Consider some of the pricing tactics commonly used by certain home improvement retailers. One well-known company advertises products as "special buys" even though it has not lowered the regular prices. Another purposely misrepresents a competitor's prices on price-comparison signs within its stores. Still another company promotes lower grade merchandise implying that it is top quality. One retailer puts a disclaimer in its ads that reads: "Prices in this ad may be different from the actual price at time of purchase. We adjust our prices daily to the lumber commodity market." The disclaimer paves the way for the retailer to raise its prices regardless of the advertised price.

Excellent retailers seek to minimize or eliminate the psychological costs associated with manipulative pricing. Most of these retailers follow the principles of "everyday fair pricing" instead of "everyday low pricing." A fact of retail life is that no retailer, not even Wal-Mart, can truthfully promise customers that it will always have the lowest prices. An uncomfortable truth for many retailers is that their "lowest price anywhere" positioning is a crutch for the lack of value adding innovation. Price is the only reason they give customers to care.

Retailers can implement a fair-pricing strategy by clearing two hurdles. First, they must make the cultural and strategic transition from thinking value equals price to realizing that value is the total customer experience. Second, they must understand the principles of fair pricing and muster the courage needed to put them into practice. Retailers who price fairly sell most goods at regular but competitive prices and hold legitimate sales promotions. They make it easy to compare their prices with those of competitors, and they avoid hidden charges. They don't raise prices to take advantage of temporary blips in demand, and they stand behind the products they sell.

Zane's Cycles in Branford, Connecticut, is one of the most successful independent bicycle retailers in the United States. Zane's has grown its one-store business at least 20 percent every year since it was founded in 1981, selling 4,250 bicycles in 2000 along with a full array of accessories. The company's success illustrates the appeal of fair pricing.

Zane's sells better bike brands with prices starting at $250. It stands behind what it sells with a 30-day test-drive offer (customers can return a bike within 30 days and exchange it for another) and a 90-day price protection guarantee (if a buyer finds the same bike in Connecticut at a lower price within 90 days, Zane's will refund the difference plus 10 percent). Zane's also offers free lifetime service on all new bicycles it sells; it was likely the first bicycle retailer in the United States to take this step. The promise of lifetime service includes annual tuneups, brake and gear adjustments, wheel straightening, and more.

Zane's holds only one promotional sale a year, a three-day spring weekend event featuring discounts on all products. Vendors and former employees come to work at the huge event—some even fly in to participate. Customers who purchase a bicycle at Zane's within 90 days before the sale are encouraged to return during the event for a refund based on the discounted price of their bike. The company refunded about $3,000 during the 2000 sale, but most of that money remained in the store because customers bought more gear. Zane's sold 560 bicycles during the 2000 sale—that's more than the typical one store U.S. bicycle retailer sells in an entire year. And yet the limited duration of the sale means that Zane's sells about 85 percent of its bicycles at the regular price.

When Connecticut passed a bike-helmet law in 1992, Zane's sold helmets to kids at cost rather than take advantage of legislated demand. Owner Chris Zane convinced area school administrators to distribute flyers to students under 12 announcing that policy. "We sold a ton of helmets and made a lot of new friends for the store," Zane says. "Our customers trust us. They come in and say, `I am here to get a bike. What do I need?' They have confidence in our ability to find them just the right bike at a fair price and to stand behind what we sell."

Constant sales, markdowns on over-inflated prices, and other forms of pressure pricing may boost sales in the short term. Winning customers' trust through fair pricing will pay off in the long term.

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Excerpted with permission from "The Old Pillars of New Retailing," Harvard Business Review,Vol. 79, No. 4., April 2001.

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Leonard L. Berry is Distinguished Professor of Marketing and holds the M.B. Zale Chair in Retailing and Marketing Leadership at Texas A&M University in College Station, Texas. He founded Texas A&M's Center for Retailing Studies and directed it from 1982 to 2000. He is the author of Discovering the Soul of Service (Free Press, 1999).