white-paper-consumer-electronics

5 Winning Strategies for Consumer Electronics RetailersBoomerang CommerceRetail [email protected]

WHITE PAPER

White Paper

March 2016

Consumer Electronics

Boomerang Commerce 2

Fast product life cycles, highly informed buyers, and rapidly changing prices make selling consum-er electronics quite challenging. Over all retailers of consumer electronics (CE) looms the shadow of Amazon, usually the most price-competitive in bestselling head items. Nearly every other retailer feels the bite of Amazon’s discounting, its brand presence with consumers, and its technology backbone.

Adding to the challenge, the leading brands have flexed their muscles and imposed Unilateral Pric-ing Policies (UPPs) and MAPs (Minimum Adver-tised Prices) for the launch and early lifecycle of key new products. UPPs and MAPs give retailers the chance to generate better margins, but also makes it difficult to create excitement for shoppers through discounting.

The UPP and MAP intertwine with the relatively fast product life-cycle of consumer electronics, where the authorized price of a new flat-panel

UHDTV may drop 15% after one month, and anoth-er 15% the next month. Often, the MAP gives way to free-float within the first year, hitting margins but giving retailers more options.

This white paper spells out five clear-cut strategies for more profitable competition in the face of price controls, velocity of product changes, and Amazon.

FIVE STRATEGIES TO CONSIDER

Boomerang Commerce works with a wide range of retailers to devise and test multiple strategies and compare the results on a continual basis. From this unique foundation of experience in omnichan-nel pricing and assortment strategies, five “battle plans” have emerged which are applicable to the fast-moving consumer electronics retailing envi-ronment. We have seen these be most successful when applied in conjunction with dynamic pricing and assortment optimization technologies that match or exceed Amazon’s capabilities.

24 weeks of changes in MAP for four major brand-name TV models. One brand holds the MAP steady, apart from a single price drop, while the others take contrasted approaches. Where the MAP goes through rapid-fire changes, retailers who take advantage of every drop in the MAP must quickly boost their prices back up when the MAP is raised sharply.

Introduction

MAP ($)MODEL 4

MODEL 3 MODEL 2

MODEL 1

100

200

300

400

WEEK 1 WEEK 6 WEEK 12 WEEK 18 WEEK 24

500

Minimum Advertised Price (MAP) Changes of Four Brand-Name TV Sets

Work around UPPs and MAPs by creatively bundling accessories, warranties, financing benefits, services, and/or money-back mechanisms such as gift reward cards with the price-restricted product.

White Paper

March 2016



Many larger retailers chafe at the restrictions that manufacturers impose via UPPs and MAPs on a range of higher-ticket CE products, but they are careful to comply. The MAP allows retailers some independence to adjust prices, but forbids them to advertise specific products for sale below a specific price.

Not all retailers bring the price directly down to the MAP in every case; it is worth testing whether the market will sustain a higher price than the MAP. In most cases, there is consumer pressure to not price above the MAP.

Despite the limited freedom to set pricing on most major, big-ticket new CE products, retailers do have price-related options for getting consumers to their doorstep.

WHAT TO DO

a) Create tempting bundles of the UPP-restricted head item with desirable accessories. Accessories often yield high margin for the retailer.

Bundling an accessory can increase sales of the tail item, which - even if it is significantly discounted for the bundle - can yield attractive margin contribution. This works for two key reasons: consumers don’t price-compare accessories or services as intensively as they research bestsellers, and Amazon is usually not price-competitive on brand-name CE tail items1. Most retailers can raise their prices on many accessory items and realize added margin, and still be more price-competitive than Amazon.

1. Navigate around the MAP and UPP RestrictionsBE INGENIOUS. CUSTOMERS DON’T JUST VALUE A LOW PRICE.

For example, Best Buy offers a Sony 55-Inch 4K Ultra HD 120Hz Android Smart LED TV. It appears that this product is price-restricted with a MAP of $998, although that is not confirmed. Best Buy bundles it with a Tilt Mount Bundle and a 6 Outlet Wall Tap Surge Protector with Dual 2.1A USB Ports.

