Retailers have been playing a price war game for years, with the victor supposedly being the store that offers the lowest priced item. Unfortunately, it’s a war that most retailers cannot win. Although massive price discounts may work for large online players like Amazon, it is not the best strategy for many retailers, particularly those with brick-and-mortar stores.
Price is only one of several motivators that drive shoppers to a purchase, and it tends to deliver mostly short term sales gains. Factors that improve customer experience, like convenience, customer service, and even ambiance, all influence the sale and tend to improve sales over the long term. So while price discounts can capture a sale once, quality customer experiences keep customers coming back.
In her review of the retail space, Sharmila C. Chatterjee, a professor at MIT’s Sloan School of Management, has seen the dramatic impact extreme price discounting can have on retailers’ businesses. Retailers that make the mistake of competing on price tend to cut valuable resources, like employee training or inventory management, which damages the overall customer experience. Instead of investing where they need to most, many retailers have fallen into the price discount trap, forcing them to file for bankruptcy or close their doors for good.
Chatterjee advises retailers to find ways their brick-and-mortar and online channels can complement one another, rather than compete. Cross-channel conveniences, like buying online and picking up in store, create a seamless experience for the customer and improve customer loyalty. In this interview, Chatterjee explains how retailers can leverage these two channels so that they complement one another and enhance customer experience.
Ellen Harvey: What led you to research the retail industry and explore the dynamics of online and offline shopping?
Sharmila C. Chatterjee: That’s a great question. My research interest is primarily business-to-business marketing. And so, I was very interested in the back end of retailing. I think my first paper was in the Journal of Retailing a long, long time ago, and it looked at the supply chain side of things. I was always interested in the back end of retailing given my B2B interests.
I started thinking about the B2C component of retailing very gradually. I started seeing a disruption that was happening in retail as online shopping emerged, and I started thinking about some of the actions brick-and-mortar stores took in response to online retail.
I started seeing a lot of price discounts when I went to the department stores, and that piqued my interest. I asked myself, “Why are the brick-and-mortar retailers focused so much on price discounts?” My initial hypothesis was, that there are different motivations for why people shop online versus offline. And there’s a research paper that came out in 2010 that shows that price discounting is the least effective strategy for long-term sales.
EH: How should retailers view the different roles of online and offline shopping?
SC: Retailers need to ask themselves, “What are shoppers’ motivations?” Some of the biggest starting advantages of online were, of course, the convenience. Shoppers have the convenience and the flexibility to look at and purchase a wide variety of products and at any time. You could buy something at midnight if you wanted to. And of course there are those online shoppers who were price sensitive, and they could do a lot of price comparisons quickly online.
When it comes to brick and mortar, what are people looking for? Why would they go to a store? Think of the things that you miss when you’re online. There’s the ambiance. Going to a store is an outing for you. Who wants to be just cooped up in a room all day? The other part of it is we’re social beings and we want the human interaction. So in a physical store, maybe there people who can help you if you have questions. And then finally, there is that instant gratification of purchasing something and getting it immediately, rather than waiting for it to be delivered.
But once brick-and-mortar stores start playing the pricing game, then it cuts valuable resources and they compete head-on against online stores. If you’re interested in the lowest price then you could very well achieve that goal just sitting in your house. You don’t need to go to a physical store for that.
So if retailers are focusing on the motivations that brought people to a store, they will double down on their investments where it counts. Train your sales assistants, and train them to be pleasant and knowledgeable. When you go to a store and you have questions, you don’t want to go all over the store to find the person to talk to. And when you do find them, you hope they actually have an answer to your question.
Retailers will also make sure their inventory is correctly stocked so that shoppers can find what they’re looking for and experience that instant gratification.
But a lot of stores, in order to compete on price, cut these resources exactly when they needed to make those investments. The holy grail of marketing is customer centricity. And you want to give the consumers what they are looking for at that point in time and at that place.
It became a vicious cycle. Retailers cut more and more and more, and then when you go shopping, you can’t find any of the things for which you went to the store in the first place. The ambiance is not great; the sales assistants are not great; it’s inconvenient; you don’t find what you’re looking for. So why would you go to the store?
EH: So many large retail companies have struggled in the past year or announced bankruptcy, like Toys R Us and Sears. Are those some of the companies that you think have made these price cuts?
SC: I very much think that by playing the price discount game, they brought on their own demise. They needed to adapt, but they needed to adapt in a way that highlighted their strengths and met the customer needs. If they did that, they would have, in my opinion, not gone bankrupt. I really think it was playing the price discount game that put the nail in the coffin.
Let’s talk about Sears. That’s a fascinating example. If you think of Sears historically, they were the Amazon of the offline days. Amazon started with books and I think Sears started with just a catalog selling watches. They were shipping things all over the country, they began to diversify their catalog, and eventually they grew to a point where they opened a brick-and-mortar store, just as Amazon is getting into brick and mortar now.
Sears was a really innovative company. They knew exactly what the customer wanted and what they were looking for. And that is the reason they thrived. Given their huge catalog, they should have been one of those companies that availed themselves of the online opportunity while still keeping their offline strength.
They could have observed customer activity online and used that information to actually enhance the customer experience in brick-and-mortar. Use them as complements rather than, again, playing the pricing game.
But instead Sears let its stores languish. They did not invest in modernizing them. Their merchandising just went nowhere. Their sales assistants were not that helpful, and you had very few sales assistants. They completely deprived their brick-and-mortar business. They got rid of their assets, like Craftsman Tools which they sold off, to keep playing the pricing game. They could never win that game because the customers who are really motivated by price have other ways, besides going to a Sears store, to fulfill that need.
