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Thursday, December 16, 2010

The Cyber War for Your Wallet

Last year on black Friday about .1% of all shoppers used their smartphones to compare prices at retail websites according to this WSJ article.  This year that figure increased 50-fold to 5.6%.

Today these apps, provided by retailers like Amazon (see this), allow customers to do an in-the-store price comparison with websites.  In the case of Amazon, an iPhone app called Price Check allows immediate comparisons by simply entering in the product or model numbers.

What does this mean for the days of the circular newspaper or USPS mail flyer?

Nothing good, I'm afraid...

For decades the pricing model of retailers has always focused on offering "loss-leaders" to customers - low-ball pricing on specific items - in order to lure the customers into the stores.  Once there the hope was that the customer would then spend money on other, higher margin items.  This higher margin, of course, would provide profit and cover the cost of the flier or advertising that brought in the customer in the first place.

Its very sad today looking at companies like Vertis that specialize in this sort of printing (from their website) we see they offer printed products like TV books, Magazine inserts, Special sections, TMC wraps, and Sunday Comics.  In my house we do all of our newspaper reading online.  Books are still purchased but that will be changing soon.  We do all of our magazine reading online save for one or two.

From my perspective Vertis doesn't produce a product I will see or use (save for the bundle of weekly shopping ads I throw out once a week).  I'm in my mid-50's.  Imagine how much of what they produce will be seen by my daughter who is 30...  No, it will all be done by smartphones.

So what does this have to do with Amazon iPhone apps like Price Check?

Well, for one thing the "online shopping" phenomena has now passed on from making newspaper and prints ads obsolete to making the basic "loss-leader" retail model obsolete.  The basic "loss-leader" model always relied on the impulsive behavior of shoppers who would tend to purchase something they wanted if they saw it in the store regardless of how they got into the store.  We've all done it to some degree - you go through all the work of getting to the sale or store based on some ad or item you wanted to buy and, while you were there, you bought something you hadn't planned on.  Did you get the best price on that particular item?  No, probably not.  But there was the gratification of knowing you had found something you were looking for.

Now let's think about this model with something like Price Check.  First of all, at least in my experience, there is a "pricing tolerance" window when shopping retail versus online.  This is the "don't care" difference between buying it now in a retail store versus buying online.

What does this entail?  For me this involves comparing:

   - Cost differential "out the door".
   - Cost of shipping.
   - Delay in receiving the item.
   - Likelihood that the item is really in stock.

So, for a $39.95 item that I can buy in the store while I'm there the price will have to be substantially lower on a percentage basis for me to bother ordering it online - particularly if I need the item for some reason (why not just buy it now versus order it online and get it for $34.95 a week from now).

As the price increases this becomes different.  I typically don't buy things that cost more than say $100 USD without planning.  Planning for me involves time and web-based research.  Examining the pros and cons of items, the costs, shipping, deals online, and so forth.  The cost of shipping versus taxes comes into play.  There is also the issue of support and service.

The decision becomes a time-dollars-cost-service model.  Making the purchase retail in a store for me is easier the less the item costs.  As the total cost of the item increases then I tend to buy online unless there is a service-related issue (where will I take the item for service) so long as the online price (including all shipping, taxes, and so forth) the same or less than the retail purchase.  Online stores typically have exchange policies on items where you simply return a DOA product which is a hassle - but not a big one.

Being a musician I have seen this develop over a long period of time.  Where I live there is a big-box music store (Guitar Center) and a locally owned Pianos'n'Stuff.  Over time I have learned that anything I buy online comes from the same warehouses that both retailers use (no one bothers to hide the UPS shipping labels).  So the product is exactly the same from all three places and probably comes from the exact same warehouse.

For music stuff support and hands-on comparison is sometimes important so I will use the locally owned store.  Buying from the big box store is virtually the same as buying online.  As the items become more expensive, though, its tempting to take an online deal over the local store.  What's the threshold for that?  Probably a couple of hundred dollars an a big purchase - that couple of hundred dollars will support the cost of any online purchase issues and so forth.

Now let's look at the big picture for Price Check.

Price Check is a simple calculator that tells you what the difference is between shipping the product to your house versus purchasing it from the retail display in front of you.  The cost difference includes the mortgage, support staff, advertising, etc. etc. that went into creating that big box retail store.  So really you are comparing all of those costs against shipping - probably from the same warehouse.  Which is going to win? 

Well, unless you need the item right now shipping to your doorstep is going to be a lot cheaper.

The next step will be for things like Price Check to begin using location-dependent information from your smart phone.  For example, Amazon will only offer a big discount on some item when you are actually in the big box retailer's store. 

This will become the "treasure hunt" model.  Imagine the scene where customers run from store to store waving their phones around to find that ad for the special deal - and then going home empty handed and waiting for the item to arrive in a few days.  The big box stores will, of course, counter with their own "in store" specials based on location in the store itself (or maybe the parking lot) - I suppose smartphone-based in-store coupons triggered by behavior in the store.

The black Friday stampedes killing shoppers at Walmart will be replaced by random collisions of shoppers, carts and automobiles caused by shoppers too lazy to look up from their smartphones wandering in front of drivers doing the same.

As with most things like this is all a race to the bottom - this time for retailers.

The products are sitting in the same warehouse regardless of where you buy them from.  They are going to ride on a truck somewhere.  Do they go to your house directly or a big, expensive store with lots of overhead where you will have to pay more?

Sadly, this is already impacting big box retailers like Best Buy.  In today's tight economy customers are flocking to better deals elsewhere.

Its only going to get worse because website cut out an entire cost element when you compare purchasing direct versus purchasing through a brick-and-mortar store.  Like the printed ads before them they are destined for the scrap heap of obsolescence.

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