At home, I have quite a few cats, enough of them that I must stay keen and alert on pricing for the brand and type of cat food my cute little felines prefer. Not only do I try to buy quality food for my kitties, but I also try to buy enough to last them anywhere between 3 weeks to a month and a half. As a result, I’m exceedingly price-conscious.
Just around the corner from my house, there is a PetSmart. Pricing on the specialized cat food of choice is quite high at PetSmart; however, through Chewy.com the pricing for the same, exact product is much more competitive. PetSmart, which acquired Chewy in 2017 for $3.35 billion dollars, promises price matching with – well – themselves and other stores (minus the competition’s online stores).
This is a pricing strategy that I personally found rather odd. Why not give customers the lower price across the board from the very beginning? Why place the onus on the customer to compare pricing with Chewy.com and delay the checkout process by forcing customers to pull out their phones, navigate to the relevant page, and show the cashier the lower price so that they have to punch a few extra buttons on the computer to price match – all while the customers in the line behind them may potentially groan and roll their eyes?
To find out, we first have to take a look at the implications of the Internet for the price aspect of the marketing mix. These implications are as follows, per Dave Chaffey and Fiona Ellis-Chadwick’s textbook, “Digital Marketing: Strategy, Implementation, and Price”:
- Price Transparency and Differential Pricing
- Commoditization including downward pressure on price
- New pricing approaches
- Alternative pricing structures or policies
To illustrate the pricing tactics and overall marketing strategy PetSmart may be using, we’ll stick to the first implication listed above.
Price Transparency and Differential Pricing
Although purchasing behaviors vary across different types of consumers, one thing is certain: it is fairly simple to find out whether a manufacturer/retailer is practicing ‘pricing discrimination.’ Pricing discrimination occurs when a seller offers one price to one type of customer for a certain product and another price to another type of customer …for the same product. The Internet has facilitated price transparency, which can be described as consumers’ ability to discover pricing structure and information due to the increased availability of such information online.
Most consumers are aware of the pricing fluctuations of their favorite products, whether these products are purchased online or in the real world. This is where the price elasticity of demand is important, a concept that describes the measurement of change in demand for a product/service in response to changes in price. If an item is ‘elastic,’ it means that changing its price will dramatically affect demand. An item is said to be ‘inelastic’ if the opposite occurs – that is to say, a change in price does not affect demand by much.
In the case of PetSmart and Chewy, it’s very easy for those who are considered digital natives (Millennials and Generation Zs) to price match PetSmart’s products. Even Boomers have adapted to this behavior. Wouldn’t this mean that the consumer would distrust PetSmart for their seemingly ‘sneaky’ way of getting shoppers to pay a higher price?
Commoditization occurs when product selection is based and becomes more dependent on differentiating benefits, features, and value-added services, per “Digital Marketing: Strategy: Implementation, and Price.”
This is where the price differential strategy of Petsmart starts to make sense: while they may lose some margin in those in-store transactions, they are counting on customers going home and creating a Chewy.com account. Why? They want to drive consumers to the website so that they may not only get the lower pricing but also subscribe to “auto-shipment,” which translates to yet another discount for the consumer.
“Customers who had signed up for automatic recurring shipments made up 66% of Chewy’s sales in 2018, according to a securities filing.”
In other words, it wouldn’t be a complete loss to PetSmart because that lost revenue is found again through the increased usage of auto-shipments.
There are many other factors that affect pricing, to be sure, and as the other implications noted above imply, the Internet has a tendency to lead retailers to drive down on price – or at the very least experience ‘downward pressure’ – because of price transparency and the high number of competitors. In PetSmart’s examples, they are by no means monopolizing the market share in the pet product industry. Offline advertising is just as important, then, as online advertising. To build trust and win customer loyalty, PetSmart attempts to continue capturing its audience’s attention in the real world, with the added convenience of simply being able to drop by one of its stores to buy pet food if the immediate urgency exists. As such, however, PetSmart must remain vigilant to its competitors and what’s happening in the online marketplace to remain profitable.