retail

Q&A: Why Brick-and-Mortar Stores Should Pay Less

by Sarah Mahoney , January 28, 2011

Rafi-Mohammed-B

Every once in awhile, someone runs an idea by Marketing Daily that sounds simple, crazy and brilliant all at once, like this one: If brick-and-mortar stores are to survive, marketers should sell them products at a discount, while Internet retailers should have to pay more. It's the brainchild of Rafi Mohammed, a pricing expert and author of The 1% Windfall: How Successful Companies Use Price to Profit and Grow, and something he's written about recently for the Harvard Business Review. We asked him to explain the idea a little more.

Q: Why should a retailer be able to ask for a lower price than those who sell strictly over the Internet?

A: If I were a physical retailer, I would be demanding a lower price. Think of all the additional costs of running a physical store. They hire and train employees to show off the merchandise; they pay for and maintain the space to display it. Retailers add a lot of value to the process, and they should get some recognition for it. And that value goes up as the products become more complex. Take TVs. Or dishwashers.

Q: Why is this more of an issue now? Customers have been shopping online for ages.

A: It's driven by mobile. There are now so many apps that allow consumers to shop solely on price, and we've really seen the effect of that in recent months. They can go into a store -- again, let's take the dishwasher -- and physically see and compare all the models. The stores' sales associates spend valuable time, explaining and educating the consumer on the various models and features.

But then, shoppers can scan a barcode and find the lowest price for that item, either online or at nearby store. And that is hurting stores. When Best Buy reported disappointing third-quarter results in early December, analysts attributed the poor numbers to increased competition from online retailers. Smartphones increase the threat, because shopping only on [a factor of] cost is now easier.

Q: So how would it work?

A: I call this discount the Physical Store Equalizer, or PSE. Retailers should point out what they provide to brands that online sellers don't, and how the opportunity to touch, feel and see goods -- not to mention ask questions to knowledgeable sales staff -- helps educate shoppers.

Since retailers bear the cost, it's fair to ask for a price of 10% less than what Web retailers pay. I just think it's time for manufacturers to compensate physical retailers for the value they bring to the sales proposition.

mobile, online, retail

4 comments about "Q&A: Why Brick-and-Mortar Stores Should Pay Less ".

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Kathy Sharpe from Resonate Networks, January 31, 2011 at 10:04 a.m.
Perhaps it is time to acknowledge the shift in channels and not subsidize those that will not survive. Offline customer service is a great value add, that is often put aside when price comes into play. Inversely many people do their research online, walking into a store fully armed requiring no customer service. Sifting out all these different scenarios becomes impossible.
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Doug Pruden from Customer Experience Partners, January 31, 2011 at 10:06 a.m.

I have thought for several years now that brick-and-mortar stores are increasingly bearing the load, serving as uncompensated showrooms for manufacturers. Consumers go to the physical store and see and touch the flatscreen TV, or try on the pair of shoes, etc. Then go home and buy the products from an online only merchant who bears none of those costs for displaying inventory, training sales personnel, or for that matter, providing customers with heat, lights and a safe parking lot.

Manufacturers don’t really care where they sell, just that they get their wholesale price and that the merchandise sells. If we continue moving in the current direction, eventually it would seem that the brick-and mortar merchants will give up the fight. Mohammed’s Physical Store Equalizer (discount) surely would face a lot of resistance from manufacturers. Ultimately, however, it would likely be a less costly alternative than a need for manufactureres to open their own showrooms.

Paula Lynn from Who Else Unlimited, January 31, 2011 at 11:18 a.m.

Without the brick and mortar stores with which consumers can compare and try on, would the on-line retailers be able to sell their products as well? Perhaps they should pay more to subsidize/contribute to "their" showrooms and pass that investment to the brick and mortars? But that's just me. But then again, when the brick and mortars charge $35 for the same $10 item on line, maybe this has to be explored further.

Nathan Eckles from Gordmans, February 8, 2011 at 6:27 p.m.

The government could always put a "duty" on internet-sold goods. They do it with manufactured goods all the time, to keep the playing field level, between US manufacturers and importers. It helps keep some jobs in the country, at the expense of the end-consumer, in a higher price. In the same manor, they could "subsidize" brick-and-mortars, by taxing goods bought through the online channel, in effect, helping b&m's compete.

And you haven't even mentioned the sales tax issue, benefiting online stores...

On the other side of the coin, b&m's don't have to worry about shipping and handling charges. If a web site offers free shipping, they're eating it in their margins.