All the other retailers checked offer the same TV at $998, but with varying bundles. Brandsmart mentions that the buyer can obtain a matching wall mount for just $27.88 additional. Bell & Howell, rather than suggest a specific bundle, offers 10% off any accessories.

b) Bundle extended warranties or guarantees, while maintaining MAP compliance. Most extended warranties generate high margin for retailers with relatively low incremental cost, but can be very attractive to shoppers on high-ticket consumer electronics items. For example, if Best Buy throws in a five-year Geek Squad Protection plan that normally sells for $169.99, that is a significant added value for the consumer.

c) Bundle the price-restricted product with value-added services such as post-sales and technical support, shipping, delivery, installation, disposal and recycling of the electronics being replaced.

1 Retail Analytics Report on Consumer Electronics, February 2016, Boomerang Commerce.

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March 2016



MAP protects margins, stifles competitiveness, and motivates retailer to bundle creatively. Seven retailers are all within $2 of one another for their respective bundles including a UHD TV with a Minimum Advertised Price of $998.

Reported Prices on Bundles Offered by Seven Retailers for a UHD TVSony 55-Inch 4K Ultra HD, 120Hz Android Smart LED TV, Model XBR5X810C

RETAILER

PRICE

ACCESSORIES

RELATEDDISCOUNTS

SERVICESINCLUDED

CASH-BACKMECHANISM

$998.00 $998.00 $998.00 $998.00 $998.00 $998.00$999.99

Tilt Mount Bundle & 6-Outlet Tap

Surge Protector

Wall Mount for $27.88 additional

3 years interest- free financing,

and a $100 Reward card

Free Shipping with Prime

Free Shipping

No Tax

Free ShippingFree Shipping and

Installation

10% off any accessories

Some retailers, like Best Buy, offer free delivery and installation, plus haul-away and recycling of even a gargantuan older model TV. One could assign a hypothetical value of $80 to those services. Walmart prices the Sony UHDTV mentioned above at $998 with free shipping.

A choice between bundles can allow the retailer to target different customer types. The eco-conscious customer might put a high value on proper recycling of an older TV. A customer who is intimidated by technology might find installation essential.

d) Offer rewards and other mechanisms to reduce the shopper’s total bill that do not violate the UPP or MAP of the restricted item, such as gift cards or interest-free or interest-delayed financing. Example: HHGregg offers the same UHDTV at $998 with three years interest-free financing, and a $100 Reward card.

CREATIVITY IS KEY

One sees that retailers are creative in finding permissible reward mechanisms, which can include Gift Reward Cards, a notable discount on common accessories, interest-free credit for one or more years, extended warranties, and other services.

As long as the dollar value of the MAP-protected product isn’t reduced, the retailer will typically remain in compliance with the MAP. It’s safer to advertise a money-back mechanism such as a coupon—not the product that it can be applied against—so as not to imply that the MAP item is offered at a reduced price. Instead, the retailer should be clear about what items are excluded from any coupon code promotion2. In the example above, HHGregg offers its $100 Reward card on any TV over $498, not specifically for the Sony.

2 https://www.sba.gov/blogs/how-minimum-advertised-pricing-impacts-your-retail-or-online-stores-marketing-efforts

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March 2016



Exploit the UPP. It protects every retailer from price competition, ensuring that for a time, all get the largest possible margin contribution from the product. To realize that margin, though, they need to move units out the door.

WHAT TO DO

Invest some of that margin in promotion to build sales. As a retailer, you cannot change the prices as flexibly as desired, but there are other techniques that can work well when price floors are in effect:

For online, prioritize higher-margin items by giving them great visibility. This can be done by adding them to one’s Consumer Electronics Favorites, Bestseller, or Featured List. Then, if the customer comes into the physical store, he or she will have the Star SKU or “hot SKU” uppermost in mind, and the in-store rep can reinforce that and clinch the sale.

