Should Retailers Match Their Own Prices Online and in Stores?

 
 
For multichannel retailers, pricing strategy can be difficult to execute and confusing to shoppers. Research by Elie Ofek and colleagues offers alternative approaches to getting the price right.
 
 
by Dina Gerdeman
The line gets blurry for shoppers when retailers won't honor their online prices in-store. (Kwangmoozaa)

While shopping for my 10-year-old daughter’s Halloween costume last October, I pulled out my smartphone and hopped online to see if the store offered the same crayon costume in more colors than it had on the rack. I was surprised to see that the outfit I was holding in my hand was $10 cheaper online—from the same store.

I asked the cashier if she would honor the online price in-store; she politely declined, saying the store didn’t match discounts found on its website. But she did offer to let me order the costume on the store’s computer and get free shipping. Sold!

For multichannel retailers—those who sell both in physical stores and online—pricing is a particularly prickly problem. And when it comes to self-matching pricing policies, retailers have differing strategies. Some brick-and-mortars, including Best Buy, Target, Staples, and Sears, will gladly match their online prices in-store if a customer asks for them. However, others, like Home Depot, Bloomingdale’s, and Macy’s, are usually quite firm about saying “no.”

It may seem as if stores that match online prices are asking to lose money if they grant price discounts in-store to inquiring customers—although some will do so to appease an angry customer or through a sense of fairness. In some cases, however, self-matching is the best strategy to earn higher profits, says Harvard Business School Professor Elie Ofek, the T.J. Dermot Dunphy Professor of Business Administration.

“We found that price-matching is not just a necessary evil; it can be a competitive tool and boost a company’s bottom line,” Ofek says.

Ofek’s research Match Your Own Price? Self-Matching as a Retailer’s Multichannel Pricing Strategy was featured in the April 2018 issue of Marketing Science. He co-authored the article with Yale assistant professor Vineet Kumar and former HBS doctoral student Pavel Kireyev.

Is self-matching an effective strategy?

Price-matching among competing retailers has been researched widely, but Ofek believes the study is the first to look at whether self-matching pays off as a pricing strategy.

“When you talk to millennials in particular, you find out they accept that prices don’t have to be the same across channels”

The researchers surveyed nearly 500 consumers about their buying habits and studied more than two dozen retailers to determine which ones self-matched. They developed a model that analyzed various types of retail situations, and they considered a variety of consumer factors, including their preference for specific brands, their preference for buying in-store versus online, and how far along they were in their decision to purchase a product.

“Pricing is a big decision,” Ofek observes. If the retailer decides to offer every consumer the same price, the result can drag down the store price and lower profit. “But when you talk to millennials in particular, you find out they accept that prices don’t have to be the same across channels. That gives the retailer more freedom with pricing.”

Among the retailers studied, between 55 and 60 percent self-matched prices, and the rest either didn’t state a formal policy or explicitly said they didn’t self-match.

When should retailers self-match?

The research team found self-matching can work to a company’s advantage in three ways:

  • Retailers can raise online prices. While prices online tend to be cheaper, a retailer that self-matches can raise the online price of a product to offset the loss the company might see by extending a price break to consumers who invoke the price match in the store. Meanwhile, if the retailer has a competitive rival that doesn’t self-match, that rival will often raise its online price as well—and both retailers then benefit from charging higher rates. In this case, self-matching creates what the researchers call an online competition dampening effect.

    “Especially if your competition is coming from pure e-tail like Amazon—by offering to price match as the sole brick and mortar retailer, you can avoid cutthroat online prices,” Ofek says. “And you are also allowing Amazon to keep prices higher. It’s a win-win.”

  • Retailers can charge undecided consumers higher prices in-store. A self-matching strategy allows a retailer to charge different prices to two types of store shoppers—those who have done their research online and arrive at the store ready to buy with evidence of the online price, as well as undecided consumers who start their purchasing process with a visit to the store.

    “Webroomers”—the decided consumers who research online first—receive the lower online price by asking the store to self-match, while undecided consumers who only discover the product they like during the visit pay the higher store price. This store competition dampening effect helps the retailer offset lost revenue from the decided consumer by charging the undecided consumer more.

  • Retailers can benefit from self-matching even with smartphone-equipped consumers. The researchers found that about 55 percent of consumers use their mobile devices in store. Surprisingly, also when some undecided consumers look up products and prices on their smartphones while in a store, companies don’t necessarily lose out on earning higher profits.

    How so? Even if consumers can find a lower price for a similar item at another retailer through a mobile device search, making a trip to the other store would involve time and travel costs many of them don’t want to bother with. But given that these consumers have evidence of the online price, the self-matching retailer can raise this price to avoid giving too much of a price break. These somewhat captive consumers will gladly pay this price to avoid leaving the store empty-handed. Moreover, rivals will likely follow suit.

Low-end retailers often don’t bother

Certain types of retailers are especially inclined to self-match, including those selling consumer electronics and home improvement goods. Low-end department stores and clothing retailers avoid the practice more often.

“We hope this research will help companies formulate the essence of their pricing strategies and messages”

“There are times when nobody in a certain market wants to offer price-matching. If the value of the product is low and there aren’t too many undecided consumers, to offer the price match doesn’t give you much in terms of extra profits from the segment that comes to the store,” Ofek says. “By price discriminating across channels, you gain a little bit by sticking consumers who visit the store with the highest price you can. People have to pay for the fact that they’re getting what they want right now while in the store.”

Ofek, whose research focuses on new-product strategies in technology-driven business environments as well as in consumer-oriented companies, hopes the research results will help retailers work through the complicated pricing puzzle and pinpoint the best fit for their businesses.

In deciding whether to self-match, companies should start by determining whether their competitors are already doing so.

“If you feel like you’re in an industry with a significant number of people coming into the store and your rival is already price-matching—you may not want to follow suit because that could result in bad outcomes,” Ofek says. “But if your rival isn’t price-matching, you might want to do it because you could benefit from preempting that strategy. We hope this research will help companies formulate the essence of their pricing strategies and messages.”

And it’s bound to help consumers like my daughter and me. Now when we go shopping, we know to peek online first and ask the store if they will honor a price match.

Related Reading:

Deconstructing the Price Tag
Name Your Price. Really.
Is Performance-Based Pricing the Right Price for You?

What do you think of this research?

Should retailers charge the same price for a product across multiple channels? Share your insights below.

About the Author

Dina Gerdeman is a senior writer for Harvard Business School Working Knowledge

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