Archive for the ‘marketing’ Category
Ethics of Shoe-Shine Pricing
Filed under: decision-making, employees, marketing, pay, pricing, profits, wages |
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A few days ago at the airport I stopped to have my shoes shined professionally, something I rarely do. The service was excellent. The guy doing the work was pleasant and knowledgeable, and the results were beautiful. The price, revealed at the end of the process: $6.75. I gave the guy a ten, and told him to keep the change. Now, that’s not exactly enough to make me think I’m a big spender, but it’s pretty good, percentage-wise (nearly a 50% tip). The guy sitting next to me did the same thing, by the way, and I’m betting that’s actually a pretty common pattern.
This got me thinking about the relationship between pricing, tipping, and currency denominations. If the price of the shoe-shine were $8.00, most people likely would still give the guy the same $10, resulting in a substantially smaller tip. But if the price were closer to $5, I bet most people would pull out a $5 bill and then looked for some change to add as a tip. So whoever sets the basic price for the shoe-shine has enormous power to influence the size of tips.
Now, the guy who shined my shoes was wearing a shirt bearing the logo of a chain of shoe care-and-repair stores, so I’m guessing he wasn’t setting his own prices. This implies that the company he works for, in addition to making a decision about his base pay, is also, through its pricing policies, making a decision that likely has an even bigger impact on his income. Of course, that decision is not entirely unrestricted. The company in question has to cover its costs. But presumably it has different pricing strategies open to it. Crudely, it can set prices high, which will likely keep demand down but will result in a big per-sale profit margin; or the company can set its prices low, and rely on volume. Either strategy might make economic sense. If (and that might be a big “if”) both strategies have the potential to work out equally well for the company, that means the choice is open, and the potential is there to base pricing on whichever strategy will do the most for employees in terms of providing customers an incentive for large tips.
(Another example: any bar manager that sets the price of a beer at $4.50 is pretty much ensuring that wait-staff are going to get lousy tips — the temptation for many people is going to be to plunk $5 onto the bar, resulting in a tip of 50 cents or 11%.)
But the factual foundation of this question, beyond my own anecdote, is all speculation on my part. I’ve never had a job where I relied on tips. Can anyone shed any light on the relevant facts, here? And does anyone know whether incentivizing tipping is something companies ever take into consideration in their pricing decisions?
Groupon Does the Right Thing
Filed under: accountability, advertising, decision-making, ethics, marketing, protest |
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On Monday I blogged about the controversy over the Groupon.com ad that played during the Super Bowl, which made light of the plight of the people of Tibet. I suggested the ad was deeply disrespectful, and even played (perhaps unintentionally) on some unfortunate stereotypes. (See Groupon Super Bowl Ad: Unethical.)
Now it seems the company is taking the widespread criticism to heart, and pulling both the Tibet ad and the others in that series. Here’s the story, by Wailin Wong for the LA Times: Groupon pulls controversial ads
Groupon Inc. Chief Executive Andrew Mason said the Chicago-based daily deals provider is pulling all of the Super Bowl ads that had provoked a negative reaction online over the weekend.
“We hate that we offended people, and we’re very sorry that we did – it’s the last thing we wanted,” Mason wrote in a blog post on Thursday, adding: “We will run something less polarizing instead. We thought we were poking fun at ourselves, but clearly the execution was off and the joke didn’t come through. I personally take responsibility; although we worked with a professional ad agency, in the end, it was my decision to run the ads….”
Now, Groupon (and in particular, CEO Mason) seem genuinely contrite; they appear not to have foreseen the public reaction to their ads. Some might speculate, cynically, that they were actually banking on the controversy and the free publicity it would bring, but I see no evidence of that. Well, better late than never I guess. But even better would be a corporate culture that empowered insiders to say, at some point during the planning & production process, “Hmm, is this really a good idea?”
