Amazon's In-Store One-Day Mobile Experiment Worrying Retailers Needlessly

A 26-hour (minus one minute) Amazon in-store mobile price-comparison experiment starting Friday (Dec. 9) is scaring a lot of retailers, who fear that allowing consumers to scan barcodes, compare prices and buy from within the store will hurt them. One retail lobbying group objects to Amazon taking advantage of its sales-tax-free status to make in-store sales.

Much of the concern may have little foundation, because Amazon has low-balled the incentives to such an extent that it's unclear if many consumers will even bother to try it.

The deal is that consumers who download the free Price Check By Amazon mobile application (if a consumer tries to search for Amazon as the first word, it won't work) can use it to scan prices in-store. Nothing new there. But from 9:00 PM (California time) December 9 through 11:59 PM (California time) December 10, if a consumer runs a check and chooses to place the item in the Amazon shopping cart and completes the purchase within 24 hours, that customer gets an Amazon credit. The purchase is limited to items in Electronics, Toys, Sports, Music and DVDs.

The price incentive? It's five percent, with a ceiling of $5 per item and a max of three items. In other words, if a consumer buys $300 worth of merchandise at Amazon, he or she will receive a whopping $15 off. Then again, the shipping charges for three $100 items is likely to well exceed $15, depending on the shipping deal accepted. On the flip side, that 5 percent is less than the sales tax in most U.S. states.

More likely purchases are not, though, in the $100 range. A more typical scanned price of $20, for example, delivers an entire dollar to consumers, assuming they qualify. Given that it is only one day (plus two hours), couldn't Amazon have tried an incentive that would have truly motivated consumers to try a new behavior?

Retailers also have psychology on their side. The consumer wants this product and the product is in his or her hands. The consumer could have it in a few minutes, or he or she could wait the bulk of a week. Saving one buck on a $20 item hardly seems sufficient motivation for that type of a wait.

If this experiment works, however, Amazon has many potential benefits. From the CRM perspective, the online giant already has excruciatingly comprehensive files on what every one of its customers has bought, in addition to everything they've thought of buying. If this mobile app works well, Amazon will also be able to add many products customers considered buying while shopping at competitors. How much would that be worth to you?

Getting back to the incentives for consumers to cooperate, the lack of tax charges is the key point for the Retail Industry Leaders Association (RILA). RILA's Jason Brewer argues that the Amazon experiment is wrong, not because of the competition for the sale but because the lack of a sales tax for an in-store sale is simply galling.

"Our issue isn't haggling over whether this app allows consumers to compare prices. Retailing is a highly competitive industry, and consumers have always had the ability to compare prices and retailers the ability to match or beat a price. That the Sunday circular is being replaced on some level by the iPhone is not a problem," Brewer said. "The fact that Amazon can exploit a loophole in federal law and then use the App (in competitors' stores) to offer a price without sales tax added highlights the need for Congress to close this loophole. It's not the $5 sale that bothers us; that's capitalism. It's the sales tax loophole that distorts a free market and provides a perceived 6 to 10 percent advantage that no brick-and-mortar retailer can match."That 6 to 10 percent range, by the way, speaks to state and local tax rates. Limiting it to state rates, that seems to range from zero to 7.9 percent.

Beyond the competitive issues, the other strong interest from Amazon is seeing how it can leverage tens of millions of consumers to deliver to Amazon—for free—highly accurate, product-specific real-time pricing across many retailers. Used wisely, that could potentially enable Amazon to underprice just enough to sway sales. And if that enables the company to have slightly lower prices, that additional 5 percent discount starts to look less anemic. Mathematically, it comes to whether the savings from the discount plus the lack of sales tax make the additional wait plus shipping charges a worthwhile trade.

The method Amazon has chosen for this intelligence, though, is not necessarily going to deliver the higher prices sought. The app gives consumers four options to explore an item: type in the name; scan the barcode; photograph the product; or speak the name of the product. To get the price data, location must be activated and—this is where it gets interesting—the price can not be scanned, spoken or photographed. It must be typed into a field by the consumer. There are two problems with that approach. First, it's a hassle. Second, whether through an inadvertent typo or a malicious falsehood, the price could be meaningfully wrong. Amazon has to trust that with a huge number of people doing this, the numbers will be mostly correct.

Also, Amazon isn't even incentivising those price submissions, saying on its blog that "in-store price submission and location confirmation are optional," meaning that the cash bonus happens—or doesn't—regardless of whether the consumer types in the price.

Still, the idea that Amazon is testing this methodology this week is making some retailers very nervous. One retail IT exec at a very large national chain said he is indeed quite worried about the prospect of his stores being filled with Amazon customers reporting back his prices to a major rival.

"This is using the in-store customers as underpaid, on-the-ground-everywhere intelligence collectors. Amazon will have an instant picture of the price of Sony TVs across the nation and everything else. Imagine a hundred competitive shoppers running around your store, scanning and entering prices of all your merchandise, trying to find the best three deals for their $15 discount and then running off to the next store," the IT exec—who didn't want his name used or his chain identified—said. "It will be an army hitting your entire chain in a single day. Tomorrow, the online price rollbacks come around and you are losing business at stores across the nation. Your margins are squeezed on every single item, down to pricing that no longer covers the cost of your distribution network."

On paper, it's a valid fear. But in the field, this argument falls apart unless a huge number of consumers are willing to do this routinely. Without much better price incentives, I think this experiment will get old quickly. Please don't get me wrong, brick and mortars. Amazon may indeed kill many of you, but this particular experiment won't be the weapon that does it.