Pricing it Right- Strategies from the 2014 US Holiday Season

Transcription

1 Point of View Pricing it Right- Strategies from the 2014 US Holiday Season A TCS Optumera Price Insights Study Introduction Price wars between some of the biggest retail giants reach their peak during the holiday season, as they fight for a greater share of sales. Online discounts and promotions introduced in early November 2014 severely impacted brick-and-mortar businesses during and Christmas. Although overall holiday sales numbers were good, brick-and-mortar retailers struggled to keep up with their online counterparts. In fact, online sales contributed to a larger proportion of overall sales compared to the previous year. Technology played an important role for both consumers and retailers. Consumers leveraged mobile and tablet devices to search for, compare, and purchase the right products. In this report, we take a look at how different retailers managed their online price discounts and promotions last holiday season, while competing against their rivals. We present our insights based on the holiday pricing data analyzed by the Tata Consultancy Services (TCS) TM Optumera Data Gathering Engine¹. For this report, we analyzed the pricing strategies adopted by Amazon, Walmart, Target, Toys R Us, Staples and PetSmart for their US businesses across product categories, which include portable electronics, home electronics, pet care, toys, and video games. Holiday Season Pricing Myths Busted Retailers have reshaped their holiday season strategies over the last few years. Many of them decided to offer discounted prices through their websites even before stores opened, encouraging consumers to start shopping much earlier. We leveraged Optumera data to bust a few myths about the holiday shopping season and uncover the reality of retail pricing strategies. Myth #1: The lowest prices are available exclusively during the weekend Reality: The lowest prices are available throughout the extended holiday season It is a popular belief that retailers pull out all stops to offer the deepest discounts during the weekend. Shoppers therefore tend to postpone purchases in anticipation of the lowest prices on the maximum range of items. However, price information gathered from multiple retailers reveals the opposite. Key items such as laptops, tablets, LED televisions, and toys are often priced at par or even lower during the week prior to and after. Figure 1 shows that only 12 percent of the sampled items were available at their lowest prices exclusively during the weekend. The remaining items were available at their lowest price across the two and a half weeks that included the weekend. [1]

2 Spread of lowest prices this Holiday Season items did not had lowest prices during Pre- Post- Only 12% items were priced lowest exclusively during Pre-, & Post- 88% items were priced lowest not only during Pre- & Post- & items were priced lowest through extended days of Holiday Season Graph indicates how the lowest prices of the sampled items were distributed during the Holiday Season. Time Period split ino Pre- (20th to 26th Nov, 2014), (27th Nov to 1st Dec, 2014) and Post- (2nd to 8th Dec, 2014) Myth #2: The best online deals are available on Cyber Monday Figure 1: Distribution of the lowest prices across the holiday season Reality: The best time for online deals varies across different categories Online shopping explodes on Cyber Monday with customers expecting the best online deals in terms of both the number and range of offers. However, data collected reveals that the best online deals were not restricted to Cyber Monday or, for that matter, any other particular day, but differed across categories. Days with maximum number of Online Deals 60.00% 50.00% HOME ELECTRONICS 52.2% Items priced lowest on Cyber Monday PORTABLE ELECTRONICS 40.7% Items priced lowest on 22nd December, 2014 THANKS GIVING WEEKEND % of lowest prices items 40.00% 30.00% 20.00% LAPTOPS & TABLETS 42.9% Items priced lowest on 14th December, 2014 CAMERAS 51.2% Items priced lowest on MultipleDays 10.00% 0.00% CAMERAS HOME ELECTRONICS LAPTOPS & TABLETS PORTABLE ELECTRONICS The graph indicates the daily trend of the percentage of lowest priced items across all retailers from the identified sample. The highlighted dates indicate the days with maximum number of lowest priced items for each category. Period of Study: 17th Nov, 2014 to 5th Jan, 2015 Figure 2: Days with the Maximum Number of Online Deals 2

