Perception Tramples Upscale Efforts (Karrh On Marketing)

One of my favorite Web spots, James Taranto’s “Best of the Web,” available from OpinionJournal.com, features a compilation called “Bottom Stories of the Day,” which highlights charmingly ridiculous headlines from newspapers and news services around the world.
Typically, stories are selected because they either report that absolutely nothing happened (such as “Canadian Airports Not Planning Security Boost,” from the Canadian Press on June 2) or state something mind-numbingly obvious (such as “Resident Finds ‘When He Removes One Squirrel, Another Moves In,’” from the Colorado Springs Gazette on June 4).
I nearly submitted a headline from the May 31 Arkansas Democrat-Gazette to Mr. Taranto for consideration: “Wal-Mart report: Image not high-end.”
The story was based on a market-research report prepared last year by GSD&M Advertising for Wal-Mart senior executives and recently leaked to the New York Times by someone at WakeUpWalMart.com.
This isn’t to pick on the Democrat-Gazette. The story was written by Michael Barbaro of the New York Times, and our state’s largest paper was right to pass along this feature on the marketing struggles of Wal-Mart. My question is whether the leaders of the world’s largest seller of everything really needed a 55-page report from anyone to tell them a low-price strategy tends to gum up attempts to subsequently turn upscale.
Price means more than just how much something costs. It is also a powerful signal to consumers about many things, including quality. In fact, empirical research from a range of product categories suggests that price explains about 25 percent of variability in product quality.
Consumers tend to rely on price as a quality cue for those products and services where few other indicators of quality are available to them and purchase of the product or service involves greater degrees of risk. That risk, by the way, isn’t just the financial kind; consumers also find risk in, for example, potentially buying clothes that don’t make them look good or food that isn’t good for the family.
The Times article stated “the chain ‘is not seen as a smart choice’ for clothing, home decor, electronics, prescriptions and groceries, categories the retailer has identified as priorities.’” Bingo! Each of these categories, while a priority for Wal-Mart, also involves higher degrees of risk to the consumer, ranging from health risk (foods and drugs) to financial risk (home decor and electronics) and social risk (clothing).
“But Jim,” you might ask, “don’t enough shoppers want a low price on clothes and furniture to make this work for Wal-Mart?” Remember that nothing happens in a competitive vacuum — and that Wal-Mart has a well-positioned competitor prospering in the very space where it wants to move. As the Times article quotes the report, “Target, with its designer-inspired clothing and furniture, feels ‘like the new and improved,’ while Wal-Mart often feels like the ‘old and outdated.’”
As mentioned in this column back in 2002 (“Blue-Light Lessons”), Wal-Mart established long-term cost advantages that in turn enabled it to win long-term on price. Target staked out a successful place in consumers’ minds with brighter, more attractive stores and an element of cool. Together, these two successful discounters crippled Kmart because Kmart ceased to lead on any important attribute — not price, not style, not location, not service.
That doesn’t mean Target could now go after Wal-Mart as a low-price leader, because it has no cost advantage over Wal-Mart and would thus get creamed. Similarly, Wal-Mart can’t just decide to move upscale and succeed (at least in the short term) because it operates at a perceptual disadvantage to Target and other retailers.
If you’re dealing in a category that is lower in risk, where there are many perceived alternatives, and where the consumer has easy opportunities to compare prices, then you have to play the low-price game. If you are among the few who can gain cost power and thus limit alternatives to the consumer, then you can even win at the low-price game. It’s just difficult to climb up the price/quality ladder once you have established yourself on the low end.