How to fight the ‘market free riders’

James Hickman, managing director of Online Home Retail, explodes the myths of internet free riders and showrooming and suggests ways that retailers can fight the online threat

When internet retailers sell products that were previously sold through retail showrooms, the accusation is often made that they are free riders.

The showrooms bear all the costs of attracting the customer and explaining the benefits of the product, then the customer disloyally goes online and buys the product more cheaply from an internet retailer, who is only able to undercut them because they have no costs to cover. This behaviour is known as showrooming.

In an attempt to combat this practice, and under pressure from their traditional customer base, some brands have moved to adopt selective distribution agreements designed directly or indirectly to shut out lower-priced online competition.

However, these actions are misguided, because the whole idea of the internet free rider is a myth.

The reality is that most customers do not want to spend their time travelling between showrooms to research their purchases. They do not know in advance what products the showroom will have on display, whether the staff they talk to will have any knowledge of the products or whether the prices on offer represent good value. Add to that the time and hassle of driving through heavy traffic and finding somewhere to park, and it’s not surprising that people want to shop online.

Despite what showrooms may claim, most people do not find what they want in showrooms and then buy online because it’s cheaper. They find what they want online because it’s more convenient.

To confirm this, I sent a survey to everyone who had purchased a particular brand of sink or tap from our online shop Plumbworld in 2017, asking them the question, ‘Did you see the product in a showroom or physical store before purchasing from’

Only 7.9% answered ‘Yes, I examined the product in a store first’, with 92.1% saying ‘No, I researched and made my purchase totally online’. So much for showrooming.

What about the idea that online retailers unfairly undercut showrooms because they don’t have to cover the same costs?

The online market is extremely competitive with hundreds, sometimes thousands, of retailers all trying to get the attention of online visitors who don’t really look much beyond the first few search results. In fact, three-quarters of all search traffic goes to the first five results on Google.

Online retailers must invest heavily in advertising if they want to have any business at all. They also have other costs that don’t apply to showrooms – web developers, graphic designers, visual merchandisers, call centre staff, warehouse pickers and packers, telesales staff, packing materials, etc.

So, if the internet retailer is not actually a free rider, why are showrooms suffering and what can they do to fight back?

The biggest problem for showrooms is that the internet has brought price transparency to the market. Ten or twenty years ago, consumers had little knowledge of what a product cost elsewhere, today they can find the cheapest price with a few clicks of a mouse.

There is no way showrooms can compete with high-volume online retailers selling everyday branded products. The online business that buys 100,000 units is always going to get a better cost price from the brand than the showroom that buys 10 units. Online retailers will increasingly dominate this part of the market, because the winning strategy uses economies of scale to drive purchasing and distribution efficiencies.

This move to internet retail is something the brands should be embracing rather than resisting with selective distribution agreements and similar tactics. The overall demand for a product increases as the retail price falls: those who could not previously afford it suddenly find they can. The brands sell more products to an expanding consumer base and they have lower overhead costs dealing with fewer, larger customers.

This does not mean that there is no place for showrooms in the disrupted KBB marketplace. There are many things that showrooms can offer that online retailers cannot. Their best strategy is to focus on higher-end customers.

Concentrate on three strategies:

  1. Specialise in higher-price-point niche brands and custom and bespoke designs;
  2. Invest in offering the very best design and planning service;
  3. Offer a quality installation and project management service.

Online retailers generally don’t like niche, high-end brands as the cost of transport damage is too high, the cost of holding stock is high and slower-moving lines take up valuable warehouse space. Custom and bespoke products are simply too difficult to deal with.

Design and installation are services that higher-end customers will pay for and that online retailers simply can’t offer. Technological changes certainly disrupt markets and that is obviously uncomfortable for those business models being disrupted. However, the only way to deal with it is to reshape strategy based on the new reality, not try to force things back to the way they were in the “good old days”.

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