Death by Pizza Delivery: Domino’s Korea
Filed under: brands, employees, food, international, marketing, pay, pricing, workplace safety |
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During most of the 80’s (starting in 1984), customers of Domino’s Pizza in the U.S. enjoyed the benefits of a catchy promise of speedy delivery: Domino’s promised to deliver your pizza in “30 Minutes Or It’s Free.” The only problem: soon after the slogan was introduced, a rise in deaths due to accidents involving Domino’s drivers was noted. The assumption was that drivers were facing pressure to make good on the promise, and were therefore driving faster, which meant they were more likely to have accidents, some of which were fatal. Lawsuits ensued. Big ones. As a result, the “30 Minute” delivery promise ended back in 1991, in the U.S. But apparently the same can’t be said for Domino’s Korea.
Here’s the story, by blogger Lee Yoo Eun, blogging at Global Voices: South Korea: Backlash After ‘30 Minute’ Pizza Delivery Death
A popular Domino’s Pizza marketing strategy promising pizza delivery within 30 minutes of an order has met with a public backlash in South Korea, following the deaths of several young delivery personnel.
The Young Union, the union For Occupational and Environmental Health (FOEC) and several labor unions held a press conference on 8 February, 2011, in front of Domino’s Pizza’s headquarters in South Korean capital Seoul, pressuring the company to abolish the ‘30 Minute’ delivery system….
Here’s another version of the story, from the Korea Times: Quick delivery jeopardizes drivers.
In often discuss the story of “30 Minutes or It’s Free,” as it played out in the U.S., in my business ethics class. I use the case to illustrate 3 key points:
- A simple business decision can have large and unforeseen consequences, ones that result in a major ethical challenge for a company. In this case, a simple (and frankly brilliant) marketing slogan resulted in Domino’s executives being called killers and the company facing multi-million dollar lawsuits.
- The ethical thing to do is not always obvious. We spend a lot of time chastising companies for bad behaviour, but in at least some cases it is genuinely difficult to know what to do. In the Domino’s case, my students are typically unified in the opinion that something had to be done to reduce the rate of accident-related deaths involving Domino’s drivers, but they’re typically deeply divided on a) how far the company needs to go and b) just what strategy they should adopt.
- Putting an ethical decision into action can be very difficult. Back in the late 80’s, there were several thousand Domino’s pizza franchises in the U.S., and tens of thousands of drivers. Any decision made by Head Office was going to have to be implemented by all those franchisees and acted on by all those drivers. Making that sort of thing happen is anything but straightforward.
As for Domino’s Korea — frankly I’m stunned to find out that the people in charge of the Domino’s brand haven’t done more to make sure that a lesson learned 20 years ago, at great expense, is reflected in their international operations.
Groupon Super Bowl Ad: Unethical
Filed under: advertising, brands, character, consumers, ethics, food, international, marketing, virtue |
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A collective gasp could be heard at one particular moment last night during the Super Bowl. No, I’m not talking about the gasp following Nick Collins’ 37 yard touchdown run in the first quarter. I’m talking about the gasp that issued at the punchline of the now-infamous Groupon.com commercial featuring Timothy Hutton.
You can see the 30-second spot here, on YouTube: Groupon – Tibet
And here’s the entire transcript:
“Mountainous Tibet — one of the most beautiful places in the world. This is Timothy Hutton. The people of Tibet are in trouble, their very culture is in jeopardy. But they still whip up an amazing fish curry. And since 200 of us bought at Groupon.com we’re getting $30 worth of Tibetan food for just $15 at Himalayan Restaurant in Chicago.”
Immediately following the commercial’s appearance, Twitter lit up with comments about how “offensive” and “tasteless” the Groupon.com commercial was. Media outlets today have been abuzz with criticism and commentary. The headlines tell the tale. According to NBC Chicago: “Groupon Super Bowl Ad Not a Good Deal”. CNN Money.com‘s headline was “Groupon spends big on controversial (tasteless?) Super Bowl spots”. Time asks: “And the Most Offensive Super Bowl Ad Goes To: Groupon?”
