Thursday, December 12, 2013

What is the 'race to the bottom' in retail?

When I had a record shop we paid around £8 wholesale for most CDs, as did all other retailers. After a couple of years we noticed some online sellers were quite dramatically lowering their prices, they would make a make a smaller profit on CDs in order to sell higher numbers of CDs. It worked for a while, then other sellers on Amazon wanted to use the same method to shift units, but they needed an advantage over merchants who were already shifting twice the units by undercutting the established market.

What advantage could new Amazon sellers give themselves over the established sellers?  The words on the listings were largely out of their control, and postage prices were set by Amazon.  So the only advantage they could give themselves was price; if they undercut their competitors by just a few pennies then they would win the business, albeit at the loss of a bit of money per-unit.

Amazon, Ebay and the Web at large are very large marketplaces.  Many people want to sell online, and these many people all need an advantage.  For 99% of sellers the only advantage they can give themselves is to ensure their prices are lower than those of their competitors.  Their competitors then retaliate by lowering their own prices, so their 'peer' sellers can only maintain their advantage by dropping their prices lower than those of their competitors.

This process gathers pace until product is sold at a loss.  So we find a situation whereby merchants are selling their product at such low prices they're actually making a loss.  So do they stop there?  No.  There are enough sellers wishing to get a foothold in a pressured market that they will sell at a considerable loss in a frantic attempt to get established.  Huge numbers of these sellers find the situation unsustainable and go out of business.  But as mentioned earlier the Internet is all about huge numbers, so for every ten thousand sellers who go bust selling at a lot there will be twenty thousand joining the game. So where does it end?

We closed our shop the day we saw product we were paying our £8 for on sale for 25p a unit on Amazon Marketplace.

This is the race to the bottom.