Keeping Score is a column that will appear periodically by Digital Commerce 360 editor at large Don Davis, who has been covering ecommerce since 2007.
Don Davis, editor at large, Digital Commerce 360
Inflation is a big story. And it would be a big deal if online prices were rising more slowly than in stores. There is some indication that’s the case today.
I draw that conclusion by comparing price changes reported in the Adobe Digital Price Index for June with comparable figures from the U.S. government’s Consumer Price Index for that same month. I don’t pretend this is a highly scientific study — I’ll get to a more rigorous study in a moment — but it’s worth looking at the results.
In 10 of the 14 Adobe index categories that closely match those in the government’s CPI, the 12-month inflation rate was higher for total retail than for online retail.
Offline prices go up sharply in furniture, computers, toys and sporting goods
In the following categories, year-over-year inflation for overall retail prices in June was higher than online:
- Furniture/Bedding
- Computers
- Toys
- Sporting Goods
- Books
- Apparel
- Jewelry
- Appliances
- Tools
- Home Improvement.
The difference was significant in some categories. For example, in Furniture/Bedding, where total retail prices increased 13.1% across all channels, they went up only 4.63% online in the 12 months up to June. In other categories, such as home improvement, the difference was minimal.
Online prices increased faster in June 2022 versus June 2021 in four categories: Grocery, Nonprescription Drugs, Pet Products and Medical Equipment & Supplies. But the online/total retail differences were smaller. The biggest difference was in medical equipment, which went up 10.5% online and only 5.9% across all channels, including brick-and-mortar stores.
On average, across the 14 categories, prices online went up 2.7 percentage points less than they did across all retail channels.
Most retail prices are the same online and offline
On the surface, it makes sense that online prices would be lower. After all, it’s so easy for an online shopper to compare the prices on various websites before making a purchase. And there’s data to suggest that’s true.
The more scientific study I referred to earlier was conducted in 2016 by Alberto Cavallo, an economics professor at the Massachusetts Institute of Technology. He found that in 10 countries he studied, the prices were the same online and offline in 72% of the cases (69% in the U.S.). But when there were differences, it was more likely that the web price was lower.
It’s worth noting that Cavallo found significant differences based on merchandise category. Prices were most likely to be identical online in clothing and electronics, and least likely in office supplies and drugstore products.
A separate study Adobe did in 2019 for the newspaper USA Today also found that prices had fallen faster online than offline in most product categories. So that trend appears to have been in place pre-pandemic.
How pricing algorithms impact online prices
Why might prices be falling faster online than in stores? The scale of online retail giants may play a role, says Ted Rossman, senior industry analyst at Bankrate.com, which provides financial information for consumers.
“For example, offline prices might be higher in part because they include more smaller businesses that can’t compete with the Amazons of the world in terms of price,” Rossman says.
Amazon.com Inc. is No. 1 in the 2021 Digital Commerce 360 Top 1000.
Another argument is that the rising cost of labor in the past year or so has impacted stores more than online operations. That comes from Krish Thyagarajan, president and chief operating officer at DataWeave, a retail data and pricing analytics firm.
He also argues that physical stores can charge more for certain kinds of merchandise that consumers want to see, touch and feel.
“Categories like furniture, fashion and premium apparel, certain personalized sporting goods, etc., can get away with higher prices in store,” Thyagarajan says. “The ‘here and now’ factor plays a big role in these decisions.”
Here’s another hypothesis: Algorithms that let retailers track competitors’ online prices and adjust their own prices automatically may play a role, says a recent study by Zach Brown and Alexander MacKay of think tank The Brookings Institution. And their analysis of pricing algorithms that online retailers increasingly use to keep up with competitors suggests in some cases the result could be higher prices online.
They argue that retailers without the resources to deploy sophisticated algorithms might decide there is no point in lowering prices because rivals will just match those prices. Instead, they sell at the most profitable price, which might be higher.
Another theory suggests that the growing role of online marketplaces might be keeping prices down online. It’s certainly true that merchants on a big shopping site like Amazon.com must constantly adjust their prices to avoid losing sales to competitors. And marketplaces now account for more than half of online sales in North America, according to Digital Commerce 360.
Online inflation and the upcoming holiday season
All those arguments are plausible. But one thing I’m fairly sure of: Online prices can’t consistently decline faster than offline prices because over time, the online price would be so much lower that most consumers would shift their purchasing to the web. If that happened, retailers that operate stores would have to respond, probably by lowering prices.
But that’s in the long term. It is possible that prices over the past year have gone down faster online than in stores. Maybe they are reversing a trend from the prior year. Or maybe retailers with excess inventory — a problem several major retail chains have spoken about publicly — have used their websites or online marketplaces to move that excess merchandise more discreetly than if they plastered big discount signs all over their stores.
I don’t know, and I’d be interested in hearing from anyone who does. Feel free to email me with your thoughts at [email protected].
But if you’re an online retailer who can offer lower prices during the holiday season, that could give you a big edge. It’s clear that inflation is changing consumers’ shopping habits. Any retail ecommerce site that can offer bargains in November and December can expect shoppers to beat a path to its URL.
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