EH: So what is the right way to leverage both online and offline channels?
SC: Online gives a lot of data on consumer preferences, on where they are going, what they are buying, and so on. If you have a counterpart brick-and-mortar in the same area as your online shoppers, you can see what the consumer preferences are, what kinds of things are they buying. That information can be very helpful in merchandising decisions that you make for the corresponding brick-and-mortar stores.
You can also see from this data what products are moving fast or not moving and then use that for inventory management. Addressing out of stock issues as well as placing the right kinds of merchandise I think is a huge part for the success for the customer experience.
Regardless of where the consumer is shopping–online or offline–you want that experience to be seamless. Give the customer options. If they want to shop at midnight but want to pick up something immediately, let them shop online and pick up in store. That’s the complement of online and offline, coming together to serve the customer needs in a holistic way.
A great example of this approach is Nordstrom Local. Nordstrom Local is a fascinating concept where they have created a service hub. Nordstrom started three Nordstrom Local stores in Los Angeles and now they are going to introduce another in New York.
Nordstrom Locals are small stores that have a much smaller square footage and they are supposed to act as complements to their online as well as their brick and mortar stores. So a consumer can shop online and pick up at these Nordstrom Locals. But they also have other services. You can get your hair cut; you can get dry cleaning done; you can even sit there and get work done in their working space. So what they are doing is trying to cater to the customer who is multitasking and in search of convenience.
Nordstrom Locals also offer a more personalized touch. You can work with a stylist who will pick out different things for you and then those things are shipped from the Nordstrom brick-and-mortar store to this Nordstrom Local. You can try them on there, and if you don’t like them, you can return them.
The only thing missing from Nordstrom Local is inventory, because they deliver what you want based on your online request or your stylist’s input.
So they have addressed the things I was talking about. They’ve addressed the human aspect. The Nordstrom Local have people there that you can talk to and they will have answers. They’ve addressed the merchandising problem. If you go and you don’t find what you like, they will ship what you want to the Nordstrom Locals for you. They have a nice ambiance. These Nordstrom Locals have really complemented the online and brick-and-mortar stores to solve the customer needs in a holistic way.
EH: What are some of the key pieces of data retailers need to track and analyze in order to pull off some of these initiatives we’ve been talking about?
SC: I think definitely the consumer’s shopping behavior. You know, what they are buying, the styles they’re buying, at what price, etc. Then retailers need to connect it with whatever background data they have on the consumer so that they’re able to really segment the customer base and then target those segments. Then retailers can start customizing their offerings to these different segments
Retailers can also connect this behavior and demographic data to their supply chain so they can see that they have the right kinds of supply at the right time and the place that it is needed.
The other thing they need to do is coordinate across the channels. Information needs to be shared across the shopping channels so someone can then draw insights and take appropriate actions to facilitate customization, to address your customer target needs, and facilitate the multichannel coordination.
What is being sold from the online? What is being sold from offline? Which merchandise are slow moving? Which are fast moving? Which customers are buying what? Having this information will help retailers create better trend forecasts.
Having data on pricing and price promotions is still obviously a part of the mix, but I think retailers should really be using all of this data to focus on the customer experience. And in order to do that, they need to go back to basics of marketing which is segmentation, targeting, positioning, and customer centricity to make the customer experience as positive as can be and seamless across channels.
EH: What are some of the tools or technology retailers should invest in to make these connections with their data?
SC: I saw in a report that many retailers are investing in customer experience analytics that will give insights into the actual experience of consumers. I was kind of puzzled when I read this report, though. While they’re adopting things like customer experience analytics, they’re not actually implementing these tools to generate insights. They have a low adoption rate within the company.
Out of stock continues to be a huge problem in brick and mortar stores. So, one of the technologies that they should really pay attention is buying merchandising software and actually using it to make their decisions. You can buy a piece of software and have all of these analytics in hand but if you’re not really using them to make your decisions, then it’s no use.
EH: Why do you think there’s that lack of implementation of technology after retailers purchase it?
SC: This is a general challenge. Software implementations are notorious for implementation failures. The top management at the retailer feel that this technology is something that has to be adopted. But then, those managers who have to use it, they really need to understand how to use it in their context. They need to understand how the software will make their decision making more efficient and effective. If they don’t see that, there is no motivation for them to change what they’re doing.
And if the managers don’t use the new technology, there are network effects. Collectively, people at the company won’t adopt it and then the technology won’t deliver the value that the top leadership envisioned.
EH: Looking ahead five years, what do you think retail will look like as more retailers take an omnichannel approach and develop these seamless experiences?
SC: I think that online will continue to play more of a role as we move forward. The funny thing is that, even though everyone blames the recent bankruptcies on online retail, in 2017 online retail was under 10% of all retail. So online, I think, will continue to grow, but I think we will have reached more of an equilibrium between online and offline. We are even seeing that today as Amazon is now starting to invest more in offline stores. We will hopefully not have these dramatic store closures and bankruptcies, that we have been seeing recently.
I think retailers will focus more on the customer experience and make investments in the store system and the human interface at brick-and-mortar. Hopefully, we will have moved past these major price discounts.
EH: Looking to the more immediate future, what do you think will be the most important trend or technology that retailers should consider in 2019?
SC: Customer experience analytics is a big area of growth, which will help retailers get insights on their target audience and how to improve their online and offline experiences. Retailers should really laser focus on the customer experience piece and make the right kinds of investments to improve the customer experience. Customer experience leaders outperform the market significantly and customer experience laggards underperform the market significantly.
