Peter Chng

Target prices differ between online and in-store

If you check prices for items at Target online, and then go into the store, you’ll frequently find that the prices in store are more than online.

For example, I recently looked up two items online and they were \$4.99 and \$3.79; in store, they were \$6.29 and \$4.89 respectively. This is a significant increase, not in absolute terms but in relative/percentage terms.

At first glance, this doesn’t seem to make sense. Why would the prices be different for the same item, from the same retailer? (You can, of course, price match in store with the online price)

However, this tactic is widely deployed by many brick-and-mortar retailers [1] [2] that have a substantial online presence as well, so there must be some benefit to it. (Unless we assume these retailers don’t know what they’re doing, which seems absurd)

Price Discrimination

Price Discrimination is probably is probably one of the most important concepts from Economics than a layperson can understand. A lot of things make sense in light of this concept.

Price Discrimination is based upon the observation that different people may assign different values to the same item, and hence be willing to pay differently for it. If you have a single price for that item, all else being equal, you won’t be getting the optimal revenue from selling it at this price.

However you simply cannot ask each and every person how much they’re willing to pay, and then get them to pay that price. That obviously wouldn’t work for a multitude of reasons, not the least of which is that it would seem hugely unfair.

But it’s present in many forms:

  • Airfare: Business class/First class cost multiples of Economy class, despite these seats not costing the airline a proportionate amount. (They cost the airline more, for sure, but not that much more)
  • Cars: Especially for economy cars, the lowest trim is often quite cheap; but as you move up the trim levels and add on options, the price often increases dramatically.
  • Software: This is less frequent nowadays, as more software moves to a subscription/SaaS model, but still, software such as operating systems came in many different levels, i.e. “Home” and “Professional”. The marginal cost to deliver a “Professional” edition vs. a “Home” edition is essentially zero, but the price difference is significant.

The list goes on, but the same pattern emerges: Add some features (which do not cost you a lot) to your product to create different product lines such that the different lines will effectively segment your customers in to different tiers based on their willingness to pay. The Wikipedia article on price discrimination goes into this in much more detail.

Online vs. Offline price

Going back to our Target example, we can reformulate it as instance of price discrimination. Assume that when customers search for products online, they typically are doing comparison shopping. This isn’t a huge assumption, since searching for products in Google typically results in results from Google Shopping displaying the price comparison between retailers right away.

In that environment, Target needs to be competitive with the price other retailers can offer (e.g. Amazon). In this environment, the ability to easily compare prices across retailers results in an approximation of the scenario typically discussed in Microeconomics 101 where the market converges on a single price. If you were thinking of buying from Target, but found a better price elsewhere, your cost to switch is basically zero, so no one is bound to any one retailer.

However, when you’re in store it’s different. You see a price on the shelf, and for many of these lower-priced items, most people probably will not even bother to pull out their phone to compare the price. Even if they do and find a lower price elsewhere, the cost to switch is not zero: You have to spend time, and possibly gas/transit fare to go to another store. Ordering online means you’d have to wait for it, versus just buying it now. (Note that there will be still some people who leave the store and go elsewhere, but as long as the lost revenue from this group is less than the revenue gained from charging more in-store, it still makes economic sense for the retailer)

Essentially, the in store markup is the extra price you pay for immediacy and the luxury of not having to search online for each and every item you want before you go out to buy it. Essentially Target, and other retailers that do this practice, are segmenting their customers by those who comparison shop more frequently, and those who don’t, and charging a different price to each. In this respect, it’s not that different than how coupons work.

Since most people won’t comparison shop for lower-priced items, I suspect this sort of online-offline price discrepancy to be more prevalent for lower-priced items rather than higher-priced ones, where it is reasonable to assume people will do more research before buying.