Battle lines are drawn in consumer electronics price war

Retailers like best buy are planning deep discounts for the holiday shopping season.

It’s not just family conflict that breaks out during the holiday season. Retailer price wars are also an annual part of the holiday experience. Best Buy and Wal-Mart both promise deep discounts on electronics this year. Amazon and online retailers will offer hot deals as well.

People love to throw around the phrase price war as if such events break out unexpectedly. But chains actually prepare for battle months ahead of time.

“It may sound like it’s reacting or that they’re spontaneously deciding that they’re going to run deeper discounts,” says Theresa Williams, who directs the Center of Education & Research in Retailing at Indiana University Bloomington. “But very often, these companies already have that built into their plan.”

Companies stock their arsenal all year long by setting aside money for sales, shipping deals, and special offers, enough to fund long engagements with the competition. But as a famous commander once observed, no plan survives contact with the enemy. When conflicts get out of hand, profit is at risk as companies slash prices more than planned. Money overspent cutting prices comes out of company profits.

It’s a balance struck by looking at company finances and competitors’ moves. Retreat from sales and the competition captures your customers. Attack too hard with deep discounts and you lose money in a quagmire. Anything can be in the crossfire, but year after year, retailers push electronics to the front lines.

“Some of these products, DVD players for $9.99, certain video games and so forth, those attract the right kind of people, so that’s where the competition is,” says Vishal Singh, marketing professor at New York University’s Stern School of Business.

Singh says shopper data show people pick up other things along with those video games, making up for the markdowns. Price combat takes a toll on companies. But there’s a key difference from real war. Civilian bystanders in price wars do well.

“It’s a treasure hunt for a lot of customers,” says Cheryl Holland Bridges, director of the Center for Retailing Studies at Texas A&M University. “I always like a good deal. I think everyone does.”

That is, everyone except investors, who don’t like it when retailers get too belligerent.

Mark Garrison: Price wars don’t just break out. Chains prepare for battle months ahead of time.

Theresa Williams: It may sound like it’s reacting or that they’re spontaneously deciding that they’re going to run deeper discounts. But very often, these companies already have that built into their plan.

Indiana University retailing professor Theresa Williams says chains stock their arsenal all year by setting aside money for sales, shipping deals and special offers, enough to fund long engagements with the competition. But as a famous commander once said, no plan survives contact with the enemy. When conflicts get out of hand, profit’s at risk as companies slash prices more than planned.

Williams: Each dollar spent over in that markdown budget is a dollar subtracted from gross margin profit.

It’s a balance struck by looking at company finances and competitors’ moves. Retreat from sales and the competition captures your customers. Attack too hard with deep discounts and you lose money in a quagmire. Anything can be in the crossfire, but year after year, retailers push electronics to the front lines.

Vishal Singh: Some of these products, DVD players for $9.99, certain video games and so forth, those attract the right kind of people, so that’s where the competition is.

NYU marketing professor Vishal Singh says shopper data show people pick up other things along with those video games, making up for the markdowns. Like any war, price combat takes a toll on companies. But there’s a key difference from real war. Texas A&M retailing professor Cheryl Holland Bridges points out that bystanders in price wars do well.

Cheryl Holland Bridges: Oh, most definitely. It’s a treasure hunt for a lot of customers. I’m one of them too. I always like a good deal. I think everyone does.

Except investors, when retailers get too belligerent. In New York, I'm Mark Garrison, for Marketplace.

About the author

Mark Garrison is a reporter for Marketplace and substitute host for the Marketplace Morning Report, based in New York.

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