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10 Pricing Understanding and Capturing Customer Value

Chapter Preview

In this chapter, we look at the second major marketing mix tool—pricing. If effective product development, promotion, and distribution sow the seeds of business success, effective pricing is the harvest. Firms successful at creating customer value with the other marketing mix activities must still capture some of this value in the prices they earn. In this chapter, we discuss the importance of pricing, dig into three major pricing strategies, and look at internal and external considerations that affect pricing decisions. In the next chapter, we examine some additional pricing considerations and approaches.

For openers, let’s examine the importance of pricing in online retailing. In case you haven’t noticed, there’s a war going on—between Walmart, by far the world’s largest retailer, and Amazon, the planet’s largest online merchant. Each combatant brings an arsenal of potent weapons to the battle. For now, the focus is on price. But in the long run, it’ll take much more than low prices to win this war. The spoils will go to the company that delivers the best overall online customer experience and value for the price.

AMAZON VERSUS WALMART: A Price War for Online Supremacy

"Walmart to Amazon: Let’s Rumble" read the headline. Ali had Frazier. Coke has Pepsi. The Yankees have the Red Sox. And now, the two retail heavyweights are waging a war all their own. The objective? Online supremacy. The weapon of choice? Prices, at least for now—not surprising, given the two combatants’ long-held low-cost positions.

Each side is formidable in its own right. Walmart dominates offline retailing. Its price-driven “Save money. Live better.” positioning has made it far and away the world’s largest retailer, and the world’s largest company to boot. In turn, Amazon is the “Walmart of the Web”—our online general store. Although Walmart’s yearly sales total an incredible $482 billion, more than 4.5 times Amazon’s $107 billion annually, Amazon’s online sales are nearly 8 times greater than Walmart’s online sales. By one estimate, Amazon captured nearly 40 percent of all online sales during the most recent year-end holiday season, more than the combined online sales of the next 21 retail competitors.

Why does Walmart worry about Amazon? After all, online sales currently account for only about 7 percent of total U.S. retail sales. Walmart captures most of its business through its 11,000 brick-and-mortar stores—online buying accounts for only a trifling 2.8 percent of its total sales. But this battle isn’t about now, it’s about the future. Online sales are growing at three times the rate of physical-world sales. Within the next decade, online and mobile buying will capture as much as a third of all retail buying. Because Amazon owns online, its revenues have soared 20 percent or more annually over the past four years. Meanwhile, Walmart’s total sales growth has pretty much flatlined during that period. Amazon’s revenues reached the $100 billion mark faster than any other company in history.

Amazon has shown a relentless ambition to offer more of almost everything online. It started by selling only books but now sells everything from books, movies, and music to consumer electronics, home and garden products, clothing, jewelry, toys, tools, and even groceries. Thus, Amazon’s online prowess now looms as a significant threat to Walmart. If Amazon’s expansion continues and online sales spurt as predicted, the digital merchant will eat further and further into Walmart’s bread-and-butter store sales.

But Walmart isn’t about to let that happen without a fight. Instead, it’s taking the battle to Amazon’s home territory—the internet and mobile buying. It started with the tactics it knows best—low costs and prices. Through aggressive pricing, Walmart is now fighting for every dollar consumers spend online. If you compare prices at Walmart.com and Amazon.com, you’ll find a price war raging across a broad range of products.

In a price war, Walmart would seem to have the edge. Low costs and prices are in the company’s DNA. Through the years, Walmart has used its efficient operations and immense buying power to slash prices and thrash one competitor after another. But Amazon is not like most other competitors. Its network is optimized for online shopping, and the internet seller isn’t saddled with the costs of running physical stores. As a result, Amazon has been able to match or even beat Walmart at its own pricing game online.

The two giants now seem pretty much stalemated on low prices, giving neither much of an advantage there. In fact, in the long run, reckless price cutting will likely do more damage than good to both Walmart and Amazon. So, although low prices will be crucial, they won’t be enough to win over online buyers. Today’s online shoppers want it all, low prices and selection, speed, convenience, and a satisfying overall shopping experience.

