Pricing has always been part art, part science and part luck. In the belief that good advice can help you improve your luck, we asked a dream team of experts for their thoughts on some of the key issues in pricing today. Here’s what they told us.
1. Help! There’s a price war (or a new Walmart) in my market. What should I do?
Dan Raftery, president of Raftery Resource Network, Antioch, Ill., says we’re really talking apples and oranges here. “A price war is understood to be temporary. You may be able to return to a normal climate eventually. When Walmart moves into town, life will never be the same.”
In a price war, he advises finding your competitor’s weak spots — service, location or whatever — and going after them. “Let the other guy spend the ad money — just match his prices. Use the money you save on ads to help pay for it,” he suggests. And if you’re fighting Walmart, do what you can on price but work to beat them on variety and service.
Everyone we interviewed advises against trying to match Walmart on price, or being the one who starts a price war in the first place. The reason? Nobody wins.
“A price war hurts everyone,” says Frank Dell, president, Dellmart & Co., Stamford, Conn. “The maximum effect is to push out the weakest retailer, but this rarely happens. The real effect is to tell consumers that retailers have been over-charging. In a price war it is best not to lead. All price wars die out over time, but the leader spends more for maybe some share increase. The best defense is to follow only on core items and every other one, not all of them. Always focus on your target customers and items important to them.”
Dell says it’s simply stupid to try to out-Walmart Walmart on price. “Any competing retailer can run a promotion with lower prices for one or two weeks. They simply don’t get credit for the effort and every Walmart store manager has the authority to match the price.” He suggests promoting items Walmart doesn’t stock.
Ben Ball, vp of Dechert-Hampe & Co., Northbrook, Ill., says that if you don’t have deeper pockets than your competitor in a price war, you can simply pretend to play. “Study your market closely,” he advises. “Identify the items that truly define price image. Hint: It is probably 30-50 items, not the 200+ items so often touted in price elasticity studies. Then, make sure you match — not beat — the price aggressor on those items, and make a big deal out of it. The goal here is to leave your shoppers with the feeling that you are as competitive as they need you to be, to avoid switching to the other guy.”
There’s agreement among those we interviewed that in a highly competitive market, you have to focus on the items that are most important in setting your price image — although there are wide differences of opinion on how many items that is.
For example, Lyle Walker, vp of marketing, KSS Retail, the Florham Park, N.J.-based marketer of price optimization software, says the number is considerably north of 200. “If there are 50,000 items in a store, there are likely as many as 1,500 to 2,000 items where shoppers have at least a directional feel for the price,” he notes. “These items aren’t always the ones the retailer expects, either. In the frozen department, shoppers have a perception of what the pricing should be in ice cream, frozen pizza and 16-ounce bags of vegetables, for example.”
It’s important getting your price right on items such as these, he explains, since they are so important in setting your price image. Calculating elasticity on these key items and pricing them competitively is essential, Walker says. But, a key point is that being competitive does not necessarily mean “matching the competition.”
Today’s price optimization software can do this sort of thing automatically, he notes. A system will look at a whole category and determine competitive prices on some SKUs, while making up the difference on the items that have less elasticity.
All our experts agree that you first need to define who your “best customers” are, and then track what they’re buying.
“Make sure you have a good value proposition on products that matter the most to your best customers,” says Derek Smith, vp of retail industry marketing, DemandTec, San Carlos, Calif. He notes that how you define your “best customers” will depend on your individual circumstances and strategies. But they’re probably your most loyal and most profitable shoppers — not cherry pickers.
Having said that, he adds that if you set prices aimed at the best 10% of your shopper list, you have to understand how this will impact the other 90%. To gain this understanding, you need to model sales history based not on just store-level SKU information but on transaction-level data — whether tied to loyalty card data or not.
By looking at shopper basket data — particularly in large baskets — you can get an idea of which items sell together most frequently and how cross-promotion pricing strategies can help trigger incremental sales, Smith says.
