By David Mayer, Senior Partner, Marketing and Customer Strategy, Lippincott
Consumers are more financially stressed than ever, which is leading to a decline in their retail spend. Throw-in seasonal peak sales for the holidays, which are predicted to drop 5%, and the pressure for retailers to lower prices in the competition for revenue growth is intense.
But should they? What solves for the short-term risks long-term damage if your pricing strategy isn’t aligned with your brand strategy. What’s more, if everybody discounts, then it becomes an unprofitable race to the bottom where only the cost-leaders can win.
Three considerations should inform your pricing decision. First, how stressed is your customer? Today, the most affluent 10% of shoppers represent almost 50% of total consumer spending. The more that