Market Based Pricing Process
Pricing to the Market Standard
Retail Products Pricing for Consumer Packaged Goods
I’m on a trip to visit a multi-unit retail operator that I visit quite frequently. Amongst the laundry list of processes that I’m creating with the team, one of the most compelling is the price. Price is a fundamental part of strategy and marketing as it defines your value perception to the consumer when combined with quality. Small changes in price, with a stable offering of products, can send the consumers flying into the parking lots to buy products. In this post, we’ll examine pricing strategies particular for retail environments that resell similar products to customers through an online or physical location. Then, we will walk through different areas to procure data to arm you with the right data to make these decisions. Lastly, we’ll walk through the subsequent actions that should be considered before committing to a change.
Sitting at a client dinner the other night, one gentleman pointed out that he had just purchased the same products from two retailers, but one was 40% more. He was perplexed as to what drove this differential. One of the gentlemen at the dinner laughed in his reply, “It’s a better service experience from service to store.” Quite a price to pay for those luxuries. Needless to say, I’ve been engaged to add diligence to this process. A quintessential piece of the puzzle is the value that the customer puts on the experience offered by the better store, despite being the same product.
In the annals of the market, we started our research project to understand the market average pricing as a starting point for our exercise. Depending on the retailer market and submarket, data can be obtained from Nielsen, IRI, and other data aggregators. I find it most beneficial to understand the total category trends in units sold and revenue sold, before diving into subcategories and products. In this particular exercise, we identified three primary categories for deeper dive based on unit and dollar share of sales for the competitive set v. the stores. Then, adding in the dimension of the average selling price, our challenges became very clear. We had to lower prices substantially in some categories to increase the inventory turn rate. In lowering gross margin, we need a strategy to begin to accelerate inventory turn to complement any changes.
Further product attribute research indicated the degree of consumer willingness to pay around the perceived quality of service, atmosphere, product assortment, and convenience. The cumulative sensitivity of these attributes multiplied and ranked by willingness to pay allowed us to establish the rate of market discount/premium to make the store a success. We apply the market premium to the market average selling price level-set our baseline pricing to the customer. Over time, we will adjust the pricing by not only using the market data but analyzing the price and quantity sold data for the store on a monthly basis.
It’s critical to find areas of inelasticity where the consumer is not as sensitive to price adjustments. The data may reflect that it’s in the beverage pricing at a restaurant or the food pricing at a destination casino, understanding these potential pockets of opportunity can drive a large improvement in cash flows.
With the completed analysis, we now have a picture of the company, competitors, and customers. Our goal in changing price is to create more gross profit through either lowering margins to create an increase in volume or increasing margins faster than volume sold decreases. So, as with any test, we now can set clear benchmarks for products and categories based on the rates of change and volume. But in making adjustments, creating a focus on price may damage the brand, so how would we consider generating additional volume? We need to communicate in the “perception of value”.
There’s always the option to lean hard on the grocery model where prices and discounts are posted weekly in newspaper free-standing inserts, which are effective for commodity products in price-sensitive markets. For brick and mortar retailing, messaging can be tuned to telegraph improvement in value as an alternative to price. Constructing these messages is more science than art requiring the meticulous collection of qualitative data about how a consumer associates their identity to the brand. Carefully, constructing messages the continue to reinforce the positive brand associations and extending into emotional reflections of prudence and responsibility may be effective, but subtle means to get to better results.
Changing pricing or any other element of marketing- promotion, product, or placement- should involve meticulous record-keeping about customers and competitors to position oneself for the best chance at success. Strategic marketing involves a great deal of research, analysis, preparation, and testing before deployment to reduce the chance of failure, just as in other business areas.
In our experience, this proves to be a daunting task; many people guess and gamble away their investments that result in little, squandering their limited opportunities. Had those investors made the investment in the right strategic marketing evaluation, they could have identified the odds prior to putting so much at risk. Better yet, with some planning, we could have minimized the risk of failure.