3 For instance, the best deals on laptops and tablets did not appear until December 14. Retailers offered the best prices for portable electronics just before Christmas. In the case of cameras, the lowest prices were spread across several days. Home electronics was the only category where more than half of the sampled items were available at the lowest price only on Cyber Monday. In terms of the number of offers, no more than half of the sampled items across categories were at their lowest prices on days with the maximum number of online deals. Myth #3: Amazon makes significant price changes to offer prices lower than competitors Reality: Not all changes result in significantly different prices One of the most staggering figures derived from the pricing data collected was the number of price changes carried out by Amazon when compared to other retailers during the 2014 holiday season. Amazon made more than 10 times the number of price changes made by all the other sampled retailers combined. Moreover, the price of several items fluctuated multiple times during the same day. For instance, the price of Apple ipad Air2 16GB, changed more than 20 times on several days. However, Figure 3 shows that these price changes were not significant. Only one-sixth of the price changes made by Amazon resulted in more than 10 percent difference from the previous price. More than two thirds of the price changes were less than 2.5 percent of the previous price. On the other hand, most of the other retailers made price changes which were significantly lower or higher than the previous price. Amazon's scale of price changes Greater than 50% 1.98% 11.36% Other Retailers Amazon % difference between price changes 25% to 50% 10% to 25% 2.5% to 10% 1% to 2.5% Less Than 1% 3.02% 4.99% 4.20% 8.78% 15.43% 21.81% 23.84% 23.00% Other retailers make the biggest price changes predominantly during 35.78% Most of Amazon's price changes are are less than 2.5 percent different from the previous price 45.83% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% Price Change with Difference > 10% 15.75% of Price Changes 77.65% of Price Changes 64.05% of Price Changes Amazon priceswere consistently lower and they did not make price changes of significant difference to remain competitive The graph compares the percentage of price difference for Amazon's price movements and that of other retailers Period of Study: 17th November, 2014 to 5th January, 2015 Figure 3: Amazon s price changes compared with other retailers Amazon s small scale price changes can be attributed to the fact that its prices were consistently lower to begin with, and they did not require much change to remain competitive. However, several of the price changes were not a result of competitive activity but were just changes in the seller information displayed on the item list page. At different times on the same day, different sellers prices were displayed for the same item. Each subsequent seller price was therefore attributed as a price change for Amazon. Since seller prices did not vary significantly, these price changes were not significantly different from the previous prices. 3

4 Illustration of Amazon's Price Change Movements At, 12:05 pm, Seller 1 price displayed At, 9:00 pm, Seller 2 price displayed again At, 3:00 pm, Seller 2 price displayed. No change in Seller 1 price SELLER1 $ SELLER 2 $ SELLER 3 $ AMAZON $ At, 7:00 pm, Amazon price displayed. No change in Seller 1, Seller 2 or Seller 3 prices At, 5:00 pm, Seller 3 price displayed. No change in Seller 1, Seller 2 prices Simple Illustration indicates how Amazon, for certain items, manages to make multiple price changes in a single day by shifting between the items' different sellers' prices on the product list page. In the above illustration, the item is also sold by three sellers along with Amazon and at different points of time during the day, different seller's price is displayed on the product list page giving the impression as if multiple price changes are being made on that item. Usually Sellers do not make multiple price changes within a day. The Retail Holiday Price War What We Discovered During the 2014 holiday season, each retailer prioritized the categories and customer segments they wanted to target and focused on competing only on specific items to drive sales. The following section highlights the pricing strategies adopted by retailers during the holiday season. Eyeing the Lowest Price Figure 4: Illustration of Amazon s Price Change Movements Consumers are constantly on the lookout for low prices. It is therefore important to identify the price leader or the retailer offering the lowest price, and then craft a strategy to beat or match the deal. However, a lot depends on the retailer s strategy for selecting the items and time to compete. Figure 5 shows that cameras, home electronics, and laptops and tablets were the most highly contested categories during 2014, exhibiting a much narrower price gap between the highest and lowest priced retailers. Pet care was the least competitive category. Except for home electronics, all other categories witnessed high competitiveness during the weekend, with video games seeing a 10 percent reduction in price gap. 4

