July 23, 2007
The Value Behind Lowest Price Guarantees
By Tom Ryan
According to a survey sponsored by Pricerunners.com, 89 percent of respondents have heard of lowest price guarantees and 65 percent have made a purchase from a particular store or website at least partly because of this type of guarantee.
Of the 65 percent buying on low-price guarantees, 38.3 percent said they did it “once or twice”; 17.6 percent, “several times”; and 9.6 percent, “many times.”
After buying, nearly 60 percent said they have looked for a price on the same product somewhere else and 47 percent said they did actually find a lower price. Of those purchasing a product offering a “lowest price guarantee,” 38 percent said they have successfully received money back after showing a lower price.
Amplitude Research surveyed 1,000 people nationwide from April 6th to April 9th on behalf of PriceRunner.com.
“These results indicate just how proactive consumers can be when it comes to researching and comparing prices on products. They will shop around for the best deal,” said Martin Andersen, general manager of PriceRunner US, a price-comparison shopping site, in a statement.
The survey comes after an article in the New York Times earlier this year by Hal Varian, a business professor of business, economics and information at the University of California at Berkeley, concluded that price-matching guarantees don’t drive down prices as expected, but actually discourage price cutting.
In his example, East Side Tires cuts its tire prices to $45 from $50, prompting West Side Tires to enact a promise to match any lower price. With the guarantee, those who find West Side Tires more convenient bring in the East Side ad and get the discounted price but West Side Tires doesn’t cut prices across the board. For its part, East Side Tires attracts no new customers with its price cut and actually loses more money by cutting prices across the board.
“So, a vendor that offers a low-price guarantee takes away much of its competitors’ motivation for cutting prices,” wrote Professor Varian.
The professor also concluded that price-beating guarantees and guarantees that only apply to advertised items may lower overall prices, although the evidence proved inconclusive.
A check of retailers by Retailwire found a number of majors touting price-matching guarantees (i.e., Home Depot, Best Buy, Office Depot) as well as a more than a few promising 110 percent refund guarantees (i.e., Lowe’s, Circuit City, Zappos.)
Discussion Questions: What do you think of low-price guarantees as a traffic driver and a competitive pricing tool? Why do some retailers use price-matching guarantees, others use price-beating guarantees, and some don’t have any price guarantees? What do you think is the best method?
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The challenge here is between understanding correlation vs. causation. Even if the numbers held up, the only real way to understand what motivates some retailers to offer a lowest price guarantee is to ask them.
Having said that, I find the interesting number here is the 55 percent who have said they actually made their retailer comply with the policy “one too many” times. That is 55 percent of the 65 percent who said the reason they shopped at the retailer was because of the offer. That means about 33 percent of the shoppers overall have approached their retailer with an item that broke the guarantee. I am not sure what you can conclude from that, but it says a lot of people were willing to hold the retailer to their promise.
I imagine there is a wide range of factors at work here…ranging from price point of the products to the density of competing retailers. I think the simple answer is that retailers offer the guarantee so that they sound like they have lowest prices. Whether they actually have lowest prices really doesn’t matter as long as they are willing to deliver on the consumers who document the exceptions. By setting an impression the retailer removes one hurdle for the consumer.
Customers don’t like feeling that a retailer is taking advantage of them. Sales resistance plunges when the customer believes that a retailer’s prices are the lowest possible, across the board. That type of overall trust is one of the key reasons warehouse clubs like Costco, Sam’s Club, and BJ’s can sell large volumes of unusual items outside their customary assortments. Retailers who teach the opposite lesson, that the shopper has to be unusually canny to get the best possible deal, are treated like used car dealers. Successful retailers nurture long-term relationships.
Price matching and price beating programs are great for the consumer. When a customer sees that a particular store has such guarantees, it inspires confidence in the purchase as the customer is aware that they will not be overpaying for items they buy. This ‘pricing confidence’ can also lead to additional purchases and larger baskets as the customer may feel that they do not have to shop around for the best price. A discount supermarket located in Toronto has taken ‘price matching’ to the next level by displaying a large board with competitor pricing on such staples as bread, milk, eggs etc. I spoke to the store manager about the sign to see if it worked and she said that she has only had positive comments from her customers but it’s been a heck of a time maintaining it as her competition comes in and can see all the ‘staple prices’ on the board without having to shop the store. So the price differences are usually in the pennies but still, it goes a long way to creating ‘customer goodwill’. From the customer’s viewpoint, I believe that the ‘110% Price Guarantee’ really stands out and has the most effect. Again, it inspires ‘pricing confidence’ in the consumer and allows them to shop without worrying about overpaying–thus creating a positive shopping experience which leads to greater sales and higher customer retention rates.
