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Chances are pretty good that at the precise moment you last shopped in a physical store for your latest washing machine or set of steak knives, the same item was being offered for a different price on the mobile app of that same retailer.
For years, customers have been pulling out their phones in stores to see how prices compare with a retailer’s competitors. But the phenomenon of looking up how prices of the store itself compare in different channels is relatively new. It has become the subject of increased interest since The Wall Street Journal reported last year that Walmart has begun charging higher prices for products online than in stores, with the goal of getting more in-store traffic.
We find that for many retailers, prices increasingly vary between online and physical stores. Retailers tend to offer lower prices in the digital space, although there are exceptions, as the Walmart example shows.
Understanding what customers value in each channel and how that affects what they are willing to pay is the key challenge for pricing teams today. Getting it right has a real payoff: In our experience, retailers that effectively price differently across all channels see bottom line growth of 2% to 5%.
How Customers Perceive Value — and How That Affects Price Sensitivity
Of course, there’s no one facet of shopping that all customers value most in all situations. Customers weigh the convenience of immediate availability, the pleasure (or pain) of shopping in a store versus online, and a product’s price. They often value different things in different shopping circumstances. Sophisticated pricing strategies need to take these customer-centric considerations into account.
The nuanced question we wanted to consider is this: Under what circumstances are customers sensitive to online/offline price differences? When are they open to price differences, and when are they put off by them?
To understand customer sensitivities to price differences, we surveyed 2,400 customers in the United States (equally divided by gender and across key demographic cohorts) across three product categories: toothbrushes ($3), mid-priced sweaters ($30), and flat-screen TVs ($300). We showed people price differences of 5% and 20% for the same item online and offline — sometimes cheaper online, and sometimes cheaper in-store. We asked them whether these price differences were acceptable, and why or why not.
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Across the board, people were fine with prices being higher in-store for the same item when they saw value in immediacy, physical proximity, and exclusive availability, although tolerance for the differential varied by how expensive the product was. Respondents expressed an understanding of the higher costs retailers pay to stock items in physical stores.
Some of the details of our findings:
- The majority of people (59%) were comfortable with nonuniformity for a low-ticket item. Over two-thirds (68%) were comfortable with in-store being 5% more expensive for a $3 toothbrush, and 51% were still comfortable when in-store was 20% more expensive.
- For higher-priced items, people were more tolerant of price differences when the item was cheaper online. For a $30 sweater or a $300 TV, 37% and 38%, respectively, were tolerant of a price difference when the item was 20% cheaper online. Few — only 18% and 17%, respectively — were willing to accept that same item being 20% cheaper in-store.
- Broadly speaking, younger people were more accepting of price differences. Some 40% of those younger than 31 were comfortable with the differences, while just 20% of those older than 45 were.
- Women were more open to price differences in a mid-priced ($30) item. About 30% of women were comfortable with differences in mid-priced items while only 20% were comfortable with price differentials for low-end ($3) and high-end ($300) items. Men in our survey tended to be more accepting of differences across the board.
- Amazon Prime members were more tolerant than other consumers of online prices being higher than in-store prices. We think this could be because these customers see the holistic value proposition differently — they more consistently value online shopping’s traits of ease of purchase, ease of returns, speed, and not having to travel to a store.
Strategies to Win the Omnichannel Pricing Game
Based on our initial research, we advise retailers to approach omnichannel pricing in three ways:
Pricing teams should focus on implementing price differential strategies. Deciding what prices to use for which channels starts with developing business rules that combine “hard facts” about price elasticity and competitive pricing, such as the impact of price change on demand by segment, with “soft facts” such as consumers’ willingness to accept price differences by channel. Approaches to elasticity include time-series methods and big data analytics to calculate how a product’s price affects demand, accounting for a wide variety of factors including seasonality, cannibalization, and competitive moves.
Pricing teams need to put in place omnichannel pricing programs, actively monitor them, and continuously optimize prices based on what works and what doesn’t. Through agile pricing practices, teams can sequence test-and-learn programs that help define pricing boundaries. We’ve found it’s best for these teams to start with a small part of the assortment, pilot the new approach, and then scale what works.
Store employees must be given the right language for talking about price differences. This new horizon of pricing requires a more active pricing communication strategy and an effective method to train store employees. Too often, when asked why a price was different in the store versus what was appearing in the related mobile app, store employees avoided a straight explanation. They’d say, “It’s probably just a mistake in the system — they should be the same price,” or “They don’t tell us why. I’m just a cashier; maybe the manager knows,” or “Online and in-store are different businesses, so they price differently based on what they need to liquidate.”
While we haven’t yet observed any retailers doing this, we believe that retailers need to train in-store staff in addressing customer questions related to price variance and the value reflected in the price. Customers are often understanding about the higher costs for stocking an item in a physical store and the value of having immediate access to a product. When a customer has a question about a product and asks what the price is, regardless of whether the question is made in person, on the phone, or via chat, front-line workers need to be both aware of the price differences and equipped to explain its reason. The training should evolve based on what customers are asking and how effective in-store staff is in providing quality, on-brand answers.
Operational challenges in managing price differences by channel need to be worked out. If companies want to be to truly customer-centric, they should offer the option for a customer to return a product purchased online to a physical store. In our experiences, customers value choice. Office Depot, for example, is able to refund a customer for the product they’ve returned at the price they paid for it no matter which channel was used to purchase it. Providing this service requires that online customer data be made accessible to staff in the store.
Leadership Needs to Embrace a “License to Price Differently”
For retailers, getting a sale at a lower price, whether online or offline, can be of value. There are opportunities for upselling and cross-selling, for developing ongoing customer loyalty, and for monetizing the data that customers share. (As a side note, customers we surveyed were not keen on the explicit trade-off of cheaper prices online in return for their data being monetized — that’s not a good talking point for explaining price differences.)
Some executives are still uncomfortable with the boldness required to show different sticker prices for the same item in different channels. Yet our field study revealed such price differences to be an increasingly common practice these days, with well-known, high-frequency U.S. retailers posting different prices on the shelf and in their mobile apps for the same item at the same time.
Putting omnichannel pricing into practice is not easy. It can start only with a mindset shift at the leadership level to embrace a “license to price differently” across channels. Only with committed leadership can omnichannel pricing be a true source of improved performance and growth.
An adapted version of this article appears in the Fall 2018 print edition.