For now, Amazon seems to have the upper hand on most of the important nonprice buying factors. Its made-for-online distribution network speeds orders to buyers’ homes quickly and efficiently—including same-day and Sunday delivery in some markets. Amazon’s online assortment outstrips even Walmart’s, and the online and mobile shopping wizard is now moving into groceries, an area that currently accounts for 56 percent of Walmart’s sales. As for Amazon’s lack of physical stores—no problem. Amazon’s heavily used mobile app lets customers shop Amazon.com even as they are browsing Walmart’s stores. Finally, Amazon’s unmatched, big data–driven customer interface creates personalized, highly satisfying online buying experiences. Amazon regularly rates among the leaders in customer satisfaction across all industries. According to one analyst, “consumers have said the Amazon shopping experience is just plain better than Walmart’s. In fact, Amazon arguably offers the best shopping experience, period.”

By contrast, Walmart came late to online selling. Although it’s now pouring billions of dollars into e-commerce technology, it’s still trying to figure out how to efficiently deliver goods into the hands of online shoppers. As its online sales have grown, the store-based giant has patched together a makeshift online distribution network out of unused corners of its store distribution centers. And the still-mostly-store retailer has yet to come close to matching Amazon’s online customer buying experience. So even with its impressive low-price legacy, Walmart finds itself playing catch-up online.

To catch up, Walmart is investing heavily to create a next-generation fulfillment network. Importantly, it’s taking advantage of a major asset that Amazon can’t match—an opportunity to integrate online buying with its massive network of brick-and-mortar stores. For example, Walmart now fulfills more than a fifth of Walmart.com orders more quickly and cheaply by having workers in stores pluck and pack items and mail or deliver them to customers’ homes. Two-thirds of the U.S. population lives within five miles of a Walmart store, offering the potential for 30-minute delivery.

Image shows shopping bags with the text "Walmart - Save money. Live better." Image shows screenshot of Amazon.com's homepage. — Walmart versus Amazon online: Achieving online supremacy will take more than just waging and winning an online price war. The spoils will go to the company that delivers the best overall online customer experience and value for the price.

(top) © NetPics/Alamy; (bottom) Bloomberg via Getty Images

And by combining its online and offline operations, Walmart can provide some unique services, such as free and convenient pickup and returns of online orders in stores (Walmart.com gives you three buying options: “online,” “in-store,” and “site-to-store”). Using Walmart’s website and mobile app can also smooth in-store shopping. They let customers prepare shopping lists in advance, locate products by aisle to reduce wasted shopping time, and use their smartphones at checkout with preloaded digital coupons applied automatically. Customers who pick up online orders in the store can pay with cash, opening up online shopping to the 20 percent of Walmart customers who don’t have bank accounts or credit cards. For customers who do pay online, Walmart is testing in-store lockers where customers can simply go to an assigned locker for pickup.

Who will win the battle for the hearts and dollars of online buyers? Certainly, low prices will continue to be important. But achieving online supremacy will involve much more than just waging and winning an online price war. It will require delivering low prices plus selection, convenience, and a world-class online buying experience—something that Amazon perfected long ago. For Walmart, catching and conquering Amazon online will require time, resources, and skills far beyond its trademark everyday low prices. As Walmart’s president of global e-commerce puts it, the important task of winning online “will take the rest of our careers and as much as we’ve got [to invest]. This isn’t a project. It’s about the future of the company.”1

Objectives Outline

COMPANIES TODAY FACE A fierce and fast-changing pricing environment. Value-seeking customers have put increased pricing pressure on many companies. Thanks to tight economic times in recent years, the pricing power of the internet, and value-driven retailers such as Walmart and Amazon, today’s consumers are pursuing more frugal spending strategies. In response, it seems that almost every company has been looking for ways to cut prices.

A price tag has the word “Price” crossed off and a word “Value” written on it. — Pricing: No matter what the state of the economy, companies should sell value, not price.

magicoven/Shutterstock.com

Yet cutting prices is often not the best answer. Reducing prices unnecessarily can lead to lost profits and damaging price wars. It can cheapen a brand by signaling to customers that price is more important than the customer value a brand delivers. Instead, in both good economic times and bad, companies should sell value, not price. In some cases, that means selling lesser products at rock-bottom prices. But in most cases, it means persuading customers that paying a higher price for the company’s brand is justified by the greater value they gain.

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Table of Contents for
10 Pricing Understanding and Capturing Customer Value