Price is definitely a traffic driver for most. There has been significant success with “low price guarantee”–we can’t argue that issue. This type of plan gives the consumer a warm/safe secure feeling of getting a good price for the value. This feeling that assures a good price even if they don’t have time to compare will be influential in creating steady traffic without costly advertising.
On the other hand, matching the lowest price helps a retailer retain their customer base so they are not tempted to go elsewhere for a special sale.
So which one is more affective depends on several other variables. Low price guarantee will attract a larger overall spend because of the comfort level but there has to be substance to the offer and not just a marketing ploy.
The low price guarantee is a valid approach to attract consumers, especially for larger ticket items. However, the strategy will backfire with erroneous results if the consumer has a difficult time with enforcement. Often, category killer types of stores all carry slightly different stock and model numbers of similar items making it impossible for consumers to compare retail pricing. When this type of scenario occurs the consumer becomes frustrated with the store, and the strategy. For lasting results, the approach needs to be realistic, fair, and practical.
Low price guarantees are certainly important, as everyone has noted in their comments. However, just for grins, let me provide some devil’s advocate commentary.
Anyone who buys online might find low price guarantees irrelevant, as online offers are usually excluded. Also, the large electronics retailers having taken a tip from mattress manufacturer/retailer deals, and created exclusive model numbers on many leading brands/items. This leads to frustration on the part of a shopper who thinks they have a refund coming only to find out they are living in a loophole. if there were a subsequent wave of research by the sponsors of the original study, it might be interesting to see how many consumers have had a bad experience as a result of a low price guarantee.
Low price guarantees are very different from price matching guarantees. For many retailers, when they guarantee to match pricing, it means that consumers have to come to their store, bring in a competitive flyer and/or have someone verify the price at a competitive store, and then the retailer will match the price. But if I am a consumer and don’t know that the product was on sale at a competitive store, I don’t know to ask for the lower price. And then I pay a premium price for the product that I buy.
Price matching, on the other hand, is when retailers actually change their shelf price on a product, based on competitive pricing activity. This guarantee ensures that consumers are getting the best price in the market. But if retailers claim to be the lowest prices in town, and aren’t, they fail in the consumer’s eyes.
Price guarantees work well on larger ticket items–typically consumers shop around and understand prices on the type of product that they are looking for. And for those consumers that don’t know the prices, they are obviously not as concerned about price on these large ticket items. But it’s the “game” that retailers play, when they carry a similar model but not close enough to price match, that you get frustrated consumers.
On lower ticket items, the EDLP and price matching combination can be effective. Consumers may be willing to pay the EDLP price (on items that aren’t destination, but still price sensitive), because they consider it a “fair” price relative to market pricing. On the more price sensitive items, and ones that the retailer identifies as destination, they may choose to price match on an ongoing basis.
In my opinion, low-price guarantees work best when combined with an every day low price operation.
I believe all other things being equal, customers shop more frequently at every day low price operations and if these operations offer low price guarantees, customers are more likely to take advantage of said guarantee with them than at a tab-driven retailer.
Seems to me that there continue to be opportunities out there for retailers in a number of channels to win customers with an ‘everyday fair price’. While an apparent majority of consumers are willing to hunt like crazy for the best price on everything, there is a significant minority that are willing to pay a fair price for quality products backed by good customer service and minimal hassles. Costco, Amazon, Trader Joe’s, and Ace Hardware are examples of retailers that don’t always have the lowest price but where the consumer knows that they will get a decent price and the service/quality they require. And, the retailers don’t have to create elaborate marketing programs touting the “biggest sale ever” or matching and rematching competitive offers. They can just be good retailers.
Price matching is a great strategy for retailers who have enormous buying power and expense control. For everyone else, it’s a fast ticket to the graveyard outside of town where they bury failed retailers.
Retailers need to look beyond price for their value propositions.
Start by adding a service that solves a real problem your shoppers have. Help your shoppers with selection. Connect with shoppers with some post-sale experience. Bring some life to the brand. Make it easy on time-starved, gasoline deprived shoppers. Keep asking customer for their thoughts on how to be better and different.
Price promotion, especially price matching, is an easy fix to build traffic. But the traffic is typically bargain-hunting bottom feeders. Unless that’s your target segment, price matching is the last tactic to use in traffic-building playbook.
We have the low price box stores who may have a better point of difference marketing to the consumer and don’t even know it. And then, there are the retailers who build brand equity and loyalty with consumer service and communication.
