Will the Internet Kill Zone Pricing?

Discussion
Jun 28, 2012

Zone pricing, the practice of selectively raising or lowering prices on products based on a variety of factors, is common in retail.

Consumers, for the most part, understand there are differences based on factors such as real estate costs. People in the New York metropolitan area, for example, expect to pay more for a Big Mac in Manhattan than they would in the suburbs. But they are not likely to be as understanding if retailers are charging higher prices for goods or services based on criteria that is less clear.

What got me thinking about this topic was a Wall Street Journal piece this week. According to the story, Orbitz has found that people who use Apple products spend up to 30 percent more on hotels than the average traveler. The service has begun showing consumers browsing with Apple hardware pricier places to stay than people going on the site using a Windows device.

Orbitz execs told the Journal that the site isn’t showing the same room at higher prices, but is returning more expensive rooms on searches by Apple users. So, in the end, Orbitz isn’t looking to fleece Apple users, but I can’t help but think that people going on the site (like myself, as I type this on an iMac), are going to be double-checking their options before booking travel on Orbitz.

Another recent story, discussed here on RetailWire, about Kantar Retail’s market basket comparison between like items sold on Amazon, Walmart.com and Walmart Supercenters, focused on pricing differences between the stores and Amazon. A piece of the discussion that was less developed was that store pricing across the market basket was cheaper in the supercenters than on Walmart.com.

The argument against e-tailers in terms of competitive "fairness" has always been that stores can’t hope to compete on price against online merchants because of overhead issues. That difference is pretty well ingrained in the brain of every consumer who has ever purchased anything online. In fact, in a world where free shipping has almost become mandatory, the price is still expected by many (most) to come in below brick and mortar locations. How will brick and click retailers explain why a particular item costs more on its website than in one of its stores?

It won’t be long, I’ve been told, before a consumer can walk into a given store and not only compare its prices versus online competitors, but also the same item on the shelves of nearby competitors, perhaps even its own stores. What will happen then? Will cherry picking rise to new levels?

Discussion Questions: How much will consumer access to pricing information support or deter retailers from using zone pricing in the future? Will brick and click merchants be able to rationalize higher prices either online or in stores in a way that consumers will accept?

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14 Comments on "Will the Internet Kill Zone Pricing?"


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Paula Rosenblum
Guest
9 years 10 months ago

Nikki and I first postulated that this would occur in 2011 after analyzing the results of our Pricing benchmark. Our 2012 benchmark showed 21% of respondents had returned to a single price (vs. 10% last year).

There will always be some exceptions. I had some conversation with a Canadian retailer who observed that because some of his store locations were so remote, he had to charge higher prices there. I think those customers will more or less accept that. But the idea that customers will subsidize store rents and/or supply chain costs in any other market has passed its day.

Zone pricing is indeed on its last legs.

Ben Ball
Guest
9 years 10 months ago

Increased consumer pricing awareness will greatly narrow the range of opportunities retailers have for “zone” pricing. The quotation marks are to emphasize that zone in this case must be considered any alternate price the consumer has access to, whether brick or click.

Two factors will impact what that range is. One is the difference in price minus the aggravation of getting the lower price. It is one thing to hit “Buy” on your smart phone and head home to wait for UPS. It is quite another to get in your car and drive from midtown to New Jersey.

The second is the relative price and importance of the purchase. I really don’t care if the shop down the street has fountain sodas for a nickel less than the shop I’m in. I’m thirsty and I want a Coke. That becomes quite a different equation as the value of the item increases. I am quite willing to drive the hour across Chicagoland to get the best price on the new car I want.

Max Goldberg
Guest
9 years 10 months ago

Two thoughts: 1) Retailers try to fool consumers at their own risk, and 2) Why is a study of 36 items being taken as gospel after being uniformly dismissed by the BrainTrust panel?

Consumers armed with smart phones can and will pick apart merchants who price items differently online than in-store. This can only damage the brand, by violating consumer trust. Smart retailers will immediately meet the lower price, but the damage is done.

Tony Orlando
Guest
9 years 10 months ago

This is a Mad Mad Mad World we are living in. Only utilities, and government can make their own pricing rules, oh and wireless companies. The profit margins for most retailers are already razor thin, and will continue to put pressure on margins moving forward. Less service, and fewer choices of stores to shop at will likely be the result of this race to the bottom.

No the sky isn’t falling, but it certainly needs shoring up.

