Pricing to Compete

Progressive retailers are successfully driving top line sales by strengthening price image. They are employing pricing programs that increase a store's profitability to leverage the shoppers' perception and help eliminate price as a barrier to shoppers entering the store or spending more time and money in the store.

Strengthening price image is a key to success in today's fluctuating retail environment where super centers drive competitive advantage through low prices, typically 13 to 18 percent lower than comparable supermarket prices in their marketplace. Membership warehouse clubs like Costco, Sam's Club and BJ's also drive the competitive advantage by providing great values. In addition, dollar stores are the fastest growing format today - the top three dollar store chains have a total of 15,000 stores.

To compete effectively retailers must reduce price vulnerability while getting full recognition of their store's value from the consumer. When planning pricing programs, retailers should strive to keep them under the radar to avoid getting into a price war with key competitors and also avoid sacrificing gross margin.

An effective pricing strategy will leverage price optimization in the price setting process. When formulating a pricing strategy, the primary goals are to eliminate pricing as a barrier to bringing consumers into the store and to use differentiators such as service and variety to retain those customers. This is achieved by managing competitive price gaps. Retailers do not need to match competitors' prices to compete. Consumers are not likely to notice very small differences in price between two retailers.

Price differences within approximately five percent (depending on the channel) are fairly imperceptible to shoppers. Consumers begin to notice price differences at a five and 10 percent price gap but are willing to pay the premium if they are getting some other value by shopping at that store. However, there is a tipping point around 10 percent, which varies widely by channel, at which point consumers begin to leave their preferred shopping location.

Six dimensions of price image
Six strategies working together help create the optimal price image. They operate like a six-link chain and if one link is weak, the integrity of the entire chain weakens. Those strategies include: everyday shelf prices, promotional offerings, known value item prices, per unit item prices, merchandising and price communication.

Everyday shelf prices. Price optimization can play a crucial role in making sure that you're on the right path in setting everyday shelf prices. If these prices are wrong, then the entire price image and your entire pricing strategy breaks down at the very first link in the chain.

Promotional offering. Promotions are key to improving price image. Retailers should consider all types of promotional pricing strategies, including heavily advertised prices, temporary price reductions or other vehicles.

Known value items are the top sellers in every category across the store. These are the most important items in the store from a price image point of view because they are the items of which consumers are most likely to know the prices, and in turn, most greatly affect the consumers' impression of the store from an item price point of view. Retailers should maintain a list of these items and be sure they are not over-priced or under-priced versus competitors.

Per unit or value prices. The best value in any category is measured on a price-per-unit basis. Strong values offered in every category across the store encourage people to shop the store more intensively on every trip. The price-conscious shopper is willing to make brand tradeoffs to get a great per-unit value.

Merchandising. The use of in-store displays and other point-of-sale (POS) vehicles highlights the strong price offerings in the store. Membership warehouse clubs are world class when it comes to using merchandising to generate a positive price image with their use of abundant displays and clear communication of value. Other retailers can benefit from the warehouse clubs' example.

Price communication. A number of different vehicles enable good price communication, including in-store signage and shelf tags, detailed register receipts or checkout personnel talking to customers about promotions and special offers. Retailers also need to communicate price to people outside of the store through vehicles such as weekly ads and direct mail.

The six dimensions build shopper loyalty, encourage people to shop the store more intensively on every trip, strengthen price image and drive competitive advantage without starting a price war. Price optimization ties the package together by ensuring that shelf prices are right. It's the first link in the chain.

Jon Hauptman is the vice president of Willard Bishop Consulting, which specializes in retail, particularly within grocery and consumer goods. Information for this column was gleaned from an RIS News Webinar titled "Redefining Price Optimization for Retailers: Strategies for Affordability and Profitability."