5 Price difference from the Price Leader % difference lowest and highest priced retailers 40.00% 30.00% 20.00% 10.00% 0.00% Most competitive category 9.58% 6.69% 14.04% 12.69% 12.43% Least competitive category 8.10% 44.40% 43.45% 29.35% 27.54% CAMERA HOME ELECTRONICS LAPTOP & TABLETS PET CARE PORTABLE ELECTRONICS Rest of Season 23.57% TOYS Competitive during 31.73% 21.39% 20.96% VIDEO GAMES The graph indicates the competitiveness of each category by highlighting the price gap between the minimum price of the lowest priced retailer (price leader) and the highest priced retailer. The graph also compares the price gap between (27th Nov to 1st Dec, 2014) and the rest of the Holiday Season (17th Nov, 2014 to 5th Jan, 2015). Competing where it matters most Figure 5 Price gaps between the highest and lowest priced retailer The range in which price changes are made is a good indicator of a retailers strategy, especially the customer segment being targeted. For instance, while Amazon was extremely active, making the maximum number of price changes for low price cameras, Walmart and Target focused on more expensive cameras. The increased price dynamism was also reflected in each retailer having the most number of lowest priced items in the respective price ranges. Retailers price change range over the Holiday Season Toys $250 to 500 Cameras Less than $25 Less than $ % 75.00% 40.00% $25 to 50 $750 to % 20.00% 15.00% 0.00% 15.00% $100 to 150 $150 to 250 $50 to 100 $500 to 750 $150 to 250 $100 to 150 $250 to 500 Amazon ToysRus Walmart Amazon ToysRus Walmart The graph indicates the price range in which retailers made price changes for Toys and Cameras categories. Time period: 17th Nov, 2014 to 5th Jan, 2015 Figure 6: Price changes over the Holiday Season across categories 5

6 A similar trend of each retailer focusing on a different price range was also observed in the toys category. Specialty retailer Toys R Us and Walmart focused on setting the most competitive prices for products in the lower price range. Different Days, Different Categories During the 2014 holiday season, retailers made the maximum number of price changes during the weekend. However, as revealed in Figure 7, each retailer made the most number of price changes on different days across the sampled categories. For some categories like home electronics and laptops and tablets, all retailers made price changes during the same time period. For instance, price changes for home electronics took place during the weekend, while for laptops and tablets, price changes peaked in mid-december. For categories such as toys and cameras, each retailer chose a different period to compete on price. For toys, while Walmart and Toys R Us made the most number of price changes during the weekend, Target and Amazon were more active during the first week of December. Day on which maximum number of price changes made by retailer Calender indicates the price change activity of retailers across categories by highlighting the days on which maximum number of price changes were made by each retailer for sampled categories. Time period: 24th Nov, 2014 to 28th Dec, 2015 Figure 7: Days on which retailers made the maximum number of price changes Responding quickly to competition Retailers today use sophisticated software to monitor competitor prices and manage their own prices. They can set alerts when a competitor s price drops below theirs or below a certain threshold, thereby allowing them to adjust prices quicker. During the 2014 holiday season, particularly over the weekend, retailers were engaged in fierce price wars. They altered prices of key items multiple times in the same day to remain competitive. Let s take the example of the Beats Headphone, which was one of the most sought after items by shoppers, this last holiday season. Amazon started Day pricing the headphones at $254.86, $15 cheaper than its closest competitor. However, within 3 hours, Target reduced its. Amazon responded immediately and matched Target s price within an hour. Walmart took a little longer to respond, but eventually matched Target s price post noon. Amazon then slashed the price of the headphones to $199.99, a whopping 20 percent lower than the price quoted by its closest competitor. All three retailers maintained their prices constant till the end of the day, by which time Amazon again raised the price to match Target and Walmart. Staples, on the other hand, did not change the price of the headphone the entire day. 6

7 Beats Headphones Price Change Trend - 4:35 AM Amazon reduces 9:34 AM Amazon raises price to $ :35 AM Amazon reduces 1:35 PM Walmart reduces 1:35 PM Amazon reduces price to $ :37AM Target reduces 11:35 PM Amazon raises Graph highlights retailer competitiveness at the granular level by indicating intra day price movements for Beats Studio Over-Ear Headphones across different retailers captured on. Figure 8: Beats Headphones Price Change Trend - Leading the price battle: Retailers and items with maximum price changes While competition heats up during the holiday season, not all retailers resort to price changes in the same manner or during the same timeframe. As shown in Figure 9, Amazon made the most number of price changes compared to any other retailer across the holiday season. The number of price changes made increased from pre- until Christmas, and came down slightly around New Year. Among the other retailers, Staples made the most price changes during the period just before Christmas. Walmart and Toys R Us used the first two weeks of December to roll back discounts post, and also to price items competitively for anticipated Christmas purchases. Target made the maximum price changes during the weekend to match the lowest prices by other retailers. Retailers' price change trend over the Holiday Season 50 Amazon makes maximum prices changes for Christmas Shopping Retailers revert to earlier prices post 3 Retailers lower prices for 2 0 Pre- to Cyber Monday Post-Cyber Monday Pre-Christmas Post-Christmas Staples Target ToysRUs Walmart Amazon The graph compares the average number of price changes for the sampled items across different retailers for different periods of the holiday season. The Time Period is split ino Pre- (17th to 26th Nov, 2014), to Cyber Monday (27th Nov to 1st Dec, 2014), Post-Cyber Monday (2nd to 12th Dec, 2014), Pre-Christmas (13th Dec to 24th Dec, 2014) and Christmas (25th Dec, 2014 to 5th Jan, 2015) Figure 9: Comparative analysis of the number of price changes made by retailers across different time periods 7