Liz Crawford
Guest
9 years 10 months ago
Shoppers can already walk into a store and compare the price (and color, size, SKU) of offerings on the shelves of nearby competitors. Check out the “Slifter” app for exactly this. What are the implications of “perfect information”? Economics classes used to teach the concept of perfect information — wherein shoppers had access to all of the prices, of all the competitors. This concept was the basis for hypothesizing about shopping behavior under perfect conditions. Unfortunately, at the time I was sitting in these classes, we didn’t learn too much about behavioral economics; it was more about ‘homo economis’ (that fictional being who only acts rationally). While apps like Slifter aren’t used by everyone, we still have a reasonable idea about the impact of the new (and very real) perfect information. Shoppers’ responses depend on a few factors. If the item is a high ticket item, which requires some research, the shoppers are more likely to investigate pricing and options information and act on that (electronics, appliances, cars, motorcycles, etc). If the item is a… Read more »
Ed Dennis
Guest
Ed Dennis
9 years 10 months ago

No it will not. Zone pricing has most often been used to increase prices to offset the additional expense of doing business in certain places. This tends to work better when dealing with consumers who are uneducated and/or neighborhood bound. It does not work in areas where consumers are educated and have broader choices. Until the time comes when theft, taxation, rent, and insurance become level across all playing fields, Zone pricing will be a necessity.

Roger Saunders
Guest
9 years 10 months ago

The ability to flex this pricing will likely be driven by demand elasticity, products offered, and how quickly consumers may want or need a product.

The latest offering of a new Digital Device, that is a “must have” for the techno-elite will hold up to Zone Pricing very well. A common, everyday purchase, that isn’t a necessity, is not going to have the same reception — it could frustrate the consumer.

With consumers continuing to deleverage, merchants need to keep in mind that pricing is one of the more prominent marketing points that their customers have in mind. Some well-thought-out caution will serve them well.

Craig Sundstrom
Guest
9 years 10 months ago

What’s to say that “zone pricing” won’t appear on the ‘net vis-a-vis higher shipping charges to more remote locations? Remember that caution on many old ads “prices higher west of the Rocky Mountains”? Oh I know: FREE SHIPPING!! will be the law of the land soon thanks to Amazon … or maybe not, and sanity will prevail.

Ralph Jacobson
Guest
9 years 10 months ago

Guess what. In case you haven’t heard, this is the age of the “Empowered Consumer.” Zone pricing was a disaster waiting to happen… for decades. I personally cannot believe that technique survived as long as it has. Don’t even THINK of how to defend charging higher prices in different neighborhoods to shoppers, let alone your online pricing strategies.

Bite the bullet. Retail pricing credibility. Buy a price optimization software package. NOW!

Robert DiPietro
Guest
9 years 10 months ago

Transparency will kill zone pricing. It is easy for a consumer to see the difference in price. How can you price differently by channel for a brick and click merchant and explain it to consumers?

Brian Numainville
Guest
9 years 10 months ago

Zone pricing is quickly becoming obsolete. Consumers now have the ability to more quickly and easily evaluate pricing across channels and across retailers. And consumers won’t accept paying more in-store versus online simply because it cost more to operate there. I do think there may be exceptions for very remote regions where it is clear that there is an obvious reason why prices might be higher.

Kai Clarke
Guest
9 years 10 months ago

Zone pricing is disappearing as “global” pricing becomes more prevalent. We already see this with mobile phones, where people are willing to puchase a product which is available in a different country, and usually pay more for it, than they would here … usually because it is not available in the USA. We used to see this in cars, and still see this with prescription drugs as more people “bleed” over the borders with Mexico and Canada to purchase their medications.

Mark Price
Guest
Mark Price
9 years 10 months ago

I believe that the days of zone pricing for items that can be easily shipped are now gone. Pricing transparency will eliminate many of the small margin gains that retailers have had by pricing products higher in specific markets. Consumers will now be able to add shipping cost to the base cost and compare their product options across virtual and physical locations.

Retailers will have to make money the old fashioned way, by delivering a superior assortment and a premium customer experience to justify price premiums.

Kim Mankey
Guest
Kim Mankey
9 years 10 months ago

When pricing is being set, I think there will simply be other factors to consider/put into “the formula” — location, like you mentioned but also travel (expense involved in going to get that extra $1 off), immediacy of purchase, exclusivity, etc.

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