January 23, 2012

By Len Denton

Business Model Innovation on the Retail Battlefield

Let’s talk about business model innovation in the retail space.  The retail sector is experiencing dramatic change as tech-oriented competitors like Amazon increasingly compete head-to head with traditional retailers like Target, Walmart and Best Buy.  The stakes are enormous and the outcome will likely result in tectonic shifts in the retail landscape within a few short years.

This most recent Christmas 2011 retail season was abuzz with two main themes.  First was the continued growth of online sales at the expense in traditional brick and mortar stores.  Christmas 2011 on-line sales grew by more than 15 per cent over 2010, exceeding $37 billion (USD)[1], an all-time high.  Second was the rapid emergence of a new retail phenomenon known as “showrooming.” In this article, I’ll examine showrooming, the threat that it holds for traditional retailers, and how they can innovate their business models to thwart that threat.

The spread of smart phones has put the power of the Internet directly into the hands of tech-savvy shoppers.  Equipped with instant access to online price comparisons, shoppers are increasingly comparing prices before making purchases.  In most cases, prices from on-line retailers are lower than prices offered in traditional brick and mortal stores.  As a result, shoppers will often visit the brick and mortar store to check out the desired merchandise, and then buy the item online at the cheaper price.  This is called “showrooming,” and it is happening so often that all major retail companies are starting to take notice.

This showrooming issue was amplified last fall when Amazon launched their Price Check smart phone app.  With the release of the Price Check app, Amazon upped the ante in their fight to win the shopping wars.  Using this app, an in-store shopper can simply scan a product’s bar code, and Amazon will give them a quick price comparison with Amazon’s own offerings.  The shopper can then purchase the product, confident that they are making a well-informed buying decision.   Amazon is counting on their competitive pricing to ensure that the shopper is buying from them while standing in their competitor’s store.  When this happens, Amazon has used their competitor’s store as their own virtual showroom.  It is a very smart tactic.

To make matters even worse for traditional retailers, Price Check includes a feature that allows the shopper to upload the brick and mortar price into Amazon’s database.  This is an absolute coup for Amazon from a competitive intelligence perspective.  Needless to say, retailers were apoplectic about Price Check and its potential to tilt the balance in Amazon’s favor.  Price Check and the showrooming that it enables have the potential to give Amazon a huge advantage over their traditional rivals.   For some additional insight, I’ve included an article from Time magazine in the footnotes.[2]  And to illustrate the power of showrooming from a personal perspective, I’ll share the following example.

My antiquated old vacuum cleaner died last week. On Saturday, I was in my local Target store shopping for a few household items.  I knew that Target had an extensive collection of vacuums on display, so I decided to check them out while I was in the store.  I found a model that I really liked, priced at about $100.  While this is not an expensive vacuum, it is a large enough purchase to make me somewhat price-sensitive.  So, I pulled out my trusty smart phone and opened the Price Check app.

Bingo!  Amazon had the exact vacuum I wanted in stock for immediate shipment at a price that was $10 less than the Target price.  All I needed to do was punch my Amazon “1-Click” button and the vacuum would be on its way.  I would get a good deal on my vacuum, Amazon would get the sale and Target would get skunked! (…or more precisely, showroomed!)

But it doesn’t have to be that way!

I frequently read articles in the business press extolling the advantages that Amazon has over its traditional brick and mortar competitors.  Low overheads, no stores, fewer employees, lightweight business model, etc.  And this is true…but only to a certain extent.  Here’s why.

When you have a shopper who is motivated enough to visit your physical store, who is actually standing in front of the very merchandise that they want to buy, this is not a problem.  This is an opportunity.  It is your price that is the immediate problem that needs to be solved.  In fact, the actual problem to be solved is to win an on-the-spot price re-negotiation against Amazon with this individual customer.  You can either win this customer-initiated price re-negotiation, or you will get showroomed.

So, let’s go back to the Target example.  I am standing in front of the vacuum I want to buy, looking at the Amazon price on my smart phone.  Should I press the 1-Click button to buy it from Amazon?

Wait…what’s this?  It’s a QR code on the product info label.  When I scan the code, it directs me to the product’s web page on Target.com.  And look.  Target’s online price for the vacuum is practically the same as Amazon’s price.  And if I click the button, Target sends a price matching e-coupon directly to my smart phone.  That means that I’ll get the same price as Amazon when I check out.  So, should I order from Amazon and get the vacuum in a few days?  Or should I accept the coupon and buy the vacuum from Target at the Amazon price?  In this case, I would probably buy the vacuum from Target.

What just happened here?  At the strategic level, two things occurred.  First, Target leveraged its core advantages in that moment – specifically, a motivated customer (me) standing in their store ready to buy.  Second, they realized that the problem they needed to solve was to win the on-the-spot price re-negotiation that happens when a smart, web-enabled shopper (me, again) pulls out their phone.

At a tactical level, Target leveraged their own excellent information systems to give me the price that I wanted at the point of the buying decision.  They also made a customized sale to a smart, informed shopper.  And, they did not get showroomed.  There is one more benefit to mention.  This is an elastic reservation-pricing model.  Target did not have to offer this lowered price to all of their vacuum cleaner shoppers.  They only need to offer it to shoppers smart enough to ask for it.

Innovating The Retail Business Model for Competitive Advantage

This on-the-spot price re-negotiation phenomenon is the real problem that Amazon is presenting to traditional retailers.  When the Price Check app emerged last fall, retailers were not able to respond effectively to it.  Amazon won nearly all of those renegotiation situations because retailers were not equipped to counteract it.  However, there is no reason why any smart retailer should ever be showroomed again.  Retailers should adopt three strategies to ensure that they win the on-the-spot price re-negotiation that showrooming introduces:

• Change strategic thinking to merge offline and online sales into one smooth continuum of customer interface.  Focus on customer experience.  Stores should always have a better experience than a website.
• Embrace mobile marketing concepts to extend and enhance the in-store experience.  Along with winning the on-the-spot price renegotiation, use smart phone technology to offer better product info, and even to improve customer service.  For instance, do you know when your best customers are in your store?  You ought to.  Would you offer me an incentive to check in when I arrive at your store (small discounts, free coffee, extra attention)?  You should.
• Upgrade your information systems to effectively compete with Amazon and other online competitors.  There is simply no reason to cede this technological high-ground to the newcomers.  Evolve quickly or die.

It’s wrong to assume that all of the competitive advantages accrue to Amazon in the ongoing retail versus e-tail battle.  Both sides have advantages that they can leverage.  The challenge is to define the problem effectively.  In this case, retailers have quite a lot of things that they can do to innovate their business models, and therefore compete more effectively against e-tailers like Amazon.

About the Author

Len Denton is President of Teknolio, LLC in Austin, Texas USA.  Teknolio is an innovation and technology commercialization services firm that helps tech entrepreneurs to accelerate their new products and services into the marketplace around the world.       www.teknolio.com.