8 Figure 10 shows the top ten items that saw the maximum number of price changes during the 2014 holiday season. Figure 10: Items with the most price changes Conclusion The 2014 holiday season was a joyous one not just for consumers, but also for retailers. Overall sales between Black Friday and Christmas Eve increased 5.5 percent in The early introduction of discounts resulted in sales being distributed over the entire holiday period rather than peaking only during the Black Friday to Cyber Monday weekend. Today, consumers are more empowered than ever before to search for the lowest prices from the comfort of their homes or within the store. Retailers are therefore under constant pressure to find innovative ways to pre-empt competition and improve sales by offering the best value for money. They are blurring the lines between and Black Friday, extending sales, and matching prices with that of their competition. Retailers followed different pricing strategies during this holiday season. Dynamic pricing was a strategy executed extensively by retailers throughout the Holiday Season. While Amazon dominated the dynamic pricing strategy arena, other retailers ensured that they either adopted the lowest priced strategy or closely followed the price leader. Retailers monitored competitors stock status and raised prices of items which competitors were out of stock for and reduced prices when stock was available. Retailers monitored specific categories and even items to make price changes to create a price image amongst shoppers. The Holiday Season has once again proved that pricing during this extremely competitive period can be a daunting task and in order to execute a sound pricing strategy, retailers need to adopt a data driven approach to collecting competitor pricing and assortment data. This strategy will help retailers to not only drive sales and remain competitive, but also, and more importantly, improve profitability. Winning the price war is not just about offering the lowest possible price. It requires a sound strategy based on the pricing activity of competitors and the product category. This will help retailers adjust the extent and timing of their price changes to realize the highest business advantage. 8

9 About TCS Retail Business Unit With over two decades of consulting and IT support experience with global retailers, TCS helps retailers improve business processes and cash flows to drive top and bottom line growth. Seven of the top 10 U.S. and six of the top 10 U.K. retailers partner with us on business transformation programs aimed at re-imagining and growing the business. Leading retailers leverage the TCS Omnistore Point of Sale (POS) and mobile POS solutions as well as our merchandizing solution suite, OptumeraTM, that amalgamate our strong business acumen, domain knowledge, and technology competency. Our Innovation Labs harness technology trends such as digital technologies to incubate and develop innovative solutions for retailers. Backed by a strong asset base and an information hub that offers daily insights on the industry, retailers, and their competitors, we deliver industry relevant consulting, solutions, and IT services and support. Contact For more information on TCS Retail Solutions and Services, please visit retail.solutions@tcs.com About Tata Consultancy Services Ltd (TCS) Tata Consultancy Services is an IT services, consulting and business solutions organization that delivers real results to global business, ensuring a level of certainty no other firm can match. TCS offers a consulting-led, integrated portfolio of IT and IT-enabled infrastructure, engineering TM and assurance services. This is delivered through its unique Global Network Delivery Model, recognized as the benchmark of excellence in software development. A part of the Tata Group, India s largest industrial conglomerate, TCS has a global footprint and is listed on the National Stock Exchange and Bombay Stock Exchange in India. For more information, visit us at IT Services Business Solutions Consulting All content / information present here is the exclusive property of Tata Consultancy Services Limited (TCS). The content / information contained here is correct at the time of publishing. No material from here may be copied, modified, reproduced, republished, uploaded, transmitted, posted or distributed in any form without prior written permission from TCS. Unauthorized use of the content / information appearing here may violate copyright, trademark and other applicable laws, and could result in criminal or civil penalties. Copyright 2015 Tata Consultancy Services Limited TCS Design Services I M I 05 I 15