Business Forum: Beating Amazon at Its Own Game

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When Hubert Joly took the helm as Best Buy CEO in August 2012, the future looked bleak for the electronics retailer. Although its stores remained a popular destination, many customers used Best Buy as little more than a showroom — perusing the store in person but then making their purchases online at sites like Amazon for a lower price.

In December 2012, more than 10 percent of all Americans named Best Buy as their favorite place to browse but not buy, according to Harris Interactive, with Best Buy losing about $280 per transaction to lower-priced Internet competitors. Many wondered if Best Buy would even survive.

Yet by the end of 2013, the company was on a tear, its stock price more than tripling and CEO Joly crowing how, "A year ago, people said that showrooming would kill Best Buy. I think that Best Buy has killed showrooming."

The centerpiece to Mr. Joly’s turnaround strategy was a new low-price guarantee, in which Best Buy offered to match Amazon’s online prices and, in a TV ad featuring comedian Will Arnett, promised a “storybook ending” to customers’ holiday shopping experience.

Unfortunately, Best Buy investors didn’t get the ending they were hoping for, as the stock price tumbled more than 40 percent in January after disappointing holiday sales. Now the bears are back, with the Motley Fool’s Adem Tahiri recently wondering if Best Buy has “sustainable momentum” or will ultimately succumb to the showrooming threat.

The problem is that matching Amazon’s price doesn’t really kill showrooming. To make another storybook analogy, consider Bram Stoker’s “Dracula,” with Best Buy in the role of fearless vampire-hunter Abraham Van Helsing and Amazon as the smooth-talking, blood-sucking villain. In the story, Van Helsing kills Dracula by impaling him in the heart.

But Amazon’s threat to Best Buy isn’t dead, the shadow of its low prices still hovering over Best Buy’s every move. One could even say that, by matching Amazon’s low prices, Best Buy is just bleeding itself to keep the vampire at bay.

There’s a better way to play this game, not just to survive the showrooming threat but to turn the tables to its own advantage.

Here’s how. Imagine that a customer comes to Best Buy looking for a new printer that sells for $299 at both Best Buy and Amazon. Rather than simply ringing up the sale, Best Buy invites Amazon and other online retailers to participate in an auction: If an online retailer can offer the printer for less than Best Buy’s cost, then Best Buy will buy the printer from them and pass the savings along to the customer in the form of a “surprise discount” at checkout.

(It’s essential that Best Buy hold this auction at checkout and not earlier. Otherwise, the customer might give Amazon the chance to beat Best Buy’s discounted price.)

To see what I mean, suppose that Best Buy’s cost from selling this printer is $269 but, due to lower overhead, online retailers such as Amazon face a cost of only $249. Now, suppose Amazon wins the auction with a bid of $259, $10 less than Best Buy’s cost. Best Buy would then pass this $10 savings on to the customer, lowering the price from $299 to $289, and cut a check for $259 to Amazon, who would then ship a new printer to Best Buy to be stocked for the next sale.

Amazon gets $10 profit but, more importantly, Best Buy gives the customer a better deal (and continues to make $30 profit itself) by offering the printer at a lower price than is available online. The customer never sees the auction results, but will be pleased at the lower price, making her even more likely to shop at Best Buy in the future.

Amazon won’t like this, but what choice does it have? If Amazon were to boycott the auction, other online retailers could then swoop in and make the sale at a profitable price. In this way, Amazon and other online retailers are essentially forced to play what is for them a losing game, and Best Buy becomes THE destination for getting not only the best showroom experience but also the lowest possible price on big-ticket electronics purchases.

Now that’s a storybook ending.

David McAdams is professor of economics at the Duke Fuqua School of Business and author of “Game-Changer: Game Theory and the Art of Transforming Strategic Situations”

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