Amazon announced recently they will no longer offer price match refunds on televisions. That follows Amazon’s decision last year to eliminate price matching on other items. They are not the first and they won’t be the last to start or stop matching prices. It raises a question we hear often – should your pricing strategy include the promise to meet or beat competitor prices? From our perspective, the answer is generally no, but it depends on the circumstances.
The usual argument in favor of price matching is that most customers do not go through the effort after a purchase to validate they got the best price, especially on small-ticket items. In addition, the fact that the low-price guarantee is out there gives customers confidence that you are the low-price provider. That may be true in many cases, but by making and publicizing a promise to match the lowest price, you are training customers to look for instances where you were not the lowest. And each time a customer is rewarded for searching for lower prices after they have bought, the incentive to do it again increases.
When your pricing strategy is to offer the lowest price on each item, you are ignoring all the other reasons for customers to do business with you.
- How easy is it to do business with you versus competitors?
- Who provides better service and assistance with the sale?
- Who provides better post-purchase service?
- What is the value of the total basket of the customers’s purchases compared to their alternatives?
All of those factors come into play in a normal purchase decision, but are devalued with a published price-match guarantee. Consider the case of a customer buying something like a washer and dryer. They often buy other things at the same time, while they are in your store. In fact it is much more convenient (and therefore valuable) for your customer to buy those other items while they are there. If your combination of helping the customer choose the washer and dryer, selecting the appropriate ancillary items, arranging installation and pricing were compelling enough for the customer to buy, you’ve done your job. Why would it make sense to refund money on unrelated items that may have been more expensive elsewhere, when the convenience value to the customer was high?
Another argument against price matching relates to administrative costs and hassle factors. Customers already have the options of buying an item, and if they find that item cheaper elsewhere, returning the original and buying the cheaper option. Of course, there is effort involved for the customer to do that. Whether purchased in-store or online, they have to go through the effort of returning the original item, and that takes time. They also have to use their credit card again, wait for the refund on the original purchase to be processed, etc. Unless the dollars are large, customers often find it is not worth that effort. However, when all they have to do is copy a flier or take a picture of the cheaper alternative, it seems a bit easier. That reduction of the hassle factor will make customers more likely to seek the partial refunds.
From the seller’s perspective, there is also more administration. Each claim must be processed by a customer service person, routed through accounting to be paid, reconciled in the monthly transactions, etc. Most likely the accounting team also must prepare estimates of expected claims that have not yet been submitted for past sales transactions. These efforts can add up to much more money than expected.
Despite all I have just written, there are times when matching a price will make sense. If it is a big-ticket item which will be accompanied by several other items, it may be wise to win on the big item and make more profits on the others. That should be a decision of managing exceptions, rather than a published policy.
To me the most important point is customers buy products and services for many reasons, only one of which is price. First and foremost, it has to be the right product for the customer. Then all the other factors mentioned above, like service and convenience become important. Price is seldom the #1 factor in customer decisions, but when you offer price matching, you move it up closer to the top of the list and devalue your other competitive differentiators. It is tough to make good margins when price is your primary competitive weapon. And it cheats your shareholders out of the appropriate returns on their investments.
Price matching may seem like a convenient way for consumers to get the best deals. When price is your key competitive advantage, it is difficult to achieve healthy profits. Your article is very informative for this competitive time.