Online Price Wars: What You Can Do to Avoid a Race to the Bottom

Price competition continues to intensify as Walmart, Target and Jet.com, among others, seek to close the gap with online price leader Amazon.com. The result is a high-stakes race to the bottom. While good news for shoppers, ongoing price drops are far from good news for grocers already operating on razor-thin margins as well as their manufacturer partners that are feeling pressure as well.

Walmart Online Grocery Prices Edge Closer to Amazon

Amazon remains the online price leader, but Walmart is definitely nipping at its heels, according to Profitero’s latest pricing study, Price Wars: Grocery, Household & Beauty. Only a slim 2 percent separates the retailers’ online pricing on grocery products studied during a recent three-month period. In contrast, Jet.com and Target trail Amazon by about 6 percent.

Our data suggests that most retailers, especially market leaders, are indeed monitoring each other’s online activity. An example of this is how aggressive Walmart has been with price matching to stay within striking distance of Amazon. Walmart.com offered identical prices to Amazon on more than half (53 percent) of the 21,000-plus grocery, beauty and everyday household products we analyzed. Looking specifically at grocery, this figure jumps to 67 percent, helping explain the narrow gap between the rivals.

Still, it remains to be seen whether Walmart, or any other grocer for that matter, can keep pace with Amazon’s prices. Perhaps the better question is should they even try. Take for example what’s happening with Prime Pantry. Amazon uses the program to create further price separation from its competition. We found Prime Pantry products to be 11 percent cheaper, on average, than the combined competitive set. Walmart.com prices averaged 10 percent higher.

An Unsustainable and Destructive Economic Model

This level of discounting and price competition is not only brutal, but unsustainable in the long run. Most retailers will lose if they simply keep matching the market leader on price across so many items. It risks company profitability as well as supplier relationships. The pricing pressure being placed on manufacturers is leading some to rethink distribution strategies as well as the level of support they can give different channels and retail partners.

It therefore becomes imperative for the industry to evolve beyond individual item pricing and find ways to compete on value instead.

Consider Value Over Individual Item Pricing

One clear-cut way to eschew price wars is to minimize like-for-like comparisons — e.g., focusing on unique items and pack sizes, private labels or product exclusives that competitors can’t match. Still, different value-based pricing strategies have merit and are worth consideration.

Some retailers, for example, are moving toward a personal pricing approach. Simply put, this means differentiating prices based on some measure of lifetime customer value or a prior established relationship, like your most loyal customers. This way, retailers are less likely to leave money on the table if price sensitivity isn’t a factor for shoppers.

Transactional pricing incentivizes shoppers with a price break or order-level discount for demonstrating a particular behavior the retailer wants. Good examples here include Walmart’s 5 percent in-store pickup discount or Jet Smart Cart incentives — e.g., waiting longer for delivery, waiving product return privileges, or paying with a debit instead of credit card.

Lastly, retailers must think about a bundling strategy — i.e., bundling products and promotions in such a way that there’s no easy apples-to-apples comparison. Think programs such as Target’s REDcard, Subscribe & Save, or 5 percent off for Amazon credit cardholders when they shop in Whole Foods. The deal may not be at an individual transaction level, but for the retailer it has a much bigger lock-in effect that yields ongoing value.

Keith Anderson is the senior vice president of strategy and insight at Profitero, where he helps global brands and retailers gain a deeper understanding of their online presence to optimize online and in-store sales.