2. Promote Higher-Margin ItemsPUT YOUR MONEY WHERE YOUR MARGIN IS.

In-store, there are a variety of measures to put into effect:

a) Spend marketing money to promote high-margin CE items. If the item is a truly hot product - the latest must-have TV or tablet - there is excitement in simply advertising that the item is in stock.

b) Train in-store sales reps to sell higher-margin consumer electronics. Appoint a product guru to create a ‘demo’ sequence to impress in-store customers, for example.

c) Incentivize in-store sales reps with bonuses or increased commissions for selling the UPP-restricted CE product.

Tap the higher margin dollars trapped in price-restricted products by investing them into driving unit sales, which make it all worthwhile. Promote high-margin products, train sales reps to put them front and center, and incentivize sales reps to close those high-margin deals.

In-store, there are a variety of measures to put into effect:

a) Spend marketing money to promote high-margin CE items. If the item is a truly hot product - the latest must-have TV or tablet - there is excitement in simply advertising that the item is in stock.

b) Train in-store sales reps to sell higher-margin consumer electronics. Appoint a product guru to create a ‘demo’ sequence to impress in-store customers, for example.

c) Incentivize in-store sales reps with bonuses or increased commissions for selling the UPP-restricted CE product.

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March 2016



AMAZON

AmazonBasics is one of the largest private label ventures in retailing, covering a wide range of categories, with emphasis on consumer electron-ics. A recent search on Amazon.com turned up 14,000 AmazonBasics items in Electronics. A large portion of these are labeled #1Best Seller in their micro-category. At the time of writing this white paper, six of the top seven Amazon Best Sellers in electronics were Amazon private label items3.

Unlike most brand-name tail items carried by Amazon4, the majority of AmazonBasics products are very price-competitive. Given Amazon’s typically less competitive pricing on electronics accessories, one could speculate that Amazon is consciously driving shoppers to its AmazonBasics offerings by means of high prices on brand-name tail items.

BEST BUY

Best Buy, the largest specialty retailer of consumer electronics, has been building its Insignia, Dynex, Init, Platinum, Geek Squad, and Rocketfish private-label brands for more than six years5. These cover a wide range of consumer electronics from TVs to tablets and accessories. Best Buy says these private-label goods now represent an ‘important component’ of total revenue6. Insignia in particular gives Best Buy an approach to the highly cost-conscious consumer.To clear the way for Insignia, Best Buy did pull back on stocking low-price brands that competed too closely on price. It also encountered challenges that manu-facturers always face, and in the early going it once had to initiate a product recall on 13,000 Insignia televisions.

3. Launch and Expand Private Label PRIVATE LABEL, PUBLIC VICTORY.

Cost-conscious consumers have come to accept that a strong retail channel which puts its reputation behind a private-label product, can actually deliver value and quality that matches or even surpasses the equivalent brand-name product.

In some retailer categories like groceries, private-label goods can represent as much as 90% of sales (Aldi’s, in the United States). In consumer electronics, by contrast, many retailers barely exploit private label. There are notable exceptions, among them Amazon and Best Buy.

3 February 7, 2016: #1. Fire tablet, #2. Fire TV Stick, #3. Fire TV Stick with Voice Remote, #4. Amazon Echo, #5. Kindle reader, #7. Amazon Fire TV. 4 February 2016 Boomerang Retail Analytics Report on Consumer Electronics5 http://www.wsj.com/articles/SB1240788666653575256 https://www.sec.gov/Archives/edgar/data/764478/000076447814000011/bby-2014x10k.htm

AMAZON

AmazonBasics is one of the largest private label ventures in retailing, covering a wide range of categories, with emphasis on consumer electron-ics. A recent search on Amazon.com turned up 14,000 AmazonBasics items in Electronics. A large portion of these are labeled #1Best Seller in their micro-category. At the time of writing this white paper, six of the top seven Amazon Best Sellers in electronics were Amazon private label items3.

Unlike most brand-name tail items carried by Amazon4, the majority of AmazonBasics products are very price-competitive. Given Amazon’s typically less competitive pricing on electronics accessories, one could speculate that Amazon is consciously driving shoppers to its AmazonBasics offerings by means of high prices on brand-name tail items.

White Paper

March 2016



WHAT TO DO

Moving into private label is a C-level decision, but retailers not currently offering private-label goods should consider doing so. Private label can be a force for profitable growth in consumer electronics. It helps cut dependency on brands, gain pricing freedom and improve margins. Assuming one is already active in private label, scaling up the private-label inventory can have a significant impact on overall margins.

