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Don't Price Yourself Out of Your Market

20 Dec, 2002 By: Thomas K. Arnold

There's a new reality in the home video business. It is this: retailers who don't drastically discount prices on new releases, at least for the first week or 10 days, might as well shut their doors and hang a “Gone Fishin’ sign on the front door.

Several studio executives with whom I've spoken in the last few weeks have marveled at the pervasive deep discounting of new video releases by such retailers as Wal-Mart, Target Stores and Best Buy. It's a practice in which they've engaged for some time, but never have prices been this low on so many titles. It's gotten so that virtually any new DVD release can be purchased for less than $15 — a most attractive price point for impulse buyers as well as multiple purchasers.

And therein lies the rub. The mass merchants have a history of lowballing prices on everything that's new, then they make up for whatever money they might have lost by selling additional units of older items that typically sell at or just below list price. In the short term, it might cost them some dough — in May, Wal-Mart was selling copies of Harry Potter and the Sorcerer's Stone for more than $2 less than what reliable sources say the chain paid for them — but in the long term, it helps perpetuate the perception that they've got the best prices in town, period, even if they don't.

Thus you find things like Wal-Mart's shelf price for the Monsters, Inc. DVD shot up from $14.77 to $18.77 overnight. Or copies of Shrek selling for $22.98, the equivalent of list — and a full six bucks less than the first-week price in November 2001. The mass merchants are serious about being a category leader in DVD and they're doing exactly what it takes. And I'd bet all three of my sons that at the end of the day, Wal-Mart comes out ahead of the game, with customers lured by cheapo prices on new releases walking out with a handful of other DVDs with decent margins. They don't call ‘em “loss leaders” for nothing, you know.

Best Buy has adopted this strategy as well, and just look at how robust their software sales are. The only thing dragging the company down is its Sam Goody mall music stores, which have traditionally charged higher prices on both CDs and video software than the big-box discounters.

This business has become increasingly price-sensitive. Retailers who are trying to carve a serious stake in sellthrough but aren't willing to compete on pricing are out of luck. This applies not just to video, but also to music. Tower Records and Video, for years one of the strongest audio-video combo chains in the country, is in serious financial trouble. I look at their ads and I instantly diagnose the problem: They're advertising the latest Britney Spears album for five bucks more than Wal-Mart or Target.

Consumers are bombarded with fliers, circulars, mailers and newspaper inserts, all of them hawking the same “flavor of the week” hit products. The prices on those hit products are the barometer by which consumers measure the entire operation. It does Tower no good to have twice the selection of CDs and DVDs as Wal-Mart, or better prices on catalog titles than Target.

You need to get the customer into the door, and the only way you're going to do that, in today's media-saturated environment, is by beating, or at least matching, the competition on price.

That's how you get them into your store — and once you've done that, you've won.

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