Download FREE eBook on 10 untold Malaysian stories: Unboxing eCommerce Entrepreneurs

Online price war: competitive instinct ahead of profit?

November 29, 2013 EC Milo Category : , , , ,


Online price wars

Retailers both online and offline start price war basically with the objectives to achieve their sales target and win market share.

In brick and mortar, a very common approach by local grocers is to promote loss leader deals via newspapers. They use attractive deals to "bait" consumers to walk in their outlets and also spend on other items which retailers will enjoy better margins.

AEON Big has a bolder approach of offering store-wide 5% discount (which we have witnessed a couple of times since May 2013) after taking over Carrefour here in Malaysia. No doubt it will cut into a grocer's margin which is around 15% in average.

Tesco on another hand has more interesting strategy by offering RM20 e-coupon with minimum RM100 purchase, to get customer experience shopping online from Tesco for the first time.

Related article: Our online shopping experience with Tesco


What about online retailer and price war?


The competition is definitely getting hotter and hotter here, especially with the Cyber Monday campaigns in Malaysia recently.

We have witnessed that an online retailer (let's name it R-retailer here) offering Samsung Galaxy Note 3 (LTE) at a rock bottom price, selling at RM1,799 (RRP: RM2,399).

Samsung Galaxy Note 3 at RM1,799

Although there are limited units on time-sale, we received some feedback that it has caused a stir in the market with a number of brick and mortar retailers worried about "price drop" and quickly released the model on thinner margin.

We have spoken to a Sales Manager from one of the largest ICT distributors here who preferred not to have his name disclosed:

No doubt online price war will benefit consumers but it is hurting the traditional businesses and the overall industry in the long run.

Even if you miss the super deal above, you can still get it for RM1,991 from R-retailer which supposedly is the cheapest in town. R-retailer's direct competitors at that time are still selling Note 3 at more than RM2,000.

Samsung gadgets at super prices

Within days, one of the R-retailer's competitors, let's name it L-retailer here, has adjusted the price to RM1,969, which is slightly cheaper than R-retailer.

Samsung Galaxy Note 3 at RM1,969

The competition to fight for online customer is intense, but at what cost?

According to our findings, the retailer's cost price for a Samsung Galaxy Note 3 (LTE) in November 2013 is between sub-RM2,000 to RM2,100.

That means both R-retailer and L-retailer are either making losses or razor-thin margin if we factor in the payment charges and fulfillment cost.

You have to wonder whether this is a matter of competitive instinct coming ahead of profit, rather than careful analysis of return on investment.


Aggressive pricing: medicine or poison for online retailer?


For sure consumers are the winners here but question mark on whether etailers are able to build loyalty with customers acquired in such way, particularly with price-sensitive items.

Will it be beneficial for etailer in the long run betting on high acquisition cost?

The only way to find out is to perform a careful analysis of customer lifetime value, but it has to be before you go on an aggressive strategy. The grocers that we mentioned earlier in this article are surely doing it, but how about online retailers especially those without strong retail expertise and experience?

Bernard Yap, E-Marketing Manager of Senheng, the largest electrical chain store in Malaysia, has shared his opinion with us on online price war:

In Senheng, we don't believe in doing business by hurting your bottom line, be it offline or online store. If everyone is engaging with price war, you make less margin or even worse lose money. Online retailers should focus on providing better service, extra value or benefits for customers instead of just playing with price alone. Unless you have a sustainable cost advantage, it is challenging to provide good service level to your customers, which is very important to build loyal customers and grow your business.

Yes, hurting your bottom line by giving big discounts might help in your short term results but your competitors can respond too. This might lead to more desperate attempts to lower prices with the hope of winning market share.

This will only reduce the profitability of the entire industry and if every retailers are making less profit, the service level will drop and we have higher chances to end up being an unhappy customer after all.

RELATED POSTS

What say you?