When the topic of pricing arises, retailers often anticipate an unpleasant discussion and more pressure on their annual goals. We have all heard quotes like these: “The only way we got people into our store over the holidays was with massive discounts….My customers had to go down market during the recession, and they aren’t moving back up….We keep losing share to private labels in the Big Boxes, all due to price.”
While such quotes are based on reality and make pricing a daunting topic, firms that manage pricing strategies proactively with the right tools in place can produce significant top- and bottom-line results. One point gain in realized prices can yield a much larger proportional improvement in profits. In our work with clients on pricing strategy, four lessons have emerged that can help retailers like you get to the point where pricing is a positive contributor to 2012’s success.
Four Price Strategy Lessons
First, understand that not every price challenge is a real threat. There are elite segments in just about every market: Many of your customers want to buy a product they see as superior, a brand in which they have a strong level of confidence, or the associated top-of-the-line service. Remembering ― and, more importantly, reinforcing ― the non-price advantages that won your firm business in the first place can allow you to avoid unnecessary participation in the vicious cycle of price-based competition. If price is the only reason you give customers to purchase from you, don’t expect anything other than price pressure.
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Second, if there is ever a topic where strong analytics makes a contribution, it is pricing. One of your key goals in 2012 should be to build a strong analytics foundation to assess the external business environment and your own firm’s dependence on pricing gains to achieve profit gains. Over and over, we see sharp differences in the pricing environment from one product/market segment to the next. Knowing where and when pricing pressures likely will be intense can enable you to make the correct decisions on price increases and determine the right responses to competitive challenges. A “one size fits all” pricing strategy might be correct on average, but wrong in every application.
Third, keep on top of best practice approaches to pricing strategy. We recently worked with a company that introduced a premium price product successfully into an incredibly challenging market by implementing a strategy that “gave customers an option that they could refuse.” That strategy offers the best of both worlds ― you don’t have to take a risk because you continue to offer a low-priced option, but you gain upside potential from customer segments that want more and will pay for it. In another instance, we saw a firm with a brand preferred by many customers shoot themselves in the foot by placing the product in too many channels; this created an inappropriate image that its product was one for which “deals are always available.” Implementing best practice concepts can yield major gains for your company.
Finally, it always is important to remember to create value to capture value. While the results of new value creation strategies probably will contribute more to 2013 and beyond than to 2012, the concept underlies all successful pricing strategies. If you are delivering value to your customers, you can be rewarded for it through a price premium or otherwise.
If you aren’t delivering value, any success you can achieve likely will be short-lived, at best. In 2012, asking the question “How can I deliver more value to my customers?” and taking action consistent with the answers can make the discussion of pricing much more pleasant in future years. For example, one of our clients recently had a significant volume of sales through the Internet. When we interviewed its customers about what they liked, disliked and hoped for in the future, three of the top ten themes were surprises to our client. Gaining a strong understanding of customer priorities is the route to success in value creation.
Pricing challenges aren’t going away. But firms that take a proactive approach to pricing and believe that it’s an element of strategy that can make a positive contribution are going to be rewarded. Remember the elite segments and serve them well. Build a strong knowledge foundation for decisions. Implement creative practices that create upside. And let your customers provide your roadmap for delivering value. The rewards from these actions can be tremendous.
