Paul Hunt

Retail pricing is a major factor in running a profitable business in the face of increased pricing pressures and competition. Retailers often struggle to balance how they optimize pricing versus store traffic.

"Retail pricing is probably the toughest thing there is to do. It’s part art and part science” - Charles Toftoy According to Charles Toftoy, associate professor of management science at George Washington University, "Retail pricing is probably the toughest thing there is to do. It’s part art and part science." While I generally agree with this statement, it is possible to create a retail pricing strategy framework that yields substantial benefits.

In this article I will dive into four high-impact strategies for retail pricing management that can drive increased profits and store traffic. We view these retail pricing strategies as essential for growing cash flows and investor returns.

Retail Price Point Strategy A surprising number of retailers continue to apply basic price markup multipliers to their cost of goods sold (COGS). This is particularly evident when the shelf price is not rounded to a number which is meaningful to customers.

Setting price points (and price endings) can be complex. As the chart below shows, price endings have four effects, some of them contradicting the others:

It is common to see products on retail shelves priced with a multitude of different dollar increments, sometimes down to the penny. This creates unnecessary complexity and confusion in the consumer’s mind. What is the difference between two similar products priced within 49 cents of each other?

This is where consumer psychology comes in. Studies repeatedly show that $100 is very different in a customer’s eyes than $99. Prices that are two digits compared versus three digits also create different buying reactions. Round numbers are easier to process and usually perceived as more “honest”. Prices ending in 9 (or .99) can leverage the “left digit" effect (people read from left to right and round numbers down) and the “just below” effect ($99 can be perceived as very different from $100).

Research has found that the impact of these price point effects depend on the region of the world you are in. In North America, endings in 9 or .99 are the norm, whereas Europeans typically use prices rounded to 0 or 5. In many Asian countries, endings in 8 are very common.

We have seen the design of an effective price point program generate millions of dollars in additional revenue. This typically includes reducing the number of price points and designing different thresholds that can be leveraged effectively according to perceived value.

Competition from Online Retailers How can brick-and-mortar retailers compete with online giants like Amazon and Overstock, and the myriad of smaller niche sites offering significantly lower prices?

The approach we use with our clients is this: If you sell the same SKUs as low-price online retailers, it is nearly impossible to compete on price, so don’t.

The best strategy we’ve found is to secure commercial agreements with as many manufacturers as possible to obtain exclusive products that the manufacturer is contractually bound to not sell elsewhere (or not to online retailers, at least).

In lieu of exclusive manufacturer agreements, the next step is to focus on value pricing. Offer more value to customers by through personalized service like in-store product demonstrations, an “open the box” policy, personal consultations, and training sessions or classes. If you have an online retail site, integrate it with your stores so customers can order online and pickup, ship and/or return merchandise to their local store -- this is an excellent convenience strategy used by Best Buy and other successful retailers.

Discounts and Promotions Many retailers offer too many discounts and promotions, or design them poorly so they are minimally effective. Retail discounting can be an addiction, creating a slippery slope of high traffic with decreasing profitability. These retailers know it works poorly most of the time, but don’t know how to eliminate or change their strategy.

Heavy price discounting may attract traffic in the short-term, but it’s usually not sustainable and eats into profits and shareholder value over the mid- to long-term unless it’s used strategically.

How can discounting and promotions be used effectively?

Seasonal promotions tend to do very well. For example, Spring, Back to School, etc.

Product bundle promotions that deliver added value to consumers are excellent. An example would be a barbecue, umbrella and a grilling utensil set.

Loyalty promotions are typically the most successful. They yield the highest returns when the offer is tailored to the customer’s desires using past buying behavior and other indicators of interest. For example, a convenience store noticed that most of its loyalty customers were avid coffee drinkers. It offered frequency-based discounts (by 10 coffees, get the 11th free) to these loyalty customers, resulting in an increase in their overall spend and basket size.

What discounts and promotions generally don’t work well?

Combining multiple discounts (e.g. a “new customer” discount plus a “senior discount” plus 50% off) is counterproductive and does not drive increased sales revenue or store traffic. These situations are viewed as one-off windfalls by customers and don’t increase store loyalty (or if they do, it’s customers seeking further windfalls).

Discretionary discounts also typically fail. The authority to give discretionary discounts should be taken away from lower-level sales staff and limited to the store’s management team for special situations (e.g. to make up for a customer service problem or product issue).

Discounts and promotions must be tracked and analyzed for success on a consistent basis. Implementing a “test-measure-learn” loop similar to what is done in the software industry is an approach we utilize with excellent results. This enables you to base your discounting decisions on past performance and test new ones effectively.

Value: The Core Element of a Sound Retail Pricing Strategy A sound retail pricing strategy positions your stores to compete effectively in the buyer’s mind. It is crucial to tie your pricing strategy to the perceived value of each product on your shelves. Therefore, effective pricing must take into account the interrelationship between perceived customer value and store profit.

Having a clear, coherent pricing strategy for each product category is important (e.g. traffic builder, profit generator, loss leader, etc.). Even more important is understanding the customer segments that drive demand and how their needs vary (e.g. baskets, price elasticity, competitive set, etc.). For example, we had one very successful retail client who had simplified their customer segmentation to the point that it was dominated by only one segment. This segment was critical to their business but upon deeper inquiry the client realized there were actually 4 customer segments that were driving their business and their pricing strategy needed to be customized for each segment.

Bringing customer value into your pricing decisions allows you to compete effectively by going beyond price. Pricing higher (or lower) according to end customer value allows you to maintain higher effective prices overall and resists unnecessary price competition where customers are less sensitive to price. This helps generate positive returns without substantially diminishing volume.

The Role of Data in World Class Retail Pricing Tracking and analyzing pricing decisions is key to the success of all pricing initiatives. Some retail businesses are overwhelmed by the sheer size of their data. Others struggle with data scattered across multiple sources and systems, which can make it hard to reconcile.

Investing to develop a core data set is an essential first step for any retailer. Management can then track performance and correct course when needed. We typically advise compiling two years of transactional data, including point of sales data like location, date, time, items bought, quantity, net and retail prices.

With a core data set in place, retailers can then implement and test pricing strategies including price points, discounts, promotions, segmentation, store tiering, and omni-channel pricing.

Optimize Your Retail Pricing Strategy Retail pricing strategy is critical to balancing competitive forces and sustainable long-term profitability and sales volume. To learn more about implementing a world-class pricing program for your retail business or investment portfolio, feel free to contact Paul Hunt at 416-943-0505 x 121 (Eastern time) or phunt@pricingsolutions.com .

Paul Hunt

Toronto, Ontario, Canada 4K followers 500+ connections

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TEC Canada

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Ivey Business School at Western University

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