Pricing is a key element for surviving and succeeding in a competitive retail market. On the one hand, rising input costs, such as raw material costs, directly impact margins. In 2011 these rose by an average of 6 – 7%. On the other hand, retailers are having to operate in a commercial environment where consumers are spending less due to the harsher economic climate.
Purchasing power reduction in mature markets has generated changes in customer purchasing behaviours. After proximity, price is the most important reason to choose a retailer, and its significance is growing. A Kurt Salmon survey found that between 2010 and 2011 price increased by 5 points to 21% amongst all reasons for choosing to shop with a particular retailer. Moreover, the development of multichannel retail has generated a diversification of competition giving power back to customers with greater choice and easier access to offers. Customers now have access to huge amounts of information via the Internet and can easily compare prices before purchasing (80% of purchases are made after visiting web sites).
In these conditions the main challenges for retailers are to:
- Define the right pricing strategy so that it has the most beneficial effects on sales, margin and customer traffic
- Optimise pricing by category, product, geographical area and channel to improve brand image and competiveness, leveraging category roles, price sensitivity, and the local market environment.
Pricing must be managed throughout the product lifecycle with different goals at each stage.
The pricing strategy must consider five areas across each stage of this lifecycle.
- How to use pricing to increase turnover and margin without deteriorating brand image.
- How to use pricing to attract new customers and develop loyal customers.
- How it should align with the chosen market positioning and category strategy.
- What the right prices are by product, store, channel, country/region, and customer segment.
- The impact on processes, organisation and IT systems in implementing a successful pricing strategy.
Six key levers drive a successful pricing approach
1. Price sensitivity and elasticity
Price sensitivity and elasticity bring an understanding of the impacts of pricing decisions on volume and what the customer is prepared to pay. Factors such as purchasing frequency, sales volumes, and price dispersion are important for making pricing decisions that are aligned to customers’ purchasing preferences and that achieve the required margin mix. Analysis of the volume effect ensures that pricing decisions will deliver acceptable margins for the level of sales targeted.
2. Cost to serve
Prices need to be set at a level that will achieve an acceptable net margin both for the retailer and its suppliers. Without fully understanding their cost to serve companies will effectively have to walk in the dark towards their profitability targets. This applies for regular pricing, as well as when considering the funding implications of promotions, and markdown strategies. Likewise, the impact on margins must be understood when operating costs change to determine whether to make a corresponding change to price.
3. Strategic category management
Every product category should have a growth plan which is based on that category’s role in the overall mix. Some categories may be targeted for high sales and high margin because they are innovative or because products are perceived to be of superior quality. Others may constitute more staple products where margin expectations are lower. Similarly, the pricing approach to own-brand products needs to be considered against their branded equivalents.
The specific characteristics of customer catchment areas are important. These include customer potential in terms of disposable income and purchasing habits, as well as the intensity of competitors and the nature of their respective pricing strategies. Using geomarketing, customer traffic, turnover, and margin can be maximised by store and customer catchment area.
5. Seasonality and regionalism
Where there are limitations to product availability such as where they are available for a fixed period of time or only in certain locations, it may be possible to attach a premium to the price of those products. Similarly demand for certain products may vary by region, and should be factored into pricing considerations. It is also important not to overlook local laws as they can constrain what pricing options are available.
6. Multichannel impacts
There are various approaches to managing pricing across different channels and markets, but essentially it involves deciding whether to have one or more pricing policies across channels. The correct pricing strategy depends on factors such as to what extent channels develop and source their own ranges, retailers’ attitude to driving customers to particular channels, what competitors are doing, and regional buying patterns.
7 May 2012