This week in the marketing course I am teaching, we are studying the wheel of retailing. This concept describes how retailers enter the market and evolve, a cycle that creates opportunities for new entrants. As explained in our textbook, Marketing: The Core, retail outlets typically appear as low-status, low-margin stores. In stages two and three, retailers add offerings, resulting in higher prices, margins and status. By stage four, new retailers enter the market with the simple characteristics and low prices that the original retailer presented in stage one. And per John Fogerty in “Proud Mary” and Lynyrd Skynyrd in “Sweet Home Alabama,” a big wheel will keep on turning.
Richard Tedlow, Harvard Business School professor and business historian, likens the wheel of retailing to disruptive innovation, a concept by fellow Harvard instructor and author Clayton Christensen. Disruptive innovation is the pattern of companies gaining a foothold with new, simpler and more focused offerings to satisfy target markets in ways that larger, more established companies cannot or will not. These new offerings can usurp the status quo as they gain acceptance and popularity, moving from niche to mainstream. In his landmark book, The Innovator’s Dilemma, Christensen lists bricks-and-mortar retailing as a sustaining (status quo) technology with online retailing as the disruptive technology upending it.
And yes, as disruptive companies build their success, they can fall victim to the same practices that made their early competitors vulnerable: more complicated and expensive offerings with a corporate culture that defends such marketing strategies. This cycle matches the wheel of retailing’s successive stages of broader product/service lines, bigger stores, higher prices and increased profit margins. The stage is set for newcomers to attack lumbering market leaders.
Electronics is the retail segment currently providing the most vivid lessons in the wheel of retailing. The Wall Street Journal reports that major chains such as Best Buy, Game Stop and Radio Shack are fighting for survival. The battleground is the marketing P known as “price” as online retailers, exemplified by Amazon.com, can sell hard goods like TVs and downloadable digital products without the markup required for costs in real estate, utilities and labor. Until recently, online retailers also avoided charging sales tax; however, this price issue is being leveled in numerous states as sales tax is now applied to online purchases.
In particular, Best Buy has represented a rapidly rotating wheel of retailing. The company emerged with an everyday low price strategy, the classic stage one descriptor. Best Buy brought the big box store concept to electronics retailing, outclassing the previous nationwide champ Circuit City and dwarfing selection in the electronics sections of traditional retailers such as Sears. It was a “category killer” similar to The Home Depot, which also cleaved Sears specialties–hardware and appliances–and sold them from hangar-sized stores. Best Buy’s offerings grew in tandem with its physical footprint from coast to coast. Appliances, home theatre systems, computers, mobile phones and physical media (CDs, DVDs) filled the square footage.
One of those very products–mobile devices–united with the disruptive technology of online retail to undercut Best Buy from under its own roof. “Showrooming” is the phenomenon of consumers investigating products in a bricks-and-mortar store and then shopping for the best price online, often while standing in the aisle. Amazon created the Price Check app, allowing consumers to scan products to verify their availability and pricing at Amazon. Electronics retailers are revamping in response to such changes in consumer behavior. Best Buy is closing and downsizing stores. Game Stop is focusing on reselling used Apple products.
In turn, online retailers are not standing still, particularly when it comes to their marketing silver bullet, price. Many of them are changing product prices several times within a day in a strategy likened to “yield management” pricing used by the hotel and airline industries. Yield management employs sophisticated technology to calculate and offer bargain prices at the right moment to ensure sales of rooms and seats that would otherwise go to waste if not sold (If a ticket is unpurchased on a flight, that revenue is lost forever once the plane leaves the ground.) Unlike its use by hotels and airlines, the dynamic pricing strategy of online retailers is not intended to move a “perishable” offering. Their price alterations fulfill search engine optimization, putting the lowest-price merchant at the top of search results, a 21st century example of a “place” strategy.
As The Wall Street Journal points out, airlines and hotels face fairly limited competition for a given seat or room. The availability of mass-produced products like electronics and appliances and the prevalence of online retailers make competition far more volatile when online retailers use dynamic pricing. The wheel of retailing turns once more. Cue up some CCR and Skynyrd.