Pricing Challenges in Multi-Channel Retail

Online retailing has now become a part of our everyday lives. Companies like Amazon have swooped in from nowhere and have suddenly grown into one of the largest companies in the world today. The online companies took the world by storm. Their growth has been sudden and astronomical. Hence, many big businesses did not get time to react. For instance, Wal-Mart now faces a direct threat from Amazon. Hence, in order to compete with Amazon, it has become necessary for Wal-Mart to go online. This competition has created the need for what is now being called multi-channel retail.

In this article, we will have a closer look at what multi-channel retail is. We will also try to understand some of the challenges which are commonly faced while creating a multi-channel retail strategy.

What is Multi-Channel Retail?

Multi-channel retail is a marketing strategy designed to offer consumers several mechanisms to purchase a product. The idea is to enable customers to use online channels as well as brick and mortar channels. This helps to maximize revenue as well as increase customer service. This idea is particularly useful for companies such as Wal-Mart who already have a lot of physical infrastructure at their disposal. Companies following the multi-channel retail are capable of providing their customers with a wide variety of products as well as the convenience, which is usually associated with online shopping.

However, there is a problem with multi-channel retail. Companies usually long to provide a uniform experience to their customers. However, the prices provided by competitors online are generally lower than store prices. Therefore, there is an inherent pricing discrepancy, which makes it difficult to maintain pricing parity across different channels. However, in the case of multi-channel retail, companies are forced to ensure that their prices are consistent regardless of which channel the customer uses to buy the product.

This creates a pricing problem when companies use the multi-channel retail strategy. Details of the pricing problem have been discussed below:

Challenges Faced in Multi-Channel Pricing

1. Different Cost Structures: The first and foremost challenge which is faced in multi-channel pricing is that the cost structures of different channels are totally different. For instance, the cost structure in an online store is mostly variable. This is because, if a greater number of orders are received, a greater number of people have to be employed for picking, packing, and other activities in a fulfillment center. Online companies generally use a temporary workforce, which can be increased or decreased based on business need during a particular time period.

   On the other hand, the cost structure in a brick and mortar store is mostly fixed. It does not matter whether the number of orders received is more or less, the costs tend to remain about the same.

   From the above explanation, it is clear that the pricing varies according to the channel being used. This makes it challenging for the retailer to come up with a price that can remain standard across different formats. The wrong pricing would mean that the company would sell more products from the wrong channel. This might seem good at the first instance but will obviously have a negative impact on the bottom line in the long run.

2. Different Competitors: Another problem with multi-channel retail is that the company is simultaneously competing with many different types of entities. The company may be facing competition from brick and mortar stores as well as e-tailers. The strategy to compete with these two classes of competitors is usually different. For instance, brick and mortar stores tend to compete with each other based on the breadth of services that they offer and also the variety of merchandise that they carry.

   In the case of online retailers, the breadth of merchandise is not really a constraint at all. Hence, competition happens mostly on price. Companies which have multi-channel retail strategies are forced to cut costs by their online competition. These lower costs then lead to losses in their brick and mortar businesses. Focus is an essential trait that a business must have in order to succeed. Unfortunately, multi-channel retail dilutes the focus of the firm.

Consumer Behaviour that Leads to Multi-Channel Retail

Even though multi-channel pricing is a complex activity, it needs to be performed by companies. This is because the consumer today thinks across product channels. The average consumer walks into a store to try on products. However, before making the purchase, these tech-savvy customers definitely check the prices online to see whether they can get a better deal for the same product. Hence, if a brick and mortar store does not have an online presence, they are likely to lose a lot of customers to online retailers. The reality is that customers do not mind minor variations in price between different sales channels. They are likely to value time and convenience over minor price differences. However, if the price differences are huge, then the customers may end up being poached by e-tailers.

The fusion between online e-tailers and brick and mortar companies is relatively new. However, given the investments that have already been made, it seems to be here to stay. It is therefore important for companies to ensure that pricing parity is maintained across different channels without losing money in the process.

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