But the ad was more than just tasteless. It was unethical. To recruit — and then trivialize — the plight of the people of Tibet to sell Groupon’s services shows a jaw-dropping level of disrespect. And while we often think of disrespect as a matter of bad manners, showing suitable respect for other humans’ basic needs and interets is a core moral principle.
It’s also worth pointing out that the commercial played, perhaps unintentionally, on the unfortunate fact that, for many westerners, complex Asian societies are often most closely associated with exotic dinner fare. Yes, yes, Tibet is exotic and troubled. But hey, they make a yummy curry!
Who knows just what the fallout will be? There have been predictions that Groupon will lose business over this — it’s been suggested that the company may have found the limit of the notion that “there’s no such thing as bad PR.” And, predictably, there have already been calls for a boycott of Groupon.com. Timothy Hutton (once an Academy Award winner) will likely have to go into the spokesperson’s equivalent of rehab, perhaps by working with a pro-Tibet charity of some sort.
Of course, some will cling to the notion that Groupon.com intended all this — that they knew the ad would be controversial, and were aiming directly at the enormous amount of free media coverage they’re now getting. Maybe that’s true. But it was a helluva gamble to take. And, if it was a gamble, it was a gamble that treated the people of Tibet as just another Asian trinket to be tossed in among the poker chips.
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Addition:
It’s been pointed out to me (by @Changents on Twitter) that Groupon is apparently donating money to the causes featured in its commercials. See: http://savethemoney.groupon.com/. I’m not at all sure that that’s sufficient to overcome the worries discussed above, especially given that the disrespectful commercials is all that most people will see or know about. What do you think?
Sustainability Rankings, the Global 100, and Greenwashing
Filed under: accountability, consultants, ethics, greenwashing, marketing, rankings, sustainability, transparency |
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What’s so sustainable about the Global 100 “World’s Most Sustainable Companies”? Not much, as far as I can see.
The ranking was released just a few days ago, as reported here by Helen Coster for Forbes: Ranking The World’s Most Sustainable Companies
The term “sustainable”–like “green” and “all-natural” before it–conveys an abstract sense of do- gooding that many companies have been happy to adopt. Corporate Knights, a Toronto-based media company, applies hard metrics to the otherwise fuzzy term, and Saturday it released its seventh-annual list of the world’s most sustainable companies….
So, what does sustainability mean, here? Toby Heaps, Corporate Knights’ editor-in-chief, says one key is to ask this question: “how are companies squeezing more wealth from the resources that they use?” So far so good — I suspect that kind of efficiency measure has something to do with what most people take “sustainability” to mean. But next Heaps strays into strange territory when he asks, in addition, “How are they doing a better job of respecting the social contract, like paying taxes or having diverse leadership?” Huh? We’ll get back to the issue of criteria in a moment. First let’s look at the rankings.
The top end of the list is dominated by global brands from the telecommunication, pharmaceutical, and energy industries (Nokia, Johnson & Johnson and Intel are all in the top 5). But an oil company takes top honours (Norwegian oil and gas company Statoil). Yes, an oil company. Now, for many people, the petroleum industry is the epitome of unsustainable business. So this will immediately raise alarms for some people. Should it? Let’s take a closer look.
The Forbes story says that Statoil topped the list “thanks in part to improvements in its water productivity.” Fair enough: water productivity (efficiency of water use) is a clear sustainability issue. But what comes next is odd. The oil company apparently did well in the ranking in part because it is “also a healthy contributor to Norway’s coffers and has a diverse board”. In other words, this oil company scored well on a sustainability ranking by doing a whole bunch of stuff that has little to nothing to do with sustainability.
For still more detail, we can look at the ranking and an explanation of the methodology behind it on the Global 100 website. According to the Methodology page, the ranking is established by looking at “environmental, social, governance (ESG) and financial data.” Already we see here a rather expansive understanding of the word “sustainability.” Next, let’s look at specific measures they used.
Some of the metrics used make perfect sense, such as energy productivity and waste productivity. Some of them, however, are hard to figure, such as CEO-to-average-worker pay ratio. Executive compensation is an interesting (and, I think, complicated) ethical issue, but how does it relate to sustainability? The detailed explanation of the various criteria offers this rationale:
A disproportionate share of compensation expenditure going to one person can lead to lower overall workforce motivation, and can also be indicative of potential governance risks, or misalignments of interests.
