By Joe Skorupa

By the end of 2012 Amazon revenue will top $60 billion and it won’t stop there. In 2015, according to Morgan Stanley, it will top the $100 billion mark. Retailers know a great deal of Amazon’s revenue is coming from customers who visit their websites or stores before completing the purchase from Amazon. So, essentially, Amazon is hijacking your customers. Here’s what you can do to fight back.

The battle with Amazon will have familiar echoes to retailers who remember struggling to compete with Walmart a dozen years ago. Many enterprises fell during those years, in the discount categories, most notably in grocery, apparel, electronics, sporting goods, toys and linens.

Those who were quick enough and smart enough to adjust to the new reality of everyday low prices (EDLP) survived. Many eventually learned they could actually thrive if they balanced rock bottom prices with services, private label products, localized assortments, loyalty programs, exclusive offers, and other forms of product/brand differentiation that increased relevancy and engagement with customers. 

Just as Walmart won the battle of EDLP and owns it today, Amazon has won the battle of universal pricing. Shoppers frequently report they are disillusioned with retailers who have price discrepancies between channels, such as one price on the website and a different price in the store. This results in lost sales and, more importantly, broken trust.

So, it is essential for retailers who do not have consistent pricing capabilities today to quickly deploy them. But competing with Amazon on universal pricing alone is a loser’s game, akin to competing with Walmart on EDLP alone.

A study of the retail industry and EDLP by the Stanford Graduate School of Business, that was passed on to me by Jason Goldberg of CrossView, produced three interesting conclusions:

•      EDLP has lower fixed costs, but promo pricing results in higher revenue.

•      Promo pricing yielded $6.2 million more per year in revenues than an EDLP strategy.

•      Changing from EDLP to a promo strategy required only $2.6 million in costs over four years, while switching from a promo to an EDLP approach required outlays six times as large.

At the same time Jason was sending me the Stanford report Kevin Sterneckert of Gartner sent me a new report he wrote that was released on January 12, 2012, and it basically came to the same conclusion. In Kevin’s report, “The Case for Flexible Multi-Channel Pricing,” he offers retailers three recommendations:

•      Retailers should pursue a two-pronged pricing strategy to succeed in an omni-channel retail world.

•      The first prong is to build systems capabilities to support price consistency across all channels.

•      The second prong is to identify opportunities for pricing events and promotions that strategically drive revenue, such as Facebook only offers or limited time offers or loyalty level offers, and so forth.

One-price-fits-all is not the end game in retailing. Promotional events through all channels are proven revenue builders and drivers of traffic to stores, which is the biggest Amazon killer of all.

Retailers have only begun getting creative with promotions. Ikea recently ran a friends and family promotion that offered 30 percent off to all friends and family of people who “Like” the Ikea Facebook site, but only if they brought them to a store on a specific weekend. Walmart, who is also struggling to compete with Amazon, lets Facebook fans Like a local store and then delivers offers to them for that specific store. Sears lets shoppers vote for which offer they want on an upcoming weekend and then makes the winning offer available. American Eagle Outfitters gives a 15 percent discount to every shopper who checks in using a geo-location app when entering the store.

Many other ideas are emerging such as group buys, offers made only to loyalty members who reach a certain purchasing level, co-creation of products, pricing and offers, promotions made only to key influencers, and flash sales that feature heavily discounted offers to select customer segments.  

No doubt there is a danger that some shoppers will reach promotion fatigue. For example, Citi Investment Research’s Deborah Weinswig has been quoted as saying, “If I get one more coupon for a one-day sale from Macy’s I’m going to puke.” And she has good reason to feel this way.

But promotional event marketing works if it is done right and it needs to be done right in a world of price transparency that can become a margin-killing race to the bottom.

A two-pronged pricing strategy alone will not win the war against Amazon, but it is necessary to provide retailers with a strong foundation to move ahead and fight other battles.

Amazon had less than $5 billion revenue in 2002. One blogger I saw projected it will hit $500 billion in 2020. A lot can happen between now and 2020, and retailers need to act now to ensure they have a secure place in this future.

It was Mike Saylor, CEO of MicroStrategy, who pointed out to me how Amazon was hijacking customers from retailers. Saylor was making a different but important point beyond pricing strategy. He was noting that Amazon is a master of aggregating data, analyzing it and using it, often in real time, to deliver what is widely regarded as the best online shopping experience in retail.

Retailers need to fight back on this front, as well, so look for an upcoming post about Amazon Hijacking Retail Customers Part 2 soon.