For example, ingredient items sold in the frozen food department often drive sales of items in other departments. To identify them, and set a pricing strategy, transaction-level data is invaluable. You can then see what a drop in price of the ingredient item does to sales of the related products.
Pete Deeb, managing partner, Deeb MacDonald Associates, Williamsburg, Va., says he’s seen retailers succeed in difficult competitive situations by expanding their service offering, upgrading their perishable programs and by insuring that their employees make the shopping experience very pleasant.
“It is probably necessary to target competitive prices on the best-selling 100-200 items in the frozen and dairy cases, however, to insure that you keep the price-conscious shopper,” he says. Deeb adds that double-couponing, sharper ads and weekly specials can be tested to see which work best.
Don Thielemann, managing director of DST Associates, Paramus, N.J., says that rather than making a knee-jerk response to a price war, it’s vital to do a thorough assessment of the competition and what effect its actions might have on your stores.
“While price is the lowest common denominator and most simplistic weapon of retail competition, it is not the consumer’s overriding determinant in retailer selection,” he notes. “Rarely does any retailer benefit by responding to a price threat with a price-only defense. If so, Walmart would be the only retailer. The best response will be based on developing a smart consumer-focused plan and effective execution — something too often neglected by threatened retailers.”
Indeed, when all is said and done, price isn’t everything. According to Donald J. Stuart, managing director, Cannondale Associates, Wilton, Conn., “Competitive pricing is only the greens fee.” To win the game, he urges retailers to build competitive differentiation based on service, perimeter offerings and a more shoppable center store.
2. How do I know when promotional price cuts are too deep, or not deep enough?
According to Dell, “Promotional effectiveness is related to season of the year, category consumption rate, frequency of category promotions, support elements (display, advertising, POS), competitive promotions and the weather.”
But pricing is also key. “When you lower the price and don’t sell any more units, you’ve just wasted money,” Dell notes. “When the price is too low, consumers refuse to buy as they think something is wrong with the product.”
If your promotion didn’t move the expected amount of product, he says, the problem isn’t always price. More than one promotion has been cancelled out by competition, or by ineffective in-store execution, Dell explains.
While you can do basic analysis with syndicated data, drilling down into shopper card data lets you track individual shopper behavior in aggregate when pricing fluctuates, says Cannondale’s Stuart. “If purchase cycles are extending, there is a high likelihood that shoppers are filling in elsewhere on some of their purchase occasions on key products,” he notes.
Stuart adds that mining loyalty card data can reveal not only the size of the promotional peak but also which shoppers are driving the sales. Key questions can then be answered he says, including ones such as: “Are we attracting new users? Are we just rewarding loyalists? Are we incenting them to buy more? Is their use-up rate faster?”
KSS Retail’s Walker says promotional pricing is an area with plenty of low-hanging fruit. “About 50% of promotions are not profitable — they just shift sales. It’s not uncommon to see units up, but category dollars down,” he points out. Today’s software, he says, allows vendors and retailers to work together modeling promotions and seeing the effects of what a manufacturer is suggesting.
3. How do I price my national brands versus store brands for maximum sales and profit?
Walker says he’s seen some of the retailers he has worked with raise prices on their private label without losing sales — thus significantly increasing category profits. “We build demand models with two years’ worth of POS history, and then dynamically adjust elasticity values based on weekly updates of POS data,” he explains. “This allows a retailer to quickly determine shifts in consumer buying behavior and some of our customers are starting to raise pricing on their private label — decreasing the spread against national brands. They’re not losing sales, and they’re still giving their shoppers value.
“I’m not talking a 50% increase — it’s pennies here and pennies there, but it all adds up,” Walker says. “Doing things the old way, you might have worked off a 25% price spread, with no way to adjust prices based on how consumers are reacting.”
“Pricing private label off the national brand is simply the wrong way to approach the issue, although this is what everyone does,” says Dell, of Dellmart. It’s not uncommon to see a 30% gap between national brand and private label, but this gap just gives away private label gross margin, he notes.