All of that seems true, but largely irrelevant. Sure, those risks are real, and they may (may!) have something to do with keeping the company in business. But surely that is not what anyone beyond a handful of consultants means by the word “sustainability.” When the public wonders whether Walmart’s business is “sustainable,” they are certainly not wondering whether the company’s business practices are going to let them keep chugging along.
Another mystifying criterion is “Leadership Diversity: % of women board directors.” Again, that’s an important issue; companies need to do more to get women into senior leadership positions, including on the board. But is there really a clear link — either conceptual or empirical — between having women on the board and the company being sustainable? Unfortunately, while that criterion is mentioned on the Criteria & Weights page, it is missing entirely from the more detailed explanation of those criteria (see PDF document here) so what the link is supposed to be is anyone’s guess.
Other weird criteria include “Safety Productivity”, “% tax paid” and “Innovation Capacity,” though the latter makes at least a modicum of sense. As far as I can see, fully half of the ten criteria used have no clear link to sustainability. And given that all criteria are given equal weight in the Global 100 methodology, that means the ranking is actually only half about sustainability, and half about other stuff.
Now, I’ve been critical of the term “sustainability” before (see “Sustainability is Unustainable.”) A lot of what I’ve said before has to do with confusion over the meaning of the term, and the resulting difficulty in measuring and tracking companies’ performance in this area. I think the Global 100 ranking ends up providing a wonderful case in point.
But the real problem, here, is that the kind of sustainability measure instantiated by the Global 100 profits directly from the confusion over the meaning of the term “sustainability.” (And I do mean “profits” — Corporate Knights is a for-profit organization, as presumably are the research firms that helped develop the Global 100 and the vast majority of sustainability consultants who help companies preen for such rankings.) Now, I don’t actually have anything against profits, and I’m not impugning anyone’s intentions. My point is that the only reason this particular set of measures can be thought to add up to “sustainability” is that the term itself is ambiguous and means different things to different people.
What’s really being measured here is a broad range of indicators having to do with all kinds of things. Again, it includes “environmental, social, governance…and financial data.” And it’s all important stuff. So the Global 100 ranking really does tell us something important (but vague) about the companies listed. But what is announced is that ‘these companies are sustainable.’ What does that mean to the public? Environment. So the list implies that these companies are environmental good guys. The result: greenwash.
So, what’s the public to do? Maybe all the public can do is realize that what sustainability consultants and gurus mean by “sustainability” has relatively little to do with what they mean by that word.
Pepsi Makes the Best of a Super Bowl-Free Sunday
Filed under: advertising, brands, corporate citizenship, CSR, marketing, sponsorship, sports | Tags: philanthropy
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Talk about making a silk purse out of a sow’s ear. PepsiCo has managed to make a win out of not sponsoring the biggest advertising event of the year.
See the story here, by Jennifer Preston of the NYT: Pepsi Bets on Local Grants, Not the Super Bowl
What’s better than reaching more than 100 million viewers during last year’s Super Bowl? For Pepsi, it could be 6,000 football fans during a high school game on Friday night in central Texas. Or a group of parents who wanted a new playground in their Las Vegas neighborhood.
That is the bet that PepsiCo made when it walked away from spending $20 million on television spots for Pepsi during last year’s Super Bowl and plowed the money into a monthly online contest for people to submit their ideas and compete for votes to win grants….
This is the first time in 23 years that Pepsi isn’t a sponsor of the Super Bowl. How did this happen? Who knows. Maybe the price-tag got too rich for them. Maybe they got outbid. (Though it’s worth noting that PepsiCo won’t be entirely absent from the Super Bowl: the game will feature ads for two of the company’s other brands, Pepsi Max and Doritos.) At any rate, Pepsi says it’s just a new strategy. Interestingly, they say — despite the fact that this new strategy involves giving millions of dollars to good causes — it’s not a philanthropic strategy:
“This was not a corporate philanthropy effort,” said Shiv Singh, head of digital for PepsiCo Beverages America. “This was using brand dollars with the belief that when you use these brand dollars to have consumers share ideas to change the world, the consumers will win, the brand will win, and the community will win.