I know who has the mid to upscale consumers and their top-of-mind awareness and loyalty, and wallets. And it isn’t price positioned retailers! Hmmmmmm
A MAD MARKETING point that isn’t considered. Too bad….
Price matching guarantees are almost a necessity today, in the world of smart consumers. While I agree that this is difficult for the smaller folks, it is crucial for the larger retailer.
In a way, it is sort of ironic that this subject comes up now. Last week, my wife and I purchased a $699 digital camera from Best Buy here in Central MA. One day later, I walked into Circuit City 2 miles away and found the same camera for $80 cheaper. Not only did BB match the price, but they gave me 10% on top.
Smart consumers know they have more then one option in the world of retailers. Now, smart retailers will take this reality to heart when they interact with the consumers. BB won a new fan that day (and a plug in this RetailWire blog), and I must admit I am now more likely to shop there first.
Fine responses, but to the question, which technique is best? The one that works for you. There is no one single answer and there are numerous schemes to get the job done depending on your audience and your competition. Like in football, find the best way for you to get through the line and score.
Today many consumers can quickly go online to determine who might be selling a product for a lower price. Shopping at a store that is convenient and offers a low price guarantee makes sense. However, the implementation is the issue.
What work does the consumer have to do get the low price guarantee? Showing up with a copy of the ad is one thing. Paying the higher price and filling out paperwork and sending it in to receive a rebate at a later date is something else. Having to track all ads and prices for 30 days after your purchase and then doing the paperwork is something else.
Then the results of the survey indicate that 11% of the consumers didn’t get their money back.
Some consumers are ready to do that kind of work and take that risk for a lower price but not all are. Are yours?
Not to sound a discordant note–but low price guarantees don’t really do a lot for anyone. Customers don’t want to get gouged, and while customers can and do check for the lowest price on commodity items that are readily available in their shopping zone, the guaranty serves as insurance against the “[fool]” factor. That is, I don’t want to pay for something and find out I was a “[fool]” and over paid.
But, retailers typically don’t attract more traffic with the guaranty (maybe…maybe they don’t lose some traffic). Retailers are caught in a discount loop and are finding it difficult to add value. The low price guaranty is part of that loop. The result is to drive down margins, decreasing the ability to provide service (unless you can drive costs down faster), and the loop cycles again. I think those retailers who provide alternative “[fool]” insurance–service, proactive ways to deal with problems, etc., do better in the long run.
Al McClain states: “Seems to me that there continue to be opportunities out there for retailers in a number of channels to win customers with an ‘everyday fair price’. I agree. Several problems arise when you start offering, or guaranteeing the lowest price, or matching the lowest price advertised. First, the product must be identical. To many consumers, without proper product knowledge, the difference between product X and product Y is nothing but a price tag.
The Dollar Tree is not trying to sell the same quality merchandise as Macy’s, nor does it say it is. However, tell the public that you offer guaranteed lowest prices, and you have people coming in with “but I saw the exact same thing over at XYZ store for 1/4 the price.” Furthermore, what does it say about the service that is offered that sets you apart? Are you sending the message to your customer that the only thing that matters to you is that they don’t pay any more than they absolutely have to? That if that means that you must cut out exceptional services that others don’t offer in order to do so that you will? What about the expertise in your product knowledge or craftsmanship (where applicable), the added services that you as a small company may be able to provide, (or as a big one may be able to afford)? Do we write these off in the name of lowest price? I would hope not.
In the end, I think that customers will realize that low price is nice, but lowest price isn’t always nicest. It often comes with its own “price.”
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The challenge here is between understanding correlation vs. causation. Even if the numbers held up, the only real way to understand what motivates some retailers to offer a lowest price guarantee is to ask them.
Having said that, I find the interesting number here is the 55 percent who have said they actually made their retailer comply with the policy “one too many” times. That is 55 percent of the 65 percent who said the reason they shopped at the retailer was because of the offer. That means about 33 percent of the shoppers overall have approached their retailer with an item that broke the guarantee. I am not sure what you can conclude from that, but it says a lot of people were willing to hold the retailer to their promise.
I imagine there is a wide range of factors at work here…ranging from price point of the products to the density of competing retailers. I think the simple answer is that retailers offer the guarantee so that they sound like they have lowest prices. Whether they actually have lowest prices really doesn’t matter as long as they are willing to deliver on the consumers who document the exceptions. By setting an impression the retailer removes one hurdle for the consumer.
Customers don’t like feeling that a retailer is taking advantage of them. Sales resistance plunges when the customer believes that a retailer’s prices are the lowest possible, across the board. That type of overall trust is one of the key reasons warehouse clubs like Costco, Sam’s Club, and BJ’s can sell large volumes of unusual items outside their customary assortments. Retailers who teach the opposite lesson, that the shopper has to be unusually canny to get the best possible deal, are treated like used car dealers. Successful retailers nurture long-term relationships.