Typically, private label pricing should be low when products are introduced, to create trial. Pricing rises as volume builds and share rises, and reaches its highest point (or narrowest gap versus national brands) when volume and share objectives are achieved, Dell says.
Of course, when you’re talking about a commodity product, it makes sense to price it off branded competition, he explains. Don’t forget to do to competitive price comparison on commodity items. But in general, he says it’s better to price private label off the individual product’s strategy or marketing plan. For example, extremely low prices on high quality, unique items simply undermine their quality image. A lower introductory price can create trial, but should be raised as share and repeat purchases are achieved.
DemandTec’s Smith is seeing smaller price gaps between national brands and private label, with private label also adding more tiers. This allows one tier to fulfill the opening price point in a category, with the other tier playing roughly on par with the national brand or even priced above it.
It’s important for the marketing and merchandising teams to get together on how private labels are priced and promoted, Smith states. Stumbles can easily happen if a high-tier private label item is promoted primarily on price, or a low-tier item is priced near the leading national brand. In promotions involving multiple brands and sizes, it’s easy to see how a slip could happen.
“You also have to understand what price gap is necessary to get the consumer to trade up or down,” depending on your strategy, he adds. For example, you might want to incent shoppers to trade down to your private label, so you get more margin. So… do you raise the price on the national brand, lower the price on the private label, or do a bit of both? Once again, it will depend on your customer set and their purchasing history.
Jon Hauptman, partner, Willard Bishop, Barrington, Ill., has seen the price gap between national brands and private label increase at some retailers, especially over the past six months. This is at least partly because national brands have passed along price increases more rapidly than private label vendors, who often are bound by contract.
“It’s not uncommon for us to find price gaps as high as 30% or higher in some categories,” he notes. “But on average, supermarkets can drive a healthy private label business with average gaps in the low-to-mid 20% range. In our own surveys of 30 supermarkets over the past two years, the average gap we saw was 26.3%. We see it as a red flag when the gap gets too high.”
DST’s Thielemann, once the director of corporate brands for Kmart, notes that any actions taken should be preceded by determining the private label’s positioning, goals and objectives. “If ‘maximum sales and profit’ is the primary goal, then that measurement along with its time frame should be clearly defined,” he says.
“At that point, there are a number of automated options for evaluating private brand pricing which should be determined on a by-category basis consistent with the brand’s positioning and ongoing consumer research learning,” Theilemann advises.
4. What are some ways to avoid pantry loading and cannibalization?
Willard Bishop’s Hauptman notes that pantry loading in today’s increasingly competitive market isn’t necessarily bad, and that most supermarkets are better off if the pantry loading is done at their stores rather than at a competitor.
“There’s a lot to be said for shopper engagement — encouraging shoppers to spend as much as possible at your store, even if it means they are pantry loading,” he says. “If you get shoppers to shop your store more intensively, you also reduce cherry picking as a percentage of sales.”
Dell agrees that pantry loading can help keep shoppers away from your competitors’ stores — although products with short shelf lives aren’t great candidates. But if you really want to avoid pantry loading, he says, go with frequent promotions, put a limit customer purchases and don’t make your pricing red-hot.
Pantry loading can be fine, according to DemandTec’s Smith, unless you’re getting practically zero margin and cutting into full-margin sales in the future. Recently, he’s done some analysis of multiples pricing, and how shoppers respond to it.
“Using transaction-level data, we can see what happens in each cart when you run these multiples. Let’s say that I regularly buy six yogurts at a time. But then, there’s a special at four for a hot price. So maybe I buy only four that time around. You may actually be getting a reduction in units by putting on a deal like that,” Smith says.
Using transaction-level data and comparing it against history, you can see if the average units per basket changed based on multiples pricing, he notes. If you collect the right data, you can also see how many new buyers you’ve gotten, and how much your steady buyers purchased during the promotion.
“The opportunity is to understand the true expandability of consumption within a category. Pantry loading is not a bad term if consumption increases,” says Stuart. “If we are simply loading for the sake of loading and extending the purchase cycle then this is something that should be minimized unless the only goal is to steal short-term share.
