FMCG Consulting

New Zealand based strategy consulting and technical training practice focused on assisting consumer product organisations achieve step changing growth.

FMCG Consulting is an Auckland, New Zealand based strategy consulting and technical training practice focused on assisting consumer product organisations achieve step changing growth. 

A live example of an online Price Glitch

The recent case of online shoppers on the Harvey Norman website picking up furniture at absurdly low prices, has not happened for the first time and will probably happen again. (Stuff News : Harvey Norman Price Glitch)

Approximately 330 people took advantage of the deal and the example quoted was of a woman paying $159 for something that was probably worth $1,699.

Last heard, Harvey Norman is not honouring the low prices but asking customers to either pay the higher price or cancel the transaction. In either condition Harvey Norman is apparently giving a $100 voucher to come back and use with Harvey Norman again. Really.!!

While we have heard the usual “experts” saying – they need to honour the prices and this will damage the brand, no commercially viable solution has been proposed. Clearly, there still is an opportunity to convert a big lose ( adverse impact on future sales and brand image) into a win.

So here is a commercially viable solution with some assumptions.
Assuming the average regular price of the items that have been purchased is $1,500 while the online shoppers have only paid $150. So for a $1,500 item of furniture Harvey Norman would have realised $1,304 once we remove GST off it. The next assumption is that the average margin Harvey Norman makes on furniture is probably around 60%. Which means the average furniture items costs 40% of $1,304 which is $522.

Now what Harvey Norman has currently realised is $150 which net of GST is $130. Deduct $522 from it and the loss is -$392. Multiply that by 330 customers and we are talking of a loss of $129,360. Now, how much of it is a lost profit opportunity? How many of those customers would have bought the 330 items of furniture at $1,500? My guess is maybe 20 if they are lucky, so would have made a profit of 20 x $1,304 x 60% which is = $15,648. And would have still had 310 furniture items in their stores and warehouse.

Harvey Norman like most retailers probably works in separate silos which control different levers of the business. Retail Sales / Buying teams control price realisation / optimisation while the Marketing team controls the advertising, brand building, sponsorships etc. In this case the issue is being addressed by the Sales team to limit its dollar loss. However, this is impacting the brand image and will potentially impact repeat purchase and the ability to gain new shoppers. But sales teams don’t see that long term impact. Brand Image or its associated measures are managed by the Marketing team.

So what is the solution? Harvey Norman is one of the largest advertisers in the country (in fact in the Top 10) from data available publicly from 2013 to 2011 (NZ Top 10 Spenders). With a published rate card spend of $60M (million), I assume with the hug discounts you get from various media channels the actual spend will be between $20M to $25M.
All Harvey Norman needs to do is reduce its media spend by $129,360 to fund this loss and then divert another $50,000 to advertise and tell the world they will honour the “price error” and apologise for the initial reaction of giving $100 vouchers. The 330 consumers will be over the moon as I would have been, and the positive brand association Harvey Norman will get through unpaid media exposure will be worth more than a few million dollars of TV ads SHOUTING at you. I can also assure the marketing team that reducing the spend from $25M to $24.8M may not make a measurable variance to their communication objectives. The current option includes disgruntled shoppers, adverse publicity and potentially high lawyer fees. I know what I’d choose. And in case after reading this, Harvey Norman decides to act as above then please let me know so I can send you the invoice for advice given :))

**All margin calculations made using assumptions. Actual data is likely to be commercially sensitive.

* Disclaimer:I have nothing against Harvey Norman personally. We buy most of our whiteware from them and 2 weeks after first publishing this post I did buy a nice dishwasher at a great price.

 

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