With Black Friday and Cyber Monday fast approaching, millions of Americans will be browsing leading retail sites looking for the best deals. Which online chains offer the best prices for consumers? Economic research suggests that customers are very sensitive to price online—particularly when shopping through comparison shopping engines like Google Shopping where they can see prices from multiple merchants selling the same product. Economists Michael Baye, John Morgan, Rupert Gatti, and Paul Kattuman concluded that for each improvement in rank on a comparison shopping site, a retailer is likely to see a 60% jump in referrals and ultimately sales through that channel.
To see how online retailed fared, I assembled a list of 758 of the best-selling products from Amazon.com and then ran these products through our RightBid Price Collector software on Nov. 15. All in all, I collected some 8,073 merchant prices from leading comparison shopping sites, such as Google Shopping and BizRate, as well as Amazon. These products were taken from a wide variety of categories, including toys, home appliances and big-screen TVs. Products with Amazon prices under $20 were omitted from the study.
We then scanned through the data and determined each merchant’s price percentile. The percentile is a score between 0 and 100 showing how its price compares to other merchants. A percentile score of 0 indicates that the merchant has the lowest price of all retailers observed; a percentile of 100 would indicate the highest price. Percentile scores under 50 indicate lower prices than those offered by the median merchant. The table below shows how some of the largest e-retailers fared, as well as their percentile ranks from a similar study from last year.
As you can see, there is a wide gap between the price competitiveness of different merchants. The average product from Lowe’s is priced at the 70th percentile whereas Home Depot scores at the 41st percentile. If you’re buying a tech product online you’ll be well served shopping at Best Buy or Newegg as opposed to Abt Electronics of Tiger Direct.
While on the surface Amazon’s percentile of 64.7 doesn’t seem terrible attractive (especially given that Amazon had one of the lowest scores last year), this doesn’t tell the whole story. There are a couple of key differences between this study and last year’s analysis. Last year’s analysis looked at about three times more products and had more of a tech/consumer electronics focus.
Moreover, since the last study RightBid has added the capability of collecting prices from comparison tables on Amazon. Oftentimes, a product on Amazon will be advertised as $79.99 with a sublink saying “25 new from $59.99.” In other words, there are many products where Amazon’s list price is higher than most of the prices from third-party merchants selling directly through Amazon.com. It may be that the overwhelming majority of customers opt for Amazon’s list price instead of searching these merchants because of concerns over reliability or for convenience.
Even though most of the percentile averages fall between 30 and 70 this difference represents a substantial gap between prices. A score of 30 could mean that half of all prices are at the 10th percentile and half are at 50, while a score of 70 could mean half of all prices are at the 90th percentile and half are at 50. Given that there were roughly 10 merchants per product, a product at the 30th percentile is likely to be ranked at 3.7 whereas a product at the median is likely to be ranked 5.5 out of 10 merchants. Using the estimate from Baye et. al, that each improvement in price rank on the same site should lead to a 60% increase in referrals and ultimately sales, we would predict that a merchant at the 30th percentile would be 133% more likely to make the sale versus the median merchant and 443% more likely to close the sale to customers who see both prices than a merchant at the 70th percentile.
While high-price merchants are unlikely to win many sales in this environment, they should not give up hope. Quite the opposite—in my original study of e-commerce pricing I found the typical product has a 2.7 percentage point gap between the two lowest prices—with one-quarter of all products having less than a 0.7 point gap between these prices. If retailers act on these slight price gaps they should see big jumps in sales with only minimal drops in margin. This holiday season retailers should see if they can unwrap gifts in the form of more competitive prices.
RightBid provides price competitiveness software for online retailers.