How Retailers Compete

At first glance, the online fountain pen market can be confusing and intimidating - there are dozens of retailers from all around the world selling the same product at different prices, and all of them seem to be competing in a different way: discounted prices, everyday low prices, free shipping, express shipping, free bottles of ink, larger ranges, and - almost universally - that promise of great customer service. This post is going to explore what is most important to buyers in making a purchase, and how this informs retail competition.

First, we'll recap the previous post: we buy a product whenever our value of the product exceeds the price, and the difference between these two values is the consumer's surplus. The surplus is what buyers focus on, far more than price or value alone, and while this is useful enough to tell us that a purchase will occur, it doesn't tell us where it will be made. 

Some readers might assume that once value is established, buyers will simply look around for the lowest price in the market. This can be true, but it's incomplete: it overlooks that value is not fixed from one retailer to another. Sure, the product itself might not be changing but the satisfaction we get from it (remember, that is our definition of value) can change. If we get some advice from the retailer before buying, it might help us to make a better choice (for example, knowing nibs run small, or that the pen needs a thorough cleaning prior to use) and this can make us happier with the product than we would be otherwise. 

If we stay with our Lamy 2000 example from the last post, we can think of two retailers who are both selling at $150. If Retailer A offers us the bare minimum in service -- no advice before we buy, no commitment to after-sales support -- while Retailer B is happy to send emails back-and-forth to help us make a decision about what is right for us, and promises to exchange the product if we're unsatisfied, then clearly the second retailer has increased our satisfaction, or our value. If we initially valued the 2000 at $180, Retailer A has done nothing to increase that and our surplus is $30 ($180-$150). Retailer B, on the other hand, has gone well out of his way to make us happy and increased our value to $220. As he's charging the same price, our surplus increases substantially to $70 ($220-$70). Although the price is the same, we're going to buy from Retailer B because what is important to us is not the lowest price in the market but maximising surplus: getting the most bang for our buck. Even if Retailer B was selling the pen for a higher price - say, $20 more - we would still be willing to buy there because the overall surplus is still greater than Retailer A ($30 of surplus from A vs $50 from B).  

The challenge of this approach is for retailers to understand what type of service is most valuable to each customer for each transaction. And it varies: when I bought my Pelikan M805, I needed help with choosing a nib because I simply had no idea about sizing, and that advice was hugely valuable. But if I was buying a Visconti, that kind of service would not be particularly worthwhile as I already know to expect. Increasing value for customers is difficult for retailers because it's so dependent on context, and the best retailers will be the ones who listen to the needs of their buyers and can give them what they need. Indeed, developing a relationship over time will help each other to understand what things are important and how the retailer can best increase the buyer's value with each purchase, and help them to maximise surplus. 

The next post will introduce the idea of business strategy, before we have a look at the strategies that retailers, including one particularly clear example of how this looks in practice; a later post will explore the idea of developing a relationship with a retailer, what the benefits and costs can be to buyers. 


NB: This is indeed where the idea of 'value-adding' came from. I've chosen to avoid using that phrase because a) it is asinine, and b) it comes loaded with a lot of negative connotations that might distract from what I'm trying to explain here. The phrase seems to be popular amongst middle managers who enjoy jargon but may not comprehend what the term actually means or how it can be usefully applied.