Rise of online shopping can usually be contributed to three main factors that makes online superior to traditional brick and mortar stores, which are cheaper prices, convenience, and greater product range. This article will focus on the price aspect of online shopping, how it creates unique trends in the market, and how Australian traditional retailers are fighting this aspect of online shopping.
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Main reasons of why it is cheaper to shop online is already well established, the fact that online retailers do not spend overhead on a store, more staff, or physically housing products means that they can offer consumers a more competitive price. From the consumers’ point of view, buying online is also cheaper because it reduces product search cost, and while it is not immediately tangible, more and more are consumers are realizing this benefit.
Take the insurance market for instance, whether it is travel or car insurance. In the past, consumers would be attracted to the largest insurers, not quite realizing that often times their prices are more expensive. Internet and online shopping has changed this dramatically, where comparison sites makes it very easy to find the cheapest product possible for your needs. This is why smaller players are having a bit of a success in taking away market share from the big boys.
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There is also suggestion that skyrocketing gas prices are also another reason why consumers are moving away from traditional retailers and do their shopping online. It has been revealed in the United States that sharp rises in online shopping in the early months of 2012 coincide with spikes in gas prices as well. While it might be too early to say that there is a direct link between the two, it is quite logical that consumers are making use of the convenience they get from buying online, with the added bonus of not needing to spend a dime to actually go to a physical store.
Still in line with the insurance market example, there also has been increased price sensitivity among consumers who frequent traditional retailers. Take Australia for example, which has a presence of several big appliance stores such as Harvey Norman, Good Guys, Retravision, and several others. Each of these stores often times sell similar products, and compete hard on price. Since each store is a franchise, even prices between branches of the same retailer can vary quite wildly. Before, consumers might find it harder to get the best price for a particular product that is being sold in multiple stores, but with the presence of the Internet, this process becomes very easy.
Interestingly enough, marketing literature has indicated that price dispersion, while limited in the online environment, still exists in online shopping malls (Petrescu 2011). Stigler (1961, 214), who wrote a seminal article regarding price dispersion, explained that price dispersion is a “manifestation, and a measure of ignorance of the market”. It is quite interesting that even with the level of ease that is being presented to consumers in an online shopping environment, they still look for cues to always simplify their purchase process. Some of the things that they look for are the retailers’ reputation and brand equity, as well as their reluctance to experience information overload (Brynjolfsson and Smith, 2000).
This shows to traditional retailers that even with ever lowering prices and profit margins, there is hope of establishing a measure of branding in an online environment. What they need to realize is that they have to transfer the experiences of servicing consumers in a brick and mortar store to the online setting. Paul Greenberg, CEO of DealsDirect.com says that disruption and opportunity go hand in hand, and claims that new retailers should take advantage of the ‘white-flag’ approach taken by some of the more seasoned brick and mortar retailers. Reinventing the retail game is not easy, but it is what is required to those who want to survive.
if you're not pumped after seeing this, you're taking a 'white-flag' approach
References:
Petrescu, M. 2011. Online Price Dispersion – more than imperfect information. Journal of Product & Brand Management 20(7): 541-548. Emerald. http://emerald.com (accessed March 28, 2012).
Stigler, G.J. 1961. The Economics of Information. Journal of Political Economy 69(3): 213-215. Quoted in Petrescu, 2011.
Brynjolfsson, E. and Smith, M.D. 2000. Frictionless commerce? A comparison of internet and conventional retailers. Management Science 46(4): 563-585. Quoted in Petrescu, 2011.
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