Best Buy Cannot Beat Amazon at Commodities Trading – Why Best Buy’s Anti Showroom Strategy is Sub-Optimal
Recently Best Buy announced it would be implementing a new Price-Matching Policy on March 3, 2013 in an effort to mitigate the ‘Showrooming Threat’ from Amazon and its other large e-commerce competitors.
Best Buy has published its ‘Low Price Guarantee’ on their website here and hopes to use it to re-gain market share of the consumer electronics market in 2013.
Our team has researched millions of prices and studies competitive scenarios to maximize profits for our clients and we believe the Best Buy strategy to simply price-match Amazon and others across the board is sub-optimal and will lead to a continued loss of market share at even lower profits. At Teikametrics, our first steps in a new client’s implementation work-flow are to understand the trends in the market that the client is entering in order to execute a strategy that can maximize profits dynamically based on supply and market conditions.
Best Buy’s efforts to publicize their new anti-showrooming strategy makes it virtually impossible to optimize their prices selectively or strategically to leverage their competitive advantages over e-commerce retailers. In short, we believe what they have announced makes it even harder to build a strategy that can be effective against Amazon. Best Buy will not beat Amazon at commodities trading.
When building a pricing strategy where the objective is to maximize revenue and market share (in the Best Buy case there is a great deal of pressure on these metrics from Wall Street), repricing without taking into consideration the short-term and medium-term market dynamics of different products within a catalog is sub-optimal. It fails to identify the opportunities that are the competitive advantage in Best Buy’s case. As a brick-and-mortar retailer they should not fight with Amazon using an anti-showrooming strategy but focus on opportunities to offer more exclusive products and products with additional services. Perhaps the Apple ‘Genius Bar’ concept is a good model to aim for? If Best Buy can rebrand and execute a value added post-sales service effectively, it will be able to charge higher prices for true value added services for the same products as those offered on Amazon. We work with our large FBA clients in a similar way to help them price up their very competitive products against non-FBA competitors based on the premium clients are willing to pay for expedited service.
A key flaw in Best Buy’s highly publicized price-matching strategy is that it is binary – ‘Best Buy will match any competitor’s price’. In contrast, using software and analytics, Teikametrics clients are able to make decisions on which product sub-sets should be repriced with logic designed to time their trades to maximize profitability and revenue.
For example, Best Buy’s blanket price-matching policy reduces the opportunity for Best Buy to identify upward trends in groups of products. A recent article in The Times of London featured Teikametrics and showed increases in prices of various high demand products going into the holiday Q4 shopping rush. Best Buy’s competitive advantage is its brand and relationships with its suppliers who welcome the opportunity to present their products in a physical location. In addition to repositioning its service offerings, if Best Buy used a strategy that could identify supply inefficiencies during peak demand, or work with its suppliers and brands to create exclusive windows of supply, the most basic theories of economic supply and demand indicate it should be able increase its prices for certain sets of products.
A key reason for choosing to blanket price-match is that it is not possible for Best Buy to accurately predict such opportunities. In addition, in a dire effort to pull customers away from Amazon, it believes it will be more effective to simply state it will match Amazon’s prices. Perhaps a hybrid solution would be for Best Buy to implement an in store solution with real-time pricing from Amazon for a small set of its products? – this would allow Best Buy to market itself as different type of in store consumer experience but for highly commoditized products be completely competitive with Amazon.
The result could be selective price-matching on products and in cases where Best Buy’s research shows customers would pay a premium for in store purchases, a higher premium accordingly. e.g. An Apple Genius Bar type ‘club membership’ for digital camera customers or a computer training ‘club’ with the opportunity to up-sell software solutions – all things Amazon as a software company cannot compete with.
At Teikametrics, we implement logic that reprices certain products higher based on fulfillment type and expected trends in a very similar way. Of course, the Amazon third-party marketplace is more fluid and efficient but we’re confident Best Buy could implement similar logic if they conducted the necessary research and predictive analytics studies.
As a team focused on pricing dynamics and retail optimization, we’re keen to see how the Best Buy strategy plays out. Our theoretical critique of their strategy leaves out many marketing and intangible nuances that we acknowledge that we may not see from our perspective – what is certain however, is that they will have to do a lot more than state they will match Amazon across the board to make an impact on their increasing market share.