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The Pricing Wars Move Online

By Bizbox

The New York Times has an interesting piece on Internet retailers who, in anticipation of the predicted dreary holiday season, are slashing their prices. And we mean slashing: for example, the piece cites a Sony DVR machine that was released, in April, with a $1200 suggested retail price that you can now purchase on one site for $750. Shipping included.

It was over three months ago that we first pointed out that the discounter is king during down times. But then we had no idea just how bad things would look now, after the collapse of the financial industry, the official news that we are all-but-certainly in a recession, and the other poor business news that has swirled about during the past quarter-year.

Of course, offering deals during the holiday season isn't exactly anything new: it's when people are buying the most, and therefore when competition is fiercest--that retailers would cut prices during such a time is something any sophomore Econ 101 student could tell you.

But the Times mentions two things that are different about this year's price-cutting in addition to its sheer scale.

The Wild, Wild Internet Price-cutting among online retailers seems to be distinctly sharper than among physical stores. The reason for this should be clear to anyone who understands the advantages of the Internet and of information technology innovations in general: the increased abundance of information that the Internet provides shifts power further from retailers to consumers, who are able to "shop around" to an unprecedented degree. Pre-Internet (and pre-Internet-dominace), if you wanted the same item, you had to walk or drive to several different stores to compare products and prices; several of these stores would be situated in the same mall if you were lucky. Now, Google can inform any consumer with an Internet connection (remember when we used to say "modem"?) of vastly more products and prices for vastly less effort.

A Longer Holiday Season Everyone knows that the biggest retail day of the year is Black Friday, otherwise known as the day after Thanksgiving. "Black," in this context, is not a sign of darkness; rather, it denotes the color ink that retailers get to use to tally their yearly balance once customers have had their way on this annual shoppingfest. Except this year for Kmart--already no stranger to discounting--Black Friday came, for pricing purposes, at the very beginning of November in expectation of generally poor holiday sales. It may improve quantity sold, but it won't be great for profit margins.

Profit margins are, indeed, the big, inescapable killer here. And guess who lowered profit margins hurt more? That's right: the small businesses, who almost by definition have less room for error, which is to say, less room to absorb revenue cuts.

And diminishing profit margins are only exacerbated by what has become an e-commerce virtual requirement: free shipping, on at least some orders. It needs to be done, because everyone else is doing it; but it is essentially an added business cost on each and every transaction to which it applies.

Looks like consumers, at least, appear in a fairly enviable position, at least compared to the retailers. Maybe they ought to celebrate their good fortune by going out and treating themselves and their families to some nice gifts.

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