A wise merchant and mentor of mine used to preach, “If you get your product right and your pricing right, you are more than 80 percent of the way there.” In this context, there was a place from which you could proudly say, “I have a great merchandising strategy.” And the lesson in that message was, “Focus on what’s important and the rest can easily fall into place.” A couple issues ago, we talked about product assortment and then followed up with its companion: placement. This month we will talk about the other star of the 4-P family: pricing.
Simply put, pricing is the unifying strategy that governs how you price all the products in an assortment. The price is the amount you are asking your customer to give you in exchange for a product. As obvious as that sounds, its meaning should not be taken lightly. After all, with the price, you are asking your customer to give up something of value in the form of money, for something else of value in the form of a product. If your product’s value, including all the associated value-driving attributes, does not exceed the value of the customer’s money, the chances of making a sale drop to approximately nil. There will be more on the idea of ‘value-driving’ attributes a bit later.
The overarching goal of any pricing strategy is twofold. Be competitive where you need to, and harvest profit where you can—easier said than done! The challenging piece is understanding when you need to be competitive and when you should downplay price and focus on other store benefits. Normally, the banner format will guide the strategy to prioritize one of the goals more so than the other. For example, a discount banner will usually execute a strategy that focuses more on competitiveness than it does on over and above services. Meanwhile, a full-service grocery store will accentuate the added value they bring to the overall shopping experience, while downplaying price. Store ambience, extensive product selection, or personalized services are all value-driving attributes that full-service stores use in the hopes they will be considered when the customer decides to purchase a product.
The overarching goal of any pricing strategy is twofold. Be competitive where you need to, and harvest profit where you can.
Regardless of the split between competitiveness and profit, it is always imperative that a price conveys value to potential customers, which can be done in many ways. A common way to convey value is to set a price below but very close to a whole dollar amount, sometimes referred to as rounding to $0.99. Amazingly, customers consciously, or otherwise, consider $2.99 to be meaningfully lower than $3.00. Another tactic is to use any number of ‘buy more and save’ pricing schemes. For example, multi-pricing like 3 for $5 or BOGO pricing like buy 1 and get the 2nd for free or even limit pricing like $3 each with a limit of five, communicates to a customer that buying in volume offers more value than buying single quantities.
At the other end of the spectrum, premium pricing attempts to drive up the value of a product by using its high price as proof of its high value. Think about the prices charged for specialty and exotic fruits. Often a seller will use premium pricing as a strategy to increase the perceived value of these products.
So far, we have only talked about pricing strategy as it pertains to a single product in pursuit of either one of two important goals. But a skilled merchant will be able to accomplish both goals by executing a coordinated strategy on a complete category.
To illustrate, I will use examples in the apple category. As we have heard, an important goal of a pricing strategy is to remain competitive. Typically, customers do not remember the prices of every item in the grocery store, so they will use a strategy called ‘key value indicators,’ or KVIs, to determine whether a particular grocery store offers competitive prices.
Analytics services like Price-U-Lytics, offered by Execulytics, combine price intelligence with analytics software to ensure retailers avoid those pitfalls.
Characteristically, customers are unaware they use this KVI strategy, but rather it is the name we have given to this intuitive customer behavior. In the apple category, bulk Gala apples are often considered the KVI or the item that creates a customer’s price impression for the category. A produce seller would be best served to remain competitively priced on bulk Gala apples. To support this competitive pricing tactic, a retailer can offer more profitable competing products to generate a higher overall profit mix, an exercise referred to as “mixing back.” Examples include newer, premium priced apple varieties like Honeycrisp, or local, lower cost apple varieties like McIntosh. They could also offer bagged product at a lower price per pound that delivers more profit per unit for the retailer. This coordinated strategy ensures the store remains competitive on the products that drive price impression, while ‘mixing back’ to achieve a higher profit.
It’s not hard to imagine that if you start with the right products and price them properly, good things can happen. Strong sales, good price impression, and high profits are a few of those good things. Although easy to imagine, it is not always simple to execute. Being out-priced on KVIs and neglecting to have a good mix-back strategy are two common pitfalls.
Analytics services like Price-U-Lytics, offered by Execulytics, combine price intelligence with analytics software to ensure retailers avoid those pitfalls. So, there you have it. To get 80 percent of the way to a great merchandising strategy, you only need two things: a good assortment and a commitment to a pricing strategy that aims to be competitive where you need to—and harvests profit where you can.
Read Part 4
Mike Mauti is the Managing Partner and Senior Vice President of Execulytics, a consulting firm catering to produce suppliers and independent retailers. With over two decades navigating the Canadian retail scene as a buyer, merchant, and operator, he certainly qualifies as an expert. And with much of that time spent in produce, he has the goods to deliver on his promise to bridge the gap between growers and retailers. Check out www.execulytics.ca to learn more about the company’s signature products: The Retail 101 Seminar and Canadian Intelligence Services.