Price matching and price beating programs are great for the consumer. When a customer sees that a particular store has such guarantees, it inspires confidence in the purchase as the customer is aware that they will not be overpaying for items they buy. This ‘pricing confidence’ can also lead to additional purchases and larger baskets as the customer may feel that they do not have to shop around for the best price. A discount supermarket located in Toronto has taken ‘price matching’ to the next level by displaying a large board with competitor pricing on such staples as bread, milk, eggs etc. I spoke to the store manager about the sign to see if it worked and she said that she has only had positive comments from her customers but it’s been a heck of a time maintaining it as her competition comes in and can see all the ‘staple prices’ on the board without having to shop the store. So the price differences are usually in the pennies but still, it goes a long way to creating ‘customer goodwill’. From the customer’s viewpoint, I believe that the ‘110% Price Guarantee’ really stands out and has the most effect. Again, it inspires ‘pricing confidence’ in the consumer and allows them to shop without worrying about overpaying–thus creating a positive shopping experience which leads to greater sales and higher customer retention rates.
Price is definitely a traffic driver for most. There has been significant success with “low price guarantee”–we can’t argue that issue. This type of plan gives the consumer a warm/safe secure feeling of getting a good price for the value. This feeling that assures a good price even if they don’t have time to compare will be influential in creating steady traffic without costly advertising.
On the other hand, matching the lowest price helps a retailer retain their customer base so they are not tempted to go elsewhere for a special sale.
So which one is more affective depends on several other variables. Low price guarantee will attract a larger overall spend because of the comfort level but there has to be substance to the offer and not just a marketing ploy.
The low price guarantee is a valid approach to attract consumers, especially for larger ticket items. However, the strategy will backfire with erroneous results if the consumer has a difficult time with enforcement. Often, category killer types of stores all carry slightly different stock and model numbers of similar items making it impossible for consumers to compare retail pricing. When this type of scenario occurs the consumer becomes frustrated with the store, and the strategy. For lasting results, the approach needs to be realistic, fair, and practical.
Low price guarantees are certainly important, as everyone has noted in their comments. However, just for grins, let me provide some devil’s advocate commentary.
Anyone who buys online might find low price guarantees irrelevant, as online offers are usually excluded. Also, the large electronics retailers having taken a tip from mattress manufacturer/retailer deals, and created exclusive model numbers on many leading brands/items. This leads to frustration on the part of a shopper who thinks they have a refund coming only to find out they are living in a loophole. if there were a subsequent wave of research by the sponsors of the original study, it might be interesting to see how many consumers have had a bad experience as a result of a low price guarantee.
Low price guarantees are very different from price matching guarantees. For many retailers, when they guarantee to match pricing, it means that consumers have to come to their store, bring in a competitive flyer and/or have someone verify the price at a competitive store, and then the retailer will match the price. But if I am a consumer and don’t know that the product was on sale at a competitive store, I don’t know to ask for the lower price. And then I pay a premium price for the product that I buy.
Price matching, on the other hand, is when retailers actually change their shelf price on a product, based on competitive pricing activity. This guarantee ensures that consumers are getting the best price in the market. But if retailers claim to be the lowest prices in town, and aren’t, they fail in the consumer’s eyes.
Price guarantees work well on larger ticket items–typically consumers shop around and understand prices on the type of product that they are looking for. And for those consumers that don’t know the prices, they are obviously not as concerned about price on these large ticket items. But it’s the “game” that retailers play, when they carry a similar model but not close enough to price match, that you get frustrated consumers.
On lower ticket items, the EDLP and price matching combination can be effective. Consumers may be willing to pay the EDLP price (on items that aren’t destination, but still price sensitive), because they consider it a “fair” price relative to market pricing. On the more price sensitive items, and ones that the retailer identifies as destination, they may choose to price match on an ongoing basis.
In my opinion, low-price guarantees work best when combined with an every day low price operation.
I believe all other things being equal, customers shop more frequently at every day low price operations and if these operations offer low price guarantees, customers are more likely to take advantage of said guarantee with them than at a tab-driven retailer.
Seems to me that there continue to be opportunities out there for retailers in a number of channels to win customers with an ‘everyday fair price’. While an apparent majority of consumers are willing to hunt like crazy for the best price on everything, there is a significant minority that are willing to pay a fair price for quality products backed by good customer service and minimal hassles. Costco, Amazon, Trader Joe’s, and Ace Hardware are examples of retailers that don’t always have the lowest price but where the consumer knows that they will get a decent price and the service/quality they require. And, the retailers don’t have to create elaborate marketing programs touting the “biggest sale ever” or matching and rematching competitive offers. They can just be good retailers.
