Pricing to Beat the Low Cost Competitor Doesn’t Work

Purchasing On-Line for Better PricingPricing to Beat the Low Price Competitor Doesn’t Work

You need to offer value that they don’t have

There is a great article on the HBR Blog Network titled “Best Buy Can’t Match Amazon’s Prices, and Shouldn’t Try.”  The blog describes Best Buy’s attempts to stay in business by offering to match Amazon’s pricing on everything.  With Best Buy’s higher brick and mortar overhead, this strategy can’t last long.  They can only survive by adding value that Amazon doesn’t.  This could include in-store service, exclusive offers, payments by manufacturers for Best Buy to act as a “display store,” etc.

We’ve seen this phenomenon elsewhere.  The recent demise of Borders bookstores had a similar theme.  Customers would shop for books in the Borders store, and then purchase their items on-line at Amazon.

The HBR blog highlights several of Pricing Gurus “Pillars of Profitability:”

  • Include features that drive profits
  • Base your pricing on the value/benefits of those features
  • Communicate the value that you are delivering to your customers

Bloomberg Business Week’s list of Worst CEOs of 2012 shows Brian Dunn (ex-CEO of Best Buy) at the top of the list.  Dunn has been on several worst CEO lists for a couple of years, for the reasons identified above.  In an NPR interview responding to the question “Has Best Buy done anything right over the past year?”, Sydney Finkelstein, a management professor at Dartmouth College’s Tuck School of Business said, “Well, they did fire him!”

It will be interesting to watch the progress of Best Buy in the coming months.  Will they be able to come up with a scheme to demonstrate and charge for their value?  Or will they go the way of Borders? Best Buy founder Richard Schulze obviously thinks there is something worth salvaging as he is continuing with his plans for a leveraged buyout.  Schulze’s plan involves lowering prices while at the same time delivering an in-store customer-service experience comparable with Apple Stores.  We’ll see.

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