Following on from Thursday's post about retail competition, today we will look at the strategies employed by retailers in the FP market. We'll begin with a quick recap of our model before discussing the strategies and an example of how these strategies can look in practice. Hopefully this will help you understand the spectrum of competition and what retailers might suit you.
The basis of our model is the idea of 'surplus', the difference between how much you value a product and the product's price. As long as the price is equal to value, we can be pretty sure you will buy the product. But the higher value exceeds price - the greater your surplus - the more likely you are to buy and to be pleased with the deal. And in Thursday's post, we discussed how retailers compete for your business by trying to offer you more surplus (or more bang for your buck).
As there's only really two factors under the control of retailers (price and value), there's only two ways they can compete: by offering you lower prices or greater value. These strategies are exclusive - it's not possible to provide the best service and lowest prices in the market - so retailers have to make a choice about which they want to pursue.
The first strategy, price minimisation, is easy to understand but can be difficult to implement: keeping prices low mean that online retailers are obligated to keep their overheads and cost structure as low as possible. This means no retail showrooms (too costly), a office/warehouse located on the fringes of town where rent is cheapest, a skeleton staff (which means there is very little time to engage in discussions with customers) and a constant pressure to identify where cost savings can be made. It is a difficult strategy to maintain as it requires unrelenting cost discipline from managers, and competition is fierce. Whereas there are some retailers which continue to use this strategy - primarily Engeika and Pen Gallery - most find that it is almost impossible to compete and succeed in the face of the major retailer in this space: Amazon. Recently, MassDrop has also attempted to use this strategy and seems to be enjoying some success; they certainly have my attention right now, and will be the subject of a future post.
The alternative strategy is to maximise the value, or the satisfaction, of buyers; it's a strategy which is common in the FP space and fits well with the instincts of many retailers. It is harder for a retailer to execute this approach as there is no 'one size fits all' solution: every customer's needs are different, and can vary from purchase to purchase. It is also expensive; personalised customer care requires a retailer to maintain a staff large enough to handle the enquiries and services. It also requires retailers to be judicious in what they offer, and do not offer, to each buyer: a particular service, such as gift wrapping, may be quite costly to the retailer (in time or money) but provide little extra value to the buyer. For a retailer, it does not make sense to incur the expense of particular services unless the buyer will value it at more than the cost. The difference between successful and unsuccessful use of this strategy is the degree to which retailers genuinely understand customers, their needs and sources of satisfaction.
Although the two strategies are exclusive, it does not mean retailers are forced to choose between one extreme or the other: they operate along a spectrum, with each retailer choosing a position that reflects the amount of service they are willing to offer, and the best prices they can offer at that point. Buyers then align themselves to the retailer(s) that reflect their personal point of surplus maximisation, the sweet spot between price and value where they are most satisfied. Some will find their surplus maximised where price is lowest (MassDrop); others will be comfortable with a low-ish price/low service point (Engeika), with a high degree of service (La Couronne du Comte) or high-priced, ultra-premium service (Montblanc).
One particularly clear example of how this works are the two dominant firms in the low-end of the FP market: Goulet Pens and JetPens. Goulet offers its customers a relatively high level of service while JetPens offers relatively lower prices. Each will optimise its approach for the types of customers that it attracts, and this will influence decisions about product range and the firm's direction. Experienced buyers who require less assistance may find that JetPens offers them greater satisfaction while those who are new the FP market may find that Goulet's supportive approach is a better fit for them.
The important note here is that competition in the market is not winner-take-all. There's no single strategy that is going to wipe out all the other competitors; Goulet and JetPens are able to comfortably co-exist, each offering a different surplus proposition to buyers and able to sustain their own businesses. That isn't to say their positions will remain constant and sustainable forever but that retailers might seem to be in competition with each other but might find they are serving totally different customers in totally different ways, and happily co-exist with each other.