Avoiding the race to the bottom
The problem with competing on price is that only one company ever has the lowest price. You can cut and cut and cut your prices but in the end you are playing chicken with your competition. One of you will blink and the other will be left with incredibly thin margins and only one point of differentiation.
The challenge with eCommerce though is that the Internet is a price shoppers dream. Price comparison sites and smartphones give rise to showrooming so what is a retailer to do?
I met with a prospect recently that has a chain of stores and was adamant that they did not want to compete on price and dilute their existing premium brand. One option that was mentioned was setting up an online discount store under another name. Their thinking is that it would allow them to have a channel for price shoppers, without diluting the brand positioning of their stores.
It is an interesting idea but my feeling is that it will simply divert customers from their stores and split their focus. They need a site to support their existing business so if they add the discount brand are they going to promote both? If they are just promoting their main brand, then no one will find out about the discount store. If they promote their discount brand, then it will be hard to convince shoppers to pay full price either online or instore for the same products.
Sales are an important part of retail culture and as we walked through their showroom I was able to see the occassional sale, clearance, or discounted item. Stick with this strategy online. Don't discount everything and always have a purpose such as scratch & dent, end of season clearance, special buy, or demo sales. Make the sales truly special events and focus on other points of differentiation that will support higher margins.