Pricing strategy remains a very timely topic. Learn how to make sound research-based decisions when lowering or increasing your prices.
Pricing Is in Demand
A few weeks ago, I decided to offer everyone on LinkedIn a simple but powerful pricing tool. If time is money, this turned out to be expensive for me; I ended up sending the TV OptiPricer tool to more than 400 connections.
I learned that while pricing may be one of the oldest levers in the game, it’s still one of the hottest topics. Therefore, it felt right to discuss pricing strategy in a little more detail here. If you are interested in the tool, please feel free to connect with me on LinkedIn and drop me a message.
Get the Price Right, Get the Profitability Right
We all know that it’s nearly impossible to give specific directions to defining the right price. Pricing is a perception game played by many but mastered by few. There is a lot of information online on the impact of different promotion types as well as general budget, value and luxury pricing strategies. I hope to inspire your thinking about the impact of price changes on shopper behaviours.
Why does pricing matter? The finance department of a multinational company found that a 1% change in buying price (COGS), unit sales or original selling price, had widely differing impacts on the operating profit:
This shows that getting the price right is an essential art to be mastered.
We have all experienced that the price perceptions of shoppers are difficult to translate into the right price. After working in the same market for a longer time, our own price perception begins to change, and we risk assuming that shoppers know prices as well as we do. Losing the ability to sense the price perception of shoppers can lead to pricing becoming a ‘one price fits all’ exercise.
Understand the Relation Between ‘Loyalty to the Deal’ and ‘Loyalty to the Brand’ to Drive Market Share
Retail is a game of building consumer relationships. Loyalty is built by developing perceptual brand accept and behavioural accept. Pricing is often regarded as a solely behavioural driver. Perceptual (emotional) accept is often seen as more of a branding exercise.
In reality, pricing connects perceptual and behavioural accept. It needs to be managed at a strategic level to establish harmony between shopper perceptions of product benefits (brand) and price (deal) to drive market share.
Research provides a better understanding of how shoppers perceive your price and benefits versus that of your competitors. It will guide your thinking on changes to the price/benefit proposition.
Right Customer, Right Price – It’s a Game of Different Behaviours and Perceptions
Watch out! Targeting price perception of shoppers is not a one-size-fits-all. By simply shooting for the average shopper without understanding differences in behaviour, you will get it wrong.
When I worked as a Trade Marketing Director, the pricing strategy was one of the biggest challenges for retail customers. Constant price promotions weren’t great for retailer profitability, or for brand image. They meant that even shoppers who were willing to pay more would buy at a relatively lower price. During research, shoppers had expressed that location and price were the primary shopping criteria. But what if shoppers didn’t know the actual price of a product?
Research showed that the majority of shoppers was unable to guess the price within a +/-10% range. In fact, only 20-25% of shoppers hit the correct price range. We also found that more than 50% of shopping journeys could be positively influenced by in-store experiences, product presentation and navigation.
(Findings from research in the food retail industry, own illustration)
We identified four shopper types that are important when optimising pricing strategies. Retailers used to spend 100% of promotional investments on 25% of shoppers. With these new insights, they could target specific shopper types instead, leading to less aggressive promotions.
Another valuable insight was that while 20% of shoppers might represent the usual 80% of revenues, the 5% most brand loyal shoppers represented 50% of profit. They were less likely to switch brands and buy less based on price. At the other end of the scale, category shoppers were solely motivated by price.
Which shopper behaviours are you targeting when designing your price and promo strategy?
The Impact of Pricing on Profitability Is Left to Perception Too Often
That perception rules doesn’t mean that understanding the impact of price reductions should be left entirely to perception. Marking down products blindly without calculating the impact on profitability, can be a very costly affair. The TV OptiPricer tool shows how large of an increase in unit sales is needed to make the same profit as before discounting a product.
(Profit break even when discounting products, own illustration from the TV OptiPricer Tool)
For example, with an initial profit margin of 50% and a 30% discount to the consumer, a 150% increase in unit sales is required to break even. It’s hard to predict exactly how many more units will be sold at a certain discount. But in many cases, an increase in unit sales by 150% would be highly unlikely.
Pricing Down is ‘Easy’, Pricing Up is ‘Hard’
When people are uncertain about the impact of price decreases, they have high anxiety around increasing prices. What if product sales will crash?
The fear is real. To face it, begin by understanding how big of a unit sales decrease you can suffer and still make the same profit.
(Tolerable loss in unit sales when increasing prices, own illustration from the TV OptiPricer Tool)
For example, 50% initial profit margin combined with a 10% price increase will result in the same profit if unit sales drop by 16.7%. This gives you a bit of a guardrail before experimenting with price increases.
Most companies have historical insights on promo-effects, which they don’t currently make use of. Correlating past price and unit changes can be a valuable exercise that can be combined with A/B or pre/post experiments (consider integrating more advanced AI tools).
In a previous company, we experimented with price reductions in a smaller part of the marketplace. We found that one of the product categories was price inelastic. Although selling prices were decreased for 20%, there were hardly any change in unit sales. Increasing prices at scale, in the belief it would only have minor impact on unit sales, therefore felt like a safe bet. After prices were increased, at a general market level, only small variations in unit sales were seen. Unit sales remained at the same level while net profit was increased by a staggering 35%!
Challenging your pricing strategy pays off!
About the Author:
Torben Valsted is an international “Business Imagineer” focused on building growth-unleashing relationships in symbiosis between commercial understanding and consumer-centric insights. Torben has been a transformational leader and growth architect for Nike, Nestlé and Carlsberg. He is a true believer of Phil Knight’s (founder of Nike) wisdom; “it can be a gift not knowing anything about a new job because it’s preventing any ideas copying what has already been done”. His extensive commercial experience from leadership roles in Trade Marketing, Sales, Marketing, Planning, Business Development, Retail and Analytics, is a living testimony to this belief. Read his work here or connect with him on LinkedIn.