It’s an interesting move. For one thing, it brings together cause-based marketing and social media on a supersized scale. And to me, whatever the motivation for the move, it’s a true-and-justified instance of corporate social responsibility. It’s not ethically obligatory: I don’t think there’s anything wrong with doing things the old way. It’s not unethical to spend $20 million-plus on commercials for the Super Bowl, like they did last year. And it’s not obligatory to support dozens or hundreds of local causes. So think of it this way: PepsiCo has $20 million to spend on building its brand. It had to choose a strategy, a choice regarding how to spend that money. They could give it to the NFL, or they could give it to a bunch of worthy charities. If they can achieve their objectives (and hence fulfill obligations to shareholders) while at the same time doing some social good, that’s a good example of CSR.
As the company says, though, it’s a gamble. But as gambles go, they’re sure making the best of it. PepsiCo is turning not sponsoring the Super Bowl into a straight-up victory, rather than a defeat. And notice also that, with the right media coverage, Pepsi still gets its name associated with the Super Bowl.
MTV’s “Skins”: The Ethics of Profiting from Teen Sexuality
Filed under: accountability, advertising, children, CSR, employees, ethics, marketing, media, sex, stakeholders, values |
Comments (5) There’s been a lot of chatter in the last few days about MTV’s teensploitation show, “Skins.” Of course, one theory says that that’s just what MTV has been hoping for — a lot of free advertizing.
I’m quoted giving a business-ethics perspective on the show in this story, by the NYT’s David Carr: “A Naked Calculation Gone Bad.”
What if one day you went to work and there was a meeting to discuss whether the project you were working on crossed the line into child pornography? You’d probably think you had ended up in the wrong room.
And you’d be right.
Last week, my colleague Brian Stelter reported that on Tuesday, the day after the pilot episode of “Skins” was shown on MTV, executives at the cable channel were frantically meeting to discuss whether the salacious teenage drama starring actors as young as 15 might violate federal child pornography statutes.
Since I’m quoted in that story, I’ll just cut to my own conclusion:
“Even if you decide that this show is not out-and-out evil and that the show is legal from a technical perspective, that doesn’t really eliminate the significant social and ethical issues it raises,” said Chris MacDonald, a visiting scholar at the University of Toronto’s Clarkson Center for Business Ethics and author of the Business Ethics Blog. “Teenagers are both sexual beings and highly impressionable, and because of that, they’re vulnerable to just these kinds of messages. You have to wonder if there isn’t a better way to make a living.”
I wouldn’t bet one way or the other on how this will turn out — in particular on whether pressure from advocacy groups and advertisers will convince MTV to can the show. If it does, then this controversy turns into a nice example of how just the wrong kind of corporate culture can produce bad results. Consider: there are an awful lot of people involved in conceiving and producing, and airing a TV drama. In order for Skins to make it to air, a lot of people had to spend months and months going with the flow, basically saying to themselves and each other “Yes, it is a really good idea to show teens this way, to use teen actors this way, and to market this kind of show to teens.” Hundreds of people involved in the production must have either thought it was a good idea, or thought otherwise but decided they couldn’t speak up. If this turns out badly, MTV will have provided yet another example of how things can go badly when employees aren’t encouraged and empowered to speak up and to voice dissent.
Lead Content in Products for Children Adults
Filed under: children, consumers, labelling, marketing, product safety, regulations, risk |
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Selling products for kids is a tricky business. We adults are, to a certain extent, willing to adopt a “buyer beware” attitude. But kids deserve protection — the duty to protect children is a universal ethical norm. Add to that the fact that they are simply more physically vulnerable, and it’s not hard to see why we expect (and impose) higher standards of behaviour on the part of companies that make products aimed at kids.
