How Retailers can use Price Match Guarantees to their advantage

Understanding customers to optimise Price Match Guarantees

Once you know how to measure success, it is time to understand the likelihood of success. There are many relevant areas to assess such as the competitive landscape, the degree of identical products across competition, perceived level of fairness and the customer value map.⁶

With the latter area, customer understanding, we know value is important to customers and we know that the perception of value is inherently dependent upon how the customer perceives the product, the benefits it offers, and the alternatives. Due to the complexities of pricing, prices are largely processed subconsciously and therefore subject to many psychological influences.

To illustrate the complexity of price perception, imagine your local store. A traditional discounter will have ~5,000 SKUs (Stock Keeping Unit), while a supermarket or hypermarket can have anything from 10,000 to 100,000 SKUs. Most retailers change prices on a regular basis, some up to 10% of the assortment per week and on some key lines up to several times a day. With this many price changes, how are customers supposed to know what the actual prices are in the store?

To make this easier to address, we’ve broken the price perception down into seven levers using qualitative and quantitative research. With this framework it is possible to assess which drivers are most important and which role an existing PMG is playing.

Another way to approach optimisation of a PMG is to understand

1. A customer’s willingness and ability to spend time to do the price matching?
2. How price sensitive are customers?

Let’s shed some light on how to answer the above two questions.

Locals, Advanced and Price Sensitive Customers

A key criterion to effectuate the PMG is that there is a willingness and an ability to search for competitor prices. With an increasing share of products sold online, comparison engines such as Pricerunner or CamelCamelCamel have created increasing price transparency i.e., customers can search for prices.  It’s important to consider however that willingness to use these websites to price match is likely to be correlated to purchase frequency and the price point of a particular product in question. Higher price points on less frequent purchases are going to be less of an “impulse” buy. If purchasing a durable good as oppose to a consumable there is increased likelihood of price comparison.

When it comes to the willingness, we can use search cost as a proxy. Search cost is a term from economics defined as the time, energy and money expended by a customer who is researching a product or service for purchase.⁷ Price sensitive customers can be defined as “those with high willingness to invest time and cost to save money”.⁸ Some customers will have high search costs, and some will have low depending on the urgency and price and product knowledge. When you are locked out of your apartment you care less about the price of a locksmith than urgently getting back inside. Customers with high price knowledge can be classified as a “Tourist.” They are less sensitive to price as they do not know the “Local” prices and may be in a different mindset than the “Locals”. From the product perspective we have the “Beginners” who are still learning about the hobby, so they have high search costs, low base level demand and inelastic price behaviour (not buying in bulk). Conversely, the “Advanced” know the hobby well and therefore, have low search costs and an elastic demand.⁹

By using data and segmentation it is possible to assess the likelihood of a PMG succeeding. More Locals, Advanced and Price Sensitive customers will increase the likelihood of PMGs being both noticed and appreciated. Furthermore, some categories might be more relevant for PMG than others.

Managing public blow back

Finally, an important element of pricing is fairness and there are few things that can threaten customers feeling of fairness more than price discrimination. The areas of contention are:

• Does a PMG decrease or increase competition and thereby prices?
• Can customers trust that the PMG offer the lowest prices?

Price decrease or increase

The refund only applies to the customers who find a price difference while other customers effectively will be discriminated upon. This is what theoretical economists call the Price Discrimination Theory. This school argues that since not all customers will be equally price sensitive and/or willing to search for price differences, the firm has an incentive to win back lost margin with the price sensitive by raising prices for the non-price sensitive customers. This is further supported by the Implicit Collusion Theory which argues that with PMGs it becomes futile to lower prices as this would trigger a race to the bottom. However, in practise it can be observed during price wars and the summer period, where prices under price matching have been both increased and decreased.

On the other hand, scholars within the marketing literature have, through the Signalling Theory, found that a PMG effectively gives the power to the customers who can vote with their wallet to force ’high‘ cost retailers to either abandon PMG or lower prices.

Whether this leads to higher or lower prices for customers in aggregate is still debated among academics, practitioners and politicians but understanding the arguments for and against is the best way to face into discussions on PMGs in a fairness and/or political context.

False sense of security?

It is not a given that just because a retailer has a PMG that they also have the lowest prices. Anecdotal examples of promoted products not being available in store, or prices not actually being cheapest could make customers feel like they are being cheated. It has also been found that in some cases up to 86% of retailers that offered a PMG did not offer the lowest price.¹³ It is therefore essential to have a solid web scraping or monitoring system in place to be proactive and manage situations where customers feel the PMG gives them a false sense of security.

Recommendations for retailers

A PMG is one tool in the toolbox of retailers who are either discounters or hi-Lo. The overall measure of success should be to increase loyalty and price perception. To do this well we recommend the following:

• Use the 7 Levers of Price Perception to consider the strength of other drivers of price perception before pushing ahead with a PMG ¹⁴
• Run a Price Perception study or a Segmentation project to understand how to measure success
• Seek additional understanding of customers to optimise PMG by segmenting customers into price sensitivity, ’Tourist‘, ’Local‘, ’Beginner‘ and ’Advanced’
• Implement an automatic monitoring system of competitor prices to ensure compliance with PMG

To learn more about how Pricing and Promotions solutions could help your business, get in touch with your local dunnhumby representative.

¹ dunnhumby RPI reports, various, 2020-2021
² https://www.thesun.co.uk/money/7189960/asda-scrap-price-match-scheme/
³ https://www.mirror.co.uk/money/tesco-scrap-price-match-guarantee-12793947
⁴ https://www.tesco.com/groceries/en-GB/zone/aldi-price-match
⁵ https://www.tescoplc.com/media/757092/_tesco-plc-preliminary-results-2021.pdf
⁶ https://www.strategyzer.com/canvas/value-proposition-canvas
⁷ https://www.strategyzer.com/canvas/value-proposition-canvas
⁸ Pricing strategy: setting price levels, managing price discounts, & establishing price structures (Smith 2017)
⁹ https://www.investopedia.com/terms/s/search-cost.asp
¹⁰ Pricing strategy: setting price levels, managing price discounts, & establishing price structures (Smith, 2017)
¹¹ Price-Matching Guarantees as a Direct Signal of Low Prices (Mamadehussene, 2009)
¹² “On the Use of Low-Price Guarantees to Discourage Price Cutting” by Arbatskaya, Hviid, and Shaffer (2006)
¹³ It might be that base prices have a bigger impact on price perception and that using data to identify the right KVIs for price-sensitive customers and invest in those rather than activating a PMG is a better strategy