HOW TO CHOOSE AND EXECUTE THE RIGHT PRICING STRATEGY

Camila LimaMarket Intelligence, Pricing Intelligence, Retail

Choosing Pricing Strategy

Deciding on the optimal pricing strategy for your business can be challenging. Not only do you have to keep your cost and your customers’ purchasing power in mind, but also consider what your competitors are doing. At the end of the day, your competitors are offering the same or similar products and targeting the same customers. If you don’t price your products perfectly, you can lose ground at the first step and as a result, will find it difficult to compete, let alone thrive.

WHAT PRICING STRATEGIES CAN I CHOOSE FROM?

There’s a wide variety of pricing strategies to choose from. You should choose one that aligns with your broader business and marketing objectives and goals. Here are some of the most common ones:

  • Loss Leader – pricing at a lower price point than competitors’ in order to incentivise purchase of other (more profitable) products. E.g. $1 per litre milk at Coles;
  • Price Leader – a deliberate focus on being the lowest priced retailer in a market across all products and relying in high sales and customer numbers. E.g. Aldi in groceries or Dan Murphy’s in Liquor;
  • Price Follower – pricing that competes with leader in the market and can involve raising or lowering prices accordingly;
  • Premium Pricer – intentionally pricing higher than competitors as to encourage positive perception and position the product or service as a higher quality in the eyes of customers, buyers and suppliers.

In order to choose the right strategy for you there are two fundamental considerations:

  1. Are my prices low enough compared to the competition to generate sufficient customers and sales?
  2. Are my prices high enough for my business to be profitable?

Therefore, you need to conduct extensive research. You can’t just have to look at the price tag of your competitors’ products – you need to uncover in-depth information about their pricing strategy. For instance, is your competitor running loss leaders on a small number of products? Sometimes, businesses intentionally incur a loss on some products, usually the ones that are more likely to attract customers, and so they place the product at a lower price point. In this case, do you lower your price for that particular product as well or base your pricing strategy on other higher value SKUs?

WHAT DO I NEED TO CONSIDER BEFORE CHOOSING MY PRICING STRATEGY?

The answer to this depends on the nature of the product. Different markets have different price change velocity. For instance, certain players of the liquor industry are changing their prices multiple times a day, so you need to consider the reality of your industry.

Some other aspects that must be taken into account are:

Competitors Actions

If your competitors have excess stock due to lack of customer demand, it means they’re most likely selling these products with a very low margin.  In the case of grey imports, there is variance in their cost, support and warranty, and you might find it hard to price reasonably if you are sourcing your products through a different channel. Supplier relationships and advantages such as rebates, bulk purchases and exclusivity agreements can influence how competitor’s prices are set. Last but not least, in-house brands such as Dan Murphy’s John Boston can be more competitively priced by cutting out the middle man or locking down long term supply contracts. Unless you keep a close eye on your competitors’ actions, you’ll be pricing your products or services incorrectly which will most likely result in missed opportunities and revenue loss.

Price Cut

 

 

 

 

 

 

 

Power SKUs

It is also important that you understand the concept of power SKUs. These are typically high volume products which consumers may focus on when considering where to purchase. As well as the margin on the power SKUs, retailers hope the consumer will purchase other items while in store. Based on insights gathered from our high-end market intelligence Insights Retail platform, the liquor industry has advertised 439 different beers in the past 6 months but more than 40% of all advertising slots are for the top 20 beers.

You need to keep a very close eye on your competitor’s pricing structure, historical pricing information and price changes. Do they change their prices based on seasonality? Are the price changes based on supply and demand? Are they mostly focusing promotional efforts on their power SKUs or running loss leaders aiming at volume for other SKUs?

Like-for-like Pricing

Businesses and brands often focus on watching their competitors’ products which are directly competing with their own – same specification, same SKU. If we think about the fashion industry, for example, where a consumer is looking for a black dress. A black dress from Zara isn’t exactly the same as a black dress from H&M. However, in the consumer’s mind it’s all about perception. They’ll be comparing both and making a decision to purchase one of them. This means you should really be watching your competitors’ similar products as well.

Don’t forget your Marketing Strategy

The key to making this work is correct targeting and marketing of your products. You have to promote your higher value SKUs more effectively than your competitors, even if they are charging a lower price for the same products.

Sales

 

 

 

 

 

 

You have to identify the Unique Selling Point (USP) of the business as a whole which includes the products, customer service, warranty, delivery and in-store experience, and formulate your strategy accordingly. For instance, you may be sourcing your raw material locally, which is a major plus point for consumers today. Your marketing for the product can be based on the fact that you want to help the local community which may mean you don’t have to lower your price to gain an edge.

CONCLUSION – DON’T FALL BEHIND!

Bottom line is: you need to understand your competitors at a strategic level and then continually monitor your competitors in order to quickly react to their initiatives.

The growth in online retailers is both a threat and an opportunity. Competitors who can change their prices without hassle of physical ticketing combined with dynamic pricing engines and algorithms means you need to have the most up to date information and make pricing decisions very quickly. On the other hand, having competitor price and product information readily available from their website means an end to expensive ‘mystery shoppers’ and catalogue clipping.

The challenge is how to collect, organise and analyse competitor product and pricing information from the internet. You could spend your day switching between competitor websites and compiling spreadsheets of pricing data but most business owners and managers have more important things to do such as serving customers or delivering services.

You can make life easier by signing up for SpotLite, an easy-to-use and affordable price tracking solution designed to help you stay on top of competitors’ pricing strategies and tactics as well as view historical pricing data. This way, you can make informed decisions regarding your pricing based on what your competitors are doing, with a greater chance of increasing revenue at a higher margin. Over time, you can gain an edge on the competition, and ensure you are able to capture market share.

Ask yourself: what are some pricing strategies you have learned from your competitors? What changes have you implemented based on competitor pricing analysis? The adoption of intelligent price tracking on your day to day business has even greater value on the long term, so if you’re not able to answer this question right now – you really need to get on board.