In either case, the assortment and pricing need to be well thought out. We recommend following this sequence of steps:

a) Research. Start by determining which private-label products can help meet demand for brand-name equivalents. Analyze the assortment in the category versus the competitor’s assortment of both brand name and private-label equivalents. Additional points to research: are there product areas where there is a relatively accessible supply, and competitors have limited supply options?

b) Establish the supply. Often, this means creating relationships with new vendors who may be offshore.

c) Price-optimize for best margins. Delivery isn’t enough – price optimization is the key to realizing the margin potential of private label, and avoiding costly mistakes. Some retailers are prone to price their private-label too low.

Boomerang has found that raising prices on private-label items from 30% below the price of the brand-name equivalent to just 10% below helped to increase sales7. In other words, raising the price on the private-label product nearly 30% lifted unit sales, drastically boosting margin. Although unproven, the causal factor appears to be that pricing just 10% below the brand-name removes doubt in the minds of consumers that the private-label product is of equal quality.

Launch or expand private label assortments, identifying opportunities in the selection and filling the gaps where there is the most to gain. Use price optimization to ensure that private-label products are well-priced in relation to their brand-name equivalents (usually within 10% to 15%), to create a perception of high quality and drive higher unit sales.

7 http://www.boomerangcommerce.com/private-brands-deliver-on-value-and-profit/

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March 2016



Best Sellers and attention-grabbing products shape consumers’ perceptions of retailers. Nowhere is this more true than in consumer electronics. Are you seen as a value leader with ‘decent’ prices across a wide, but boring inventory of unexciting products -- or do consumers think of you first when they want the best price on products they crave?

Do you have the right brands and assortment? Shoppers often generalize their opinion of best seller inventory and pricing, and that view takes over as their total opinion about the retailer. They research new, big-ticket head items carefully and will form very specific, sharp opinions starting with the bestseller inventory and related offers.

WHAT TO DO

Adding the fast movers that are lacking in one’s assortment requires thoughtful identification of the gaps to fill, plus close attention and a fairly hands-on approach. It begins with research to identify your target “battlefields” and learn which are the “populars”.

a) Pick subcategories to focus on Asymmetrical warfare can work to the smaller player’s benefit. No retailer will be the most price-competitive in every subcategory, at every moment, particularly given the relentlessly dynamic pricing in consumer electronics. It’s often beneficial to carve out subcategories where you

4. Pick the Popular Products in Strategic CE CategoriesPICK YOUR BATTLEFIELDS, THEN PICK YOUR PRODUCTS.

will assert price leadership and attract customers. Select specific brands or product types where the competition is not killing margins with discounting and focus there, establishing leadership.

Jet has done this in both Computers & Accessories, and Cameras & Accessories8, where its average weighted pricing is 5% or more below Amazon on the SKUs we compared. By contrast, in consumer electronics overall, Jet prices about 2% above Amazon.

Since head-to-head, symmetrical price with Amazon is a lost cause, instead pick the customers you may be able to serve better than Amazon can, where expertise can help win customer loyalty, and it may not be all about lower price. Learn and serve all the needs of those customers, and utilize price and assortment optimization - because they work.

8 February 2016 Retail Analytics Report on Consumer Electronics, Boomerang Commerce.

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b) Research the assortment gaps and select which to fill Be the expert in what’s hot and holding excitement for shoppers, tracking product reviews, ratings, and social media chatter. Check the widely-used lists across the Web for category leaders, including Amazon Best Sellers, Best Buy Featured Products, etc. and for each subcategory. We find that in many cases, carrying half of the Amazon Best Sellers in each of your key subcategories will make a strong enough impression on shoppers to ensure that price leadership succeeds in generating greater traffic.

c) Fill the gaps How does one actually go about filling in the gaps in the assortment? The answer: sensibly, and surgically. Let’s take a hypothetical scenario where

the main competitor offers 100 UHD TV models, but a smaller retailer carries only 10. Don’t rush out to add new vendors and stock 90 new models to exactly match the competitor’s assortment. Remember that carrying 50 percent will typically appear to the consumer as a strong assortment, so there will be no disadvantage due to lack of selection.

