Reference no: EM131161462

Here is the question:

1. What kind of price strategy are Target and Best Buy using to overcome online retailers' advantages?

Background:

Chapter 21 Case Study

Target: Fighting to Price Match Online Retailers

There are many reasons why consumers buy things online, instead of going to a physical store. Online retailers often have a bigger inventory, complete with reviews from other consumers, which can be searched quickly and easily. What is more, online retailers typically have much lower prices than physical stores, since they don't have to incur costs for in-store inventory management, transportation to stores, or human resources (i.e., in-store staff). For example, the prices at Target are typically 14 percent higher than Amazon, while those of Best Buy are 16 percent higher than Amazon. This is, of course, a significant benefit for consumers. Another benefit that online retailers deliver to consumers is a high level of customer service, as companies like Zappos offer free express shipping and a no-exception return policy.

These benefits of online shopping often motivate consumers to go "showrooming." They will go to a physical store to check out a product physically, maybe play with it for a bit, or check out its build quality. When they are satisfied, or not, with the product, they will go home, hop on their computer and buy the product online. In essence, then, the physical store is not much more than a physically accessible online catalog for their online competitors.

In an effort to stem their losses and gain an advantage over their Internet competitors, Target and Best Buy recently announced a price-matching policy. During the holiday shopping season of 2012, both retailers promised that they would match the prices offered by a specific number of online retailers. Target's plan identified five online competitors: Amazon.com, Walmart.com, Bestbuy.com, Toysrus.com, and Babiesrus.com, and promised that it would match product prices from November 1st to December 16th. Best Buy, on the other hand, will match prices from 20 websites, including Amazon, Dell, and Wal-Mart, but not third-party sales sites like Amazon Marketplace or Ebay, where prices tend to be much more volatile. According to Target CEO Gregg Steinhafel, the price match move is intended to show consumers that Target should be their preferred shopping destination. "We're already rock solid in price. But if periodically some competitor has a lower price, this gives our guests the ability to know 'I can do all of my one-stop shopping in Target.'"

On the surface of things, the price-match policies would seem to favor consumers, since they can physically check out a product and get the lowest price. However, there are a number of exceptions to both policies that may make them ineffective. At Target, for example, the shoppers have to ask for the price cuts and show proof to an in-store employee of the lower price. This requirement is likely to lead to quite an unpleasant experience during the busy holiday season, when workers are overwhelmed by demanding consumers, who themselves are stressed out by crowded stores. As Sheri Petras, CEO of the consulting company CFI Group asks, "Can you imagine being on the checkout line at Target with 20 items and you're scanning products on your phone to find out the gum is 12 cents less at Amazon? Can you imagine standing behind that person in line?"

The exceptions at Best Buy may be even more vigorous. The company's will only match prices on electronic and appliances, and not items like DVDs, CDs, or accessories. There will be a stretch of eight days, from the Sunday before Thanksgiving to the following Monday, when the policy will not be in place. As with Target, all competing prices must be verified by an employee, but they will do so only when asked by a shopper. And more importantly, the store employee can refuse to match the price if they feel that it is disadvantageous to do so.

Most retail experts thus feel that the price-matching policies, far from increasing physical store sales, will actually do the opposite. They argue that, in practice, it will be simply too difficult to match Internet prices, since they fluctuate so much. Moreover, they argue that even with a price-match, there simply is not enough motivation for customers to buy them at a physical store. If a consumer finds something that is cheaper online than at a Target or Best Buy, they are more likely just to buy that product online than driving to a store, waiting in line, and hoping that an employee doesn't make them the exception to the rule.