In the UK a department store called John Lewis has used a famous slogan “Never knowingly undersold” for 82 years to reassure customers that the best deals can be found at John Lewis.
If customers found the exact product cheaper elsewhere, then John Lewis would guarantee to match the retail price and refund the difference.
John Lewis did regular price checking and, where lower prices were discovered, they lowered their prices to match or beat the competition.
But times change and yesterday John Lewis admitted that its promise to beat any competitor on price will only apply to shops within 8 miles of the particular store.
This was a move forced on John Lewis through the changing trends in retail.
John Lewis are a traditional retailer with stores on the High Streets of the major cities and towns in Britain. But retailing has changed in the 82 years since the price matching promise was made.
Out-of-town warehouse style outlets and Internet based competitors have much lower costs and have the ability to sustain prices below John Lewis.
As from 20 October 2007, the price promise changes to bricks and mortar outlets within an 8 mile radius of the store and this is being tested in Aberdeen, Glasgow and Edinburgh.
The Customer Benefits of Price Promise Guarantees
The customer benefits of this type of price promise guarantee is that it makes it more easier for the customer to buy from a source that it trusts.
No longer does the customer have to visit all kinds of different outlets to check prices on major household purchases.
It adds certainty to the process, reduces buyers remorse and the bad-will from finding an item you’ve just bought at a significantly lower price elsewhere.
But it may not give you the main benefit that you expect – lower prices.
The Supplier Benefit of Price Promise Guarantees
The implied suggestion behind a price guarantee is that prices are guaranteed to be low but it doesn’t necessarily work like that.
In retail situations where products are standard and service levels are likely to be similar, price is the main differentiator.
Whoever sells at the lowest price wins the order and pockets the incremental margin made on the sale.
Let’s look at what may happen in a simple example with a television.
Store A sells a television for £250 that it can buy for £150 and makes £100 margin.
Store B enters the market and doesn’t have the purchasing power of store A and pays £170 but decides to sell the TV for £240 as it is happy with the £70 margin on the business it believes it can capture from undercutting Store A.
Prices could be reduced in tit-for-tat moves all the way down to Store B’s purchase price, beyond which it cannot go.
But if Store A has a price promise guarantee, “we will match or beat any rival offering” then look what happens when Store B enters the market.
It looks at Store A’s price and looks at the price guarantee. It immediately knows that there is no incentive to undercut Store A. Instead it will price match at the £250 level. Nothing else makes sense as Store A has the market power to beat Store B at the discounting game.
So in this situation we have a price guarantee that appeals to consumers and creates customer goodwill as it suggests fair deal pricing but it actually leads to higher market prices.
This is the power of price signalling – provided the threat is credible and people can see the rival prices, this type of price guarantee removes any temptation to price cutting. The pay-offs just don’t work – a lower per unit margin and no increase in sales volume to compensate.
The effective use of price guarantees are a great example of the way that game theory can be built into business strategy. Game theory is the most effective way of looking for likely responses from your competitors.
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