Financial Insights on Retailing: What's Price Got To Do With It?

Stupidity pays. In fact, stupidity has paid well over the years. So well, in fact, that it is an important source of what passes for corporate profitability these days, at least for consumer businesses and probably for a lot of other businesses as well. Of all the elements in the marketing mix, the one that the Internet was supposed to transform the most was price.

The reduction in consumer search costs was supposed to equalize prices and squeeze out profits. Not only would consumers be able to compare prices but so would the competition, which in simple terms would mean that stupidity would no longer pay. The profitability of most businesses is driven by their dumbest customers, those who are unwilling to search for a better deal at a lower price. How difficult would life be if all of our customers acted like our toughest, smartest, best-informed customers?

Consumer spending on information technology has soared in the past decade. In some ways, consumers have reached a level of information parity with retailers. This IT parity means that consumers have more knowledge about products, pricing, features and product performance than the sales associates employed by retailers, further reducing the value of and the need for retail workers who actually try to sell the consumer something.

In the arms race between buyer and seller, the newest, most mundane technology theoretically should radically shift the balance of power in favor of buyers. Earlier, they had to go from seller to seller making inquiries and checking out different offers, in other words, they had to shop. The cost of search was real. Men were at a distinct disadvantage at this activity. Shopping is like forcing them to ask for the same set of directions, at least a couple of times. Technology leveled the playing field for consumers in general, giving them access to information that once was only available to the largest businesses or the most adroit shoppers.

In some ways, at least for those who are paying attention, Google has leveled the playing field. Fortunately for most retailers, there are still a lot of consumers who can't be bothered. The fear that the Internet will turn branded products into commodities is potentially real for many products. Here are just a few examples:



Yahoo Shopping offers three places where one can buy a Toshiba Satellite P105-S9312 Laptop Computer, and all three locations quote the same price of $1,999.99. Google's Froogle shopping site has the same computer for $1,999.95. A half dozen other sites including brick and mortar places like Best Buy and Circuit City all offer the same price point. With such a proliferation of comparable products and similar prices, can any of these sellers be making any margin?

And yet, not all is lost. The computer companies reduce the knowledge edge of consumers by overwhelming them with thou-sands of different alternatives. Is the Toshiba laptop really the best deal, or would an HP or Dell be a better alternative? Do I really need a 100-GB hard drive or could I get by with 40? The proliferation of models and features in the realm of consumer electronics makes consumers relatively stupid again, shifting the knowledge edge back to the seller.

Here is another example: There are hundreds of different offers that one can find on the Internet for Tolstoy's War and Peace, ranging in price from $0.90 to $300.00 at dozens of different sites. Why the difference? Some are first editions, others are used paperbacks; some are in CD format, while others come with CD supplements. Again, even for a classic like War and Peace, there are hundreds of different alternative choices for essentially the same product, making strict price comparison difficult and consumers relatively stupid.

Implications for Retailers
Why the difference? It's the same in cyburbia as it is in mallburbia — price is not the only criterion that consumers, both smart and dumb, take into account when making a purchase. Even with a near universal ability to track prices, we will continue to see large price differences. When consumers buy, they are buying more than just a product. They are buying the trust of the seller, the ease of making the transaction, a no-hassle return policy, speed of delivery, and the convenience of shopping — all of which, for many businesses, remains just short of dreadful. At the end of the day, few businesses win on price alone.