Price matching is a great strategy for retailers who have enormous buying power and expense control. For everyone else, it’s a fast ticket to the graveyard outside of town where they bury failed retailers.
Retailers need to look beyond price for their value propositions.
Start by adding a service that solves a real problem your shoppers have. Help your shoppers with selection. Connect with shoppers with some post-sale experience. Bring some life to the brand. Make it easy on time-starved, gasoline deprived shoppers. Keep asking customer for their thoughts on how to be better and different.
Price promotion, especially price matching, is an easy fix to build traffic. But the traffic is typically bargain-hunting bottom feeders. Unless that’s your target segment, price matching is the last tactic to use in traffic-building playbook.
We have the low price box stores who may have a better point of difference marketing to the consumer and don’t even know it. And then, there are the retailers who build brand equity and loyalty with consumer service and communication.
I know who has the mid to upscale consumers and their top-of-mind awareness and loyalty, and wallets. And it isn’t price positioned retailers! Hmmmmmm
A MAD MARKETING point that isn’t considered. Too bad….
Price matching guarantees are almost a necessity today, in the world of smart consumers. While I agree that this is difficult for the smaller folks, it is crucial for the larger retailer.
In a way, it is sort of ironic that this subject comes up now. Last week, my wife and I purchased a $699 digital camera from Best Buy here in Central MA. One day later, I walked into Circuit City 2 miles away and found the same camera for $80 cheaper. Not only did BB match the price, but they gave me 10% on top.
Smart consumers know they have more then one option in the world of retailers. Now, smart retailers will take this reality to heart when they interact with the consumers. BB won a new fan that day (and a plug in this RetailWire blog), and I must admit I am now more likely to shop there first.
Fine responses, but to the question, which technique is best? The one that works for you. There is no one single answer and there are numerous schemes to get the job done depending on your audience and your competition. Like in football, find the best way for you to get through the line and score.
Today many consumers can quickly go online to determine who might be selling a product for a lower price. Shopping at a store that is convenient and offers a low price guarantee makes sense. However, the implementation is the issue.
What work does the consumer have to do get the low price guarantee? Showing up with a copy of the ad is one thing. Paying the higher price and filling out paperwork and sending it in to receive a rebate at a later date is something else. Having to track all ads and prices for 30 days after your purchase and then doing the paperwork is something else.
Then the results of the survey indicate that 11% of the consumers didn’t get their money back.
Some consumers are ready to do that kind of work and take that risk for a lower price but not all are. Are yours?
Not to sound a discordant note–but low price guarantees don’t really do a lot for anyone. Customers don’t want to get gouged, and while customers can and do check for the lowest price on commodity items that are readily available in their shopping zone, the guaranty serves as insurance against the “[fool]” factor. That is, I don’t want to pay for something and find out I was a “[fool]” and over paid.
But, retailers typically don’t attract more traffic with the guaranty (maybe…maybe they don’t lose some traffic). Retailers are caught in a discount loop and are finding it difficult to add value. The low price guaranty is part of that loop. The result is to drive down margins, decreasing the ability to provide service (unless you can drive costs down faster), and the loop cycles again. I think those retailers who provide alternative “[fool]” insurance–service, proactive ways to deal with problems, etc., do better in the long run.
Al McClain states: “Seems to me that there continue to be opportunities out there for retailers in a number of channels to win customers with an ‘everyday fair price’. I agree. Several problems arise when you start offering, or guaranteeing the lowest price, or matching the lowest price advertised. First, the product must be identical. To many consumers, without proper product knowledge, the difference between product X and product Y is nothing but a price tag.
The Dollar Tree is not trying to sell the same quality merchandise as Macy’s, nor does it say it is. However, tell the public that you offer guaranteed lowest prices, and you have people coming in with “but I saw the exact same thing over at XYZ store for 1/4 the price.” Furthermore, what does it say about the service that is offered that sets you apart? Are you sending the message to your customer that the only thing that matters to you is that they don’t pay any more than they absolutely have to? That if that means that you must cut out exceptional services that others don’t offer in order to do so that you will? What about the expertise in your product knowledge or craftsmanship (where applicable), the added services that you as a small company may be able to provide, (or as a big one may be able to afford)? Do we write these off in the name of lowest price? I would hope not.
In the end, I think that customers will realize that low price is nice, but lowest price isn’t always nicest. It often comes with its own “price.”