That implies all kinds of ways in which manufacturers need to exercise caution: in product design, in the sourcing of parts and ingredients, in the manufacturing process, and in marketing. One way to avoid the extra hassle: make a product for kids, ignore the relevant safety standards, but make sure that you claim, when asked, that it’s really not for kids at all.
Here’s the story, by Justin Pritchard for The Associated Press: Feds dismiss recall on lead glasses
A federal agency reversed itself Friday and said lead-laced Wizard of Oz and superhero drinking glasses are, in fact, for adults — not children’s products subject to a previously announced recall.
The stunning about-face came after the Consumer Product Safety Commission said last month the glasses were children’s products and thus subject to strict federal lead limits.
Lab testing by the Associated Press found lead in the colored decorations up to 1,000 times the federal maximum for children’s products. The CPSC has no limits on lead content on the outside of adult drinking glasses….
The story here is in part about the odd decision by the Consumer Product Safety Commission. But I want to focus on the decision the company here made.
Now, I might have been a bit harsh when I implied above that the company making these glasses is being disingenuous when they say the glasses really aren’t for kids. Who knows what their intentions were? Our default assumption about people’s intentions should be a fair and charitable one, in the absence of evidence to the contrary. But that of course highlights the difficulty with a regulation based on divining a company’s intentions:
Under federal law, an item is a “children’s product” if it is “primarily intended” for those 12 and under.
Now on one hand, regulation based on intent makes a good deal of sense. If the relevant standards for kids’ products really is different, there really is no other way to draw a line between what counts as a product for kids and a product for adults. There’s nothing stopping parents from giving their kids access to products that are clearly “for” adults. So it seems fair for companies to be able to say, look, we intended that product for adults…it’s not our fault if some parents decided, instead, to give our product to their kids.
But I also think it’s worth pointing out that while regulations may focus on the manufacturer’s intentions, the relevant ethical standard should point to reasonable expectations. The makers of the glasses in question here may well have intended their product to be used primarily by adults, but the question they should have asked themselves is whether glasses with fantasy characters on them can in fact reasonably be expected to end up in the hands of kids. And if so, they should adhere to standards that are relevant to that expectation.
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Thanks to LH for alerting me to this story.
Ethics as Strategy and Marketing
Ethical decision-making can helpfully be thought of as a matter of strategy and of marketing. This way of framing ethics is, I think, likely to be particularly useful in talking about ethics with either MBA students or business executives.
First it is worth noting that there is of course a cynical sense in which ethics can be a matter of strategy and marketing, and that’s when companies adopt an ethical posture because they see it as a good strategic move or as a smart marketing maneuver. That’s a good topic, but it’s not what I’m talking about here.
What I’m talking about is the sense in which very often, in the world of business, acting on one’s ethical convictions requires that one think in terms of strategy and marketing. An example may help.
Picture yourself working in a team-based work environment. Now imagine that the team decides to adopt a particular course of action, but it is one that you, after careful consideration, sincerely believe to be ethically problematic. OK, so you’re pretty sure you’re right.
Now what?
Well, knowing that you’re right doesn’t do much to change things, at least not automatically.
First comes a strategic decision. You need to choose a strategy, a course of action tailored to the situation. At the most basic level, your first strategic decision is whether to act or not. Maybe you’ll decide that discretion is the better part of valour, and end up holding your tongue. Maybe the issue is too small to be worth rocking the boat. But if the issue is worth pursuing, you’ll need to decide on a strategy for doing so. The thing that makes strategic decision-making difficult is the thing that differentiates strategic decisions from other sorts of decisions, which is that strategic decisions are decisions that need to take into consideration the decision-making of other people or institutions. (The contrast, technically, is with what are called “parametric” decisions, decisions that need only take into account facts about the non-decision-making bits of the world, such as “what is the weather like today?” or “how much money is in my pocket?”) So, in making a strategic decision about whether and how to voice concerns, you will need to think carefully about how other people are behaving, and how they will react to you — in other words, you need to think about what their strategies are likely to be, which is no trivial problem. That is the essence of strategic decision-making.
