The Value of a Price Match Guarantee11.28.10
I'm watching the Giants game right now and a Best Buy holiday commercial came on. At the end of it, it summed up the commercial with "Get unbeatable prices with our price match guarantee."
I thought there were some interesting facets to this:
1. Why is Best Buy promoting themselves with price?
Best Buy has a long established relationship as a high-quality electronics big box store. They were never known as the cheapest place. That distinction previously belonged to Circuit City (who obviously has since gone out of business) and regional players -- many of whom have gone out of business. Undoubtedly, Best Buy is now being slaughtered by the really large retailers (WalMart, Target, etc.) and online (amazon and others). So this is their new tact. I think this is a terrible tact.
Pricing is not a sustainable advantage unless you have an unassailable cost structure. The only way for them to have an unassailable cost structure is if they're the biggest guys on the block. This is what WalMart does -- they beat down on their suppliers to constantly get lower cost of goods and maintain reasonable margins on their products. Over time, this has resulted in a small but decent margin (15% I believe?) -- and an overall strategy / brand associated with low pricing. I don't think Best Buy can win or perhaps even survive by pushing price. WalMart and Target will hit them on specific items (this is what they've done in toys and have come to dominate that category), amazon will continue to crush BestBuy.com on a number of fronts, and the online world will continue to broadly underprice their products for those bargain shoppers.
2. How is Best Buy promoting themselves with price?
This is one of the most baffling portions of the commercial to me. I think it's just bad marketing. Think about the logic of their tagline: "Get unbeatable prices with our price match guarantee." I'm a consumer. I have this brand association of Best Buy -- higher end store with ok prices (at best). So I hear this commercial. What does it mean? It's saying that they have unbeatable prices but only because they have a price match guarantee. That means that I, as a consumer, have to tell Best Buy that I saw a better price elsewhere and now I can get that product for that price at Best Buy but only if I tell them. Here's everything that's wrong with that:
a. It mentally marks in my mind that Best Buy may or may not have the best price for an item -- that I have to hunt around to determine if it is the best price.
b. If I did hunt around, I then have to decide not to buy from the place that had the best price and go to Best Buy. Unless that other place is skeevy in some way, why would I do this?
c. I have to then interact with Best Buy sales people (and generally people don't like interacting with the sales people) in order to get... the same price as it is somewhere else!
3. Can Best Buy win with this strategy?
Absolutely not. When I was at amazon, Best Buy was the absolute gold standard in terms of Electronics. They were huge, had tons of physical stores, offered a pleasant buying experience, and were very profitable. Obviously the world has changed -- so much of Electronics has gone online, huge retailers like WalMart and Target have gobbled up a lot of market share, and Best Buy has been desperate to find a new path. The last time I was in Best Buy, they even carved out a huge portion of their store to start selling kitchen appliances and housewares -- something that struck me as completely off-brand. It was very nicely done and executed, but is that a natural product extension for Best Buy. I'm doubtful.
The challenges Best Buy is facing is no different than what many other huge retail segments are facing -- most prominently books and toys (and to a lesser extent music and DVDs but those have some more unique challenges associated with them.) Basically, the market dynamics are working against them -- and that's probably one of the worst situations for them to be in.
A number of years ago, Circuit City and Best Buy started to tinker around with the strategy of trying to marry their online and offline strategy as a way to give more value to consumers over just online customers. Not a bad idea. They never hit on anything that really worked, but it was a good start. I don't have a solution for them -- but the solution has to be solved with value -- value to the customer. What value can Best Buy offer that WalMart, Target, or amazon.com cannot? I have no doubt that Magnolia Hi-Fi will be around for a very very long time. Why? No one can compete with them in terms of high-end electronics and excellent customer service. WalMart and Target will not enter that segment and amazon.com basically cannot. Best Buy needs to find its equivalent.