Amazon’s takeover of Whole Foods is important for several reasons, especially as an opportunity for the online retailer to experiment with prices in an offline setting. I disagree with Bloomberg’s claim that prices have to reach Walmart’s levels1. Instead, the key challenge is to cut select prices just enough to improve Whole Foods price perception2. A key benefit is that free media coverage enhances Amazon’s own paid marketing in this regard.
We studied exactly these costs and benefits in the Dutch retailing price war3. Albert Heijn (AH) initiated by cutting prices across the board and announcing its goal to become cheaper than the average Dutch retailer. Despite competitors matching the price cuts, AH succeeded in improving its price image, without sacrificing its strengths in service and assortment perceptions3
Positive media coverage was partially responsible for future rounds in the price war, which cooled after the media started to focus on the negative aspects for suppliers, employees and the competitor that went out of business4. The price war stimulated consumers to reconsider AH, but also helped the hard discounters Aldi and Lidl as the importance of price grew in the minds of the consumers.
How much and for how many products should Amazon cut prices to improve Whole Foods price perception? Previous pricing research shows only a handful of products really count: those for which many consumers are willing and able to remember and react to prices. This list includes frequently bought products (e.g. bread, milk, vegetables) and products making up a large part of the grocery budget (e.g. meat, indulgences). As to the size of the price cut, consumers need not see a large % drop – it is more important the price moves under a psychological dollar threshold. For instance1, avocados went from $2.50 to $1.99, almond milk dropped from $3.99 to $2.99 and vine-ripe tomatoes were reduced from $2.99 to $1.99.
Beyond these guidelines though, it is up to Amazon to experiment smartly and get offline pricing right by trial-and-error. In online pricing, the company has come to dominate despite consumers being just a click away from lower prices elsewhere on almost any product. As a colleague remarked “I use Amazon now as a price benchmark tool for categories myself. For any given branded product, Amazon sets the maximum price I feel I should be willing to pay, and beating that price gives me the feeling of a good deal. I’ve noticed over the past two years that I’ve started to buy much more from other websites, and that I’ve used Amazon only as a tool for information search. Which is a dangerous position for them if I’m not just an isolated case (but I might well be).” Indeed, if low prices are not Amazon’s core advantage, continuous testing and learning may well be. As Simon concludes “Last month, Amazon bought a laboratory, a network of 456 customer-friendly testing facilities which welcome roughly eight million “volunteers” each week. Amazon’s relentless price testing in the online world anchors its competitive advantage”.
1 Bloomberg, ‘Amazon will have to cut Whole Foods prices more to beat Walmart”, August 30, 2017, http://fortune.com/2017/08/30/amazon-whole-foods-prices-beat-walmart/
2Simon, Hermann “Whole Foods is becoming Amazon’s Brick-and-Mortar Pricing Lab”, Harvard Business Review, September 12, 2017, https://hbr.org/2017/09/whole-foods-is-becoming-amazons-brick-and-mortar-pricing-lab
3Van Heerde, Harald J., Els Gijsbrechts, and Koen Pauwels. “Winners and losers in a major price war.” Journal of Marketing Research 45.5 (2008): 499-518.
4Van Heerde, Harald J., Els Gijsbrechts, and Koen Pauwels. “Fanning the flames? How media coverage of a price war affects retailers, consumers, and investors.” Journal of Marketing Research 52.5 (2015): 674-693. https://mro.massey.ac.nz/xmlui/bitstream/handle/10179/9594/Van%20Heerde%2C%20Gijsbrechts%20and%20Pauwels%20%282015%29.pdf)