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The Inconvenient Truths (Part Two) – Cheap Price Will Not Solve Your Problems.

I’m not sure if there has ever been a time in retail history when industry thinking and social trend have been more obviously headed in different directions. Retail industry thinking is dominated by cheap price as the dominant attribute and ‘profit through volume’ as the underpinning. Social trend – fueled by new technology enabling 24/7 access to the world and total transparency – is heading in the direction of expression of self, a thirst for turn-on (right here, right now), 24/7 access to the world and a level of transparency never seen before.

Don’t get me wrong, profit through volume (The Wal-Mart philosophy) is a very powerful business model. For one or two players in each market segment. That player will inevitably own cheap price, the lowest cost of doing business, the lowest margins and the highest volume. They become the 40 tonne gorilla. Competing with a 40 tonne gorilla on their terms is not a strategy with a high likelihood of success.

Today in Australian retail we see margins in steep decline and volumes up but not enough to offset the margin decline. We over-expand business models to breaking point chasing a level of volume increases that doesn’t exist in a relatively static, mature population. As a result more and more retailers are getting into difficulty trying to discount their way out of the hole. In order to survive they radically reduce their cost base.

Some years ago I bought one of the first plasma televisions released. It was forty two inches, pretty basic television functionality and cost AUD$6,200. Just before Christmas I bought the latest fifty five inch HD plasma, with all the bells and whistles for AUD$1,200. Now I know the Australian dollar is stronger than it was when I bought the first TV, but there is no way that increased sales volumes can offset that level of price decline – in any category.

Shoppers are re-drawing the lines of what they see as commodities (must have needs that are almost grudge purchase essentials) and turn-ons (that are about experiential reward first and how the hell I’m going to pay for it a distant second). They are using the technology at their disposal to educate themselves about where they can buy commodities the cheapest and what the latest turn-ons are and where they can access them. In a world that is constantly looking for stimulation, dumbing down your retail business to sustain cheap price will more often than not destroy or distract from the source of competitive advantage that is the basis of your future.

Cheapest price is the most transparent and easily benchmarked attribute in today’s shopping context. And it will only get worse as more and more apps and technology solutions deliver instant price interrogation, group buy negotiation, access to grey market options and cross-border purchases. In the cheapest price world – where you don’t just have to be cheapest locally but globally – a transactional customer experience that has been stripped out due to cost cutting provides no defence.

Retail must re-embrace controlled inflation as our friend and re-discover the ability to sell customers up to the next price increase with added features and benefits. To make that work though, we need to deliver stimulating shopping experiences to shoppers who love shopping.