Rapid growth in online sales. Staggering drops in earnings for brick-and-mortar department store chains. Specialty retailers going out of business. This phenomenon has a name: The Amazon Effect.
Regardless of your retail segment, Amazon is your competitor. From computers to garden gloves to bicycles, Amazon sells it. And chances are, they’re doing it better than you.
Amazon captured more than half of all online sales growth last year and now has a market value greater than 10 of the most well-known retailers combined. The Amazon Effect has real consequences. The Sports Authority is gone. JC Penney is closing 140 stores. Upscale department stores like Nordstrom and Saks are turning to off-price formats to make up for lost revenue.
Amazon continues to raise the bar across three dimensions, which is clearly resonating with consumers:
They offer a growing assortment of products. Amazon has methodically added new categories over time, such as groceries and auto parts, which makes one-stop shopping more of a reality. They have launched in-house fashion apparel brands and are expanding their portfolio of private label items like vitamins to offer alternatives to traditional brands.
They continue to pioneer in customer service and experience. One-click purchasing, highly individualized product suggestions and Prime benefits make shopping compelling. Combine these features with the Alexa smart home device and you get a very differentiated retail experience.
As if all of this isn’t enough, Amazon woos customers with its pricing approach. Amazon often begins with low prices and is selectively responsive to external pricing actions. On top of that, they are addressing customers’ desire for price transparency by de-emphasizing list pricing, and they shy away from couponing.
Trimming store counts and cutting expenses may be necessary defensive steps, but that won’t lead retailers to long-term success. The fastest – and arguably most impactful – way to fight back against the Amazon Effect is by managing prices. It’s easier said than done, however. The biggest question for retailers is when and how to respond. Some retailers have dropped prices across the board, and others have relied on more promotional activity. Those moves are broad strokes and can crush margins and damper top-line sales.
The discipline of “adaptive pricing” introduces an analytical framework for retailers to be more targeted with their pricing actions. They can build better decision-making capabilities to answer key unknowns including “what prices should we match and which should we ignore?” and “how do we think Amazon will respond to our price changes?”. These better predictive capabilities can help retailers succeed.
The choice is simple: Fight back or be disrupted. In my next blog, we’ll explore how retailers can leverage adaptive pricing to combat The Amazon Effect.