Leverage existing vendors to fill gaps more quickly. Later, there will be time to set up business relationships with a larger number of manufacturer. Plan ahead for the need to establish new vendor relationships to expand the assortment. Another friction-reducing move: rather than stock up on all 40 new SKUs, consider drop-ship arrangements to fulfill online orders.

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March 2016



There is a variety of analytic applications and resources that retailers can use to devise, test, and compare assortment and pricing strategies. Adopting a unified platform, versus a group of unrelated point solutions, makes managing the entire process easier.

Learn From History, Be Ahead of the Price Cycle Knowing when the UPP MAP transitions occur, by understanding the timing, allows one to have pricing and marketing strategies ready for the shift. In addition, once MAP comes into effect, every retailer can apply price optimization to these still-hot fast movers - within the manufacturers’ boundaries.

Exploit the Best Competitor Intelligence Available They are watching every major retailer, and ‘they’ includes Amazon. It is critical to the bottom line

5. Optimize the Inventory by Leveraging Analytic ToolsUSE HIGHER MATHEMATICS TO WIN YOUR BATTLES.

Know the UPP and MAP timing and be ready to take full advantage. Use the best competitor intelligence, optimization, and analytical tools available. Remember that price and assortment optimization go hand in hand, and use them together.

that each retailer is equally well informed about the competition. Accurate, near real-time tracking requires the capability to accurately match products, including private-label equivalents and promotional bundles.

Think of Assortment Optimization and Price Optimization as Siamese Twins Assortment optimization is essential to identify and fill SKU gaps, as well as to scale up for more revenue. Pricing optimization allows retailers to price newly added items correctly. Since assortment growth and dynamic pricing go hand in hand, a unified platform that optimizes both is a really good idea.

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March 2016



The five battle strategies recommended for retail ninjas in consumer electronics are:

1. Work around UPP and MAP restrictions by using such measures as bundles of accessories, value added services, and/or various rewards to incentivize customers.

2. Invest in promoting higher-margin items.

3. Scale up (or launch into) private-label offerings and use price optimization to avoid underpricing.

4. Carry the popular products in whichever categories you choose as your preferred battleground. Become an expert in what’s hot and shapes the consumer’s perceptions. Identify the gaps, fill them and optimize prices.

5. Leverage analytic tools, understanding that assortment and pricing optimization are much more effective as a unified approach.

In the fast-moving and intensely competitive arena of consumer electronics, retailers need technology and battle strategies that provide sustainable advantages, both broadly across their market, and at a granular level of targeted subcategories. The five strategies presented in this white paper should help retailers compete more profitably in consumer electronics throughout the year.

Conclusions

A study by Forrester Research9 found that on a high-end GE microwave, Amazon made eight price changes in a single day. Keeping up - or simply keeping one’s strategy relevant in the face of such repricing activity - can only be done at scale with the kind of guided analytics technology that Boomerang Commerce provides.

On products that are price-restricted, pricing optimization can still serve a critical purpose, in recommending a discount or pricing strategy even if no one is allowed to implement it. The reason is simple. Knowing the ideal price for maximum margin contribution helps to establish a promotional bundle that is permitted, yet still equates to the optimal price by giving the consumer related cost savings that net out to the optimal price.

9 http://www.boomerangcommerce.com/wp-content/uploads/2015/07/Holiday-2015-pricing-strategies.pdf

Boomerang CommerceRetail [email protected]

Founded in 2012, Boomerang Commerce offers the first prescriptive analytics suite for omni-channel retailers. Seven of Internet Retailer’s Top 50 retailers rely on its Retail Solutions Suite, which delivers actionable decision recommendations that enable retailers to proactively compete and boost profits at scale. Built by a team from Amazon, McKinsey, MIT and Stanford, Boomerang applies machine learning and big data analytics to massive data quantities across digital and brick-and-mortar channels, and it derives superior insights and actionable business recommendations to transform business decision makers into retail ninjas.

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