An Interesting Pricing Strategy at Best Buy

Saturday, January 28, 2017

Today I'm going to do something I never thought possible.

I'm going to apologize.

More specifically, I'm going to apologize to American retailer Best Buy. For years I've badmouthed the store as a poorly stocked, expensive retailer that serves no useful purpose, but to act as a showroom for internet retailers such as Amazon and Newegg. I'm adult enough to realize that I'm capable of making mistakes, and it turns out that Best Buy has done something quite useful. It presented a very interesting pricing technique that few would dare attempt.

This month witnessed the widely anticipated launch of the new Asus Chromebook Flip - that is to say, the launches of the Flip. There are actually two versions of the device. One is powered by the respectable Core m3 processor, and the other by a significantly less powerful Pentium chip. The devices are otherwise identical.

Interestingly, both retail at the exact same price.

More interestingly, the lesser model is a Best Buy exclusive, while the other is being sold at various retailers, both online and in brick and mortar locations.

I'd be willing to bet that many consumers will head to Best Buy, see the Flip being sold at the same price as at other retailers and make a purchase. Naively, they'll assume that what they're buying is the same product that others are buying elsewhere.

Many would shrug their shoulders and exclaim caveat emptor, leaving it at that. I, however, see something worthy of discussion. Best Buy has presented an interesting twist to the concept of commodity pricing. In most economic texts, it is stated that sellers of commodity goods have zero pricing power, and are thus forced to sell their products at similar prices as the rest of the market.

Best Buy took this rule and put a new spin on it. If a store has a product that looks like it is a commodity good, it can sell that product at the commodity's established market price - even if the product is actually inferior.

Clearly, such behavior can prove quite risky. The sale of counterfeit consumer goods has long led to expensive lawsuits and even criminal prosecutions, but this is something very different. Best Buy isn't selling a counterfeit good. It's selling products manufactured by the same firms, with the same brand names and model names as everyone else's. The only difference is that their products are just... worse.

This technique may prove quite profitable in the short run - its akin to selling fool's gold at real gold prices. Over time, however, the firm is playing with fire. When the masses wake up to what the firm is doing, they will stop buying products from the store entirely. Even if Best Buy stops the practice entirely, and does sell the exact same product as everyone else, the market for lemons will apply.

Potential buyers will never know whether or not to trust Best Buy, so they will err on the side of caution and choose to shop elsewhere. At that point, there will be hell to pay in the boardroom, but for now the strategy appears to be paying off.

American businessman Sy Syms was famous for saying "an educated consumer is our best customer," but it appears as though different businesses target different types of customers. In any case, pricing is the most important and powerful profit lever that your company has to work with. Why not contact me for a consultation?