Next comes a marketing decision. (For practical purposes, the marketing decision might not be separable from the strategic one, but I’ll separate them for discussion purposes here.) Once you’ve decided that your strategy will indeed be to voice your concerns, how will you actually broach the topic? At a team meeting, or by means of quiet discussion with one or more key team members? If you need to seek like-minded allies, who will they be? And what will your sales pitch be? Will you cautiously express moral doubt, or will you pound your fist on a desk and declare the current course of action “unacceptable”? And just what will you be trying to sell the team — a small-but-meaningful shift in course, or a total about-face? The point is that you have not just to arrive at an opinion, but to sell it, too.
What we see here is that ethics is more complicated than simply knowing (or figuring out) the right thing to do.
But what I think we also see here is one more way to connect ethics with issues that managers and MBA students already take seriously. It’s a way of pointing out that ethics is far from the “soft” topic it is often accused of being. As someone with a Ph.D. in philosophy, I know that ethics is far from “soft” because I know a fair bit about the incredibly technical theoretical literature on the topic. But to many in the world of business, ethics is considered soft (while accounting, for example, is hard — firmly rooted in concrete realities). Pointing out that solving practical problems in ethics requires, among other things, solving challenging problems in strategy and marketing is yet another way to attempt rescue ethics from unfortunate perceptions of the topic.
Walmart & Free Shipping: Who Will Suffer?
Filed under: competition, consumers, CSR, internet, marketing, pricing, profits, retail, SME, strategy |
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Once again, Walmart is making headlines with a business practice that will be good for its customers, and bad for its competitors. Here’s the story, by Stephanie Clifford for the NYT: Wal-Mart Says ‘Try This On’: Free Shipping
For years, Wal-Mart has used its clout as the nation’s largest retailer to squeeze competitors with rock-bottom prices in its stores. Now it is trying to throw a holiday knockout punch online.
Starting Thursday, Wal-Mart Stores plans to offer free shipping on its Web site, with no minimum purchase, on almost 60,000 gift items, including many toys and electronics. The offer will run through Dec. 20, when Wal-Mart said it might consider other free-shipping deals….
Not surprisingly, Walmart’s competitors are alarmed. Smaller on-line businesses don’t get the kinds of sweet shipping rates that Walmart gets from UPS and FedEx, and they don’t have the regional distribution centres that allow Walmart to keep its shipping costs low. It’s pretty clear that this move by Walmart is going to put serious pressure — maybe even fatal pressure — on some of its competitors.
Just 2 quick points to make:
1) It’s worth noting (for the benefit of those who don’t know) that Walmart’s profit margins are already razor-thin. Yes, the make big profits overall, but that’s due to their mind-bogglingly huge volume of sales. On a per-sale basis, their profit is very small. So the money for shipping a given product (for free) isn’t coming out of the profits on sales of that product — the profits just aren’t there. Something has to give. One possibility is that it really is a short-term gimmick, perhaps intended precisely to drive competitors out of business. That would potentially count as an instance of predatory pricing, which would be at least arguably unethical and potentially illegal — in spite of the short-term benefits to consumers.
2) Normally when we think about Walmart’s effect on competitors, we think about its effect on its very small competitors, the ‘mom & pop’ operations. But I wonder whether that’s the case here. I’m no expert on the structure of the industry, but it seems that the companies most likely to be hurt are Walmart’s large and mid-sized competitors, i.e., companies that occupy roughly the same strategy space as Walmart. It seems to me (and it’s just a hypothesis) that most small retailers will have significantly different business strategies than Walmart, and hence won’t be competing directly with Walmart in ways that would let them fall victim to this latest maneuver. If I’m right, then if Walmart really can sustain this free shipping policy (and they haven’t claimed they’ll even try to) it would be very bad for its medium-sized and large competitors. If that’s the case, will people have the same kinds objections as they tend to have when Walmart’s consumer-friendly strategies are instead bad for small businesses?
The Business Ethics Blog 