Black Friday was disappointing for retailers this year. Sales were down 11% from last year, ‘Black Friday’ Fades as Weekend Retail Sales Sink, and I expect the retailers to report lower margins when they report earnings in the coming months. This follows a constant bombardment of email boxes and television ads announcing early sales and deeper discounts. Perhaps shoppers just decided that lower prices just were not worth the madness of dealing with the Thanksgiving weekend crowds. These results are a good reminder that relying on price competition can be hazardous, whether you are selling to consumers or other businesses.
We have seen this story repeat itself over the past several years. Retailers have gotten very aggressive in offering deals with very deep discounts and more hours when the discounts are available. Other retailers follow suit and soon everybody is slashing prices to compete for the holiday shoppers, and prices end up not being a differentiator. The media then reports huge crowds and long lines of shoppers looking for certain low-priced merchandise. Discounts then continue throughout the holiday season. Soon after the holidays we see reports that the holiday sales and margins were disappointing.
Six weeks ago the Wall Street Journal reported that Walmart was planning to compete on price with online sellers this year, Wal-Mart Weighs Matching Online Prices. With that announcement, Walmart was essentially signaling that price would be their primary competitive weapon during the holidays. But Walmart is always competing on price. When was the last time you heard someone say they like shopping at Walmart or they prefer the Walmart service experience? Walmart competes primarily on price because they have a very efficient supply chain and a very low cost to serve. It is generally a losing game trying to compete with Walmart based on price.
So what should you do if one of the heavyweights in your industry gets very aggressive with low prices? You can’t just ignore it. The prices your competitors publicize will be reference points for your customers and prospects. But if you decide to try to beat them at their own game by lowering prices even further, your odds of success are very low. Those headline low prices are easy to implement and will certainly attract the most price-sensitive customers, but those customers are also most likely to switch to someone else the next time they buy.
You would be much better off by emphasizing your differentiating characteristics and uniqueness. Communicate to your customers how you add value to them, whether that is personal service, a wide assortment, easy ordering and returns, or whatever it may be. Make sure your prices on the headline items are close enough to the cheap guys, but high enough to reflect your differentiators. Offer a range of products or services, so you have something to offer the price-sensitive customer without cannibalizing all your business, but also have premium products and services for the customers willing to pay for them. And lastly, deliver the experience you promised – one that delights customers and engenders loyalty.
We continue to learn the dangers of competing on price from Black Friday. While many customers are certainly price sensitive, most customers rank the quality of products and services as more important than price. Unless you have a sustainable cost advantage, your competitors will be able to match your prices, removing that differentiation and resulting in disappointing sales and margins. Resist the urge to simply lower prices, and compete instead on the rest of the customer experience.
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