In 500 words answer the following questions:
- How important are prices in the battle of brick and mortar stores against internet competitors? Are there other considerations that may be more important?
- If these companies are striving to maximize their profits, does it make sense to ignore or reduce in its importance the pricing concept of MR=MC?
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PHOTO: RICHARD B. LEVINE/ZUMA PRESS
By SARA GERMANO and
In October, the acting chief executive of GNC Holdings Inc. made a confession: The big vitamin retailer had “a badly broken business model.” Its prices were too confusing and constantly undercut by online competitors. Sales were plunging.
Behind the scenes, executives had decided the only way to fix things was to start over. So on Wednesday, GNC will close its 4,400 U.S. stores to overhaul its pricing system, which featured as many as four different prices on some labels.
When the stores reopen the next day, labels for GNC’s protein powders, herbal remedies and nutritional supplements will feature just one price. There will still be discounts, but about half of the company’s products will start at lower prices than before, while a quarter of the prices will be higher, says GNC’s chief marketing officer, Jeff Hennion.
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It is unclear if GNC’s changes will be enough to reverse a sales slump that has erased half of the Pittsburgh company’s market value in 2016. But the overhaul highlights a seemingly basic problem that has suddenly confounded many retailers from upscale furniture outfit Restoration Hardware Holdings Inc. to apparel chains such as Abercrombie & Fitch Co.: how to set prices for products they sell.
“Go back 10 years ago or 15 years ago, and price was price. It was, you either felt good or bad,” Mr. Hennion said in an interview.
Smartphones have changed the game. “Now you go in and you’re like, ‘what are the other 80 stores where I can buy this, and what are nearby?’”
While heavy promotions, especially during the holiday period, have become a sophisticated calculus, the nature of setting retail prices has become more complex. Online stores can set algorithms to change prices by the hour and nearly every shopper is armed with a smartphone, making the market transparent.
“To be at the wrong price going forward, the customer won’t find you. When they go online, we’re not going to be relevant. We’re not going to show up in algorithms,” Steven Temares, chief executive of Bed Bath & Beyond Inc. told analysts last week.
The home-goods chain, which has long relied on 20% off coupons to lure shoppers, has been testing a membership plan that instead gives customers 20% off all purchases and free shipping for $29 a year.
“New customers who come online don’t understand, or even know we have a coupon,” he said. “So for us to be reliant on a coupon and to be at the wrong price, it’s just the wrong thought process.”
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The company’s quarterly profit fell 29% in the latest period and it lowered its sales and profit targets for the year. Executives said they were encouraged by the membership trial, but it was too soon to tell how it is changing customer behavior.
A steady pricing model, such as charging a fixed percentage on the cost of making a good, doesn’t work at most chains, according to experts.
“The goal is to charge each customer the most they are willing to pay, and different people are willing to pay different amounts,” said Z. John Zhang, a marketing professor at University of Pennsylvania’s Wharton School. “You start high to give first dibs to the people willing to pay the most and then lower the price. The most price-sensitive customers will wait for the deal.”
Weaning customers off coupons and discounts can be difficult. In 2012, J.C. Penney Co. cut back sales and promotions in favor of everyday low prices, but the move alienated shoppers and sales plummeted.
In March, Restoration Hardware introduced a loyalty card to replace seasonal sales events. CEO Gary Friedman argued that promotional events didn’t align with the company’s upscale image and were resulting in spikes in volume and higher cancellation rates, creating inefficiencies in the supply chain.
Now, card holders pay $100 annually to get 25% off merchandise. Some 260,000 people have signed up for the program, but they haven’t been buying items with the same urgency since its introduction.
The company reported a 6% drop in same-store sales in its latest quarter and said it is now clearing seasonal merchandise and taking deeper discounts to move items it has decided to discontinue.
“I am sure our short-term results will be misinterpreted by many as choosing the wrong road as we continue to invest in differentiating and redefining the RH brand,” Mr. Friedman told investors on Dec. 8.
Given Restoration Hardware’s price points, it’s a “no-brainer” for anyone buying furniture to join the program, said Neil Saunders, chief executive of retail research firm Conlumino. “It’s a very odd scheme…Why not just reduce the price?”
Teen-apparel chain Abercrombie & Fitch has also struggled to hold the line on discounts. Earlier this year, Executive Chairman Arthur Martinez said the short-term pain of enforcing a disciplined price strategy was worth the long-term benefits.
In November, however, the retailer posted its third straight quarter of declining same-store sales and had to clear inventory through unplanned promotions. “We don’t operate in a vacuum,” Mr. Martinez recently said.
At GNC, executives gathered input from outside consultants, ran tests in 10 markets and had to get the support of outside vendors as well as its franchise owners. The company eliminated gaps between web and store prices, moved to end a discount-card program and determined new prices by comparing products it carried against similar ones at competitors.
“I don’t think everyone’s going to be priced the same every minute on every item,” said Tim Mantel, GNC’s chief merchandising officer. “When Amazon prices through its algorithm, there’s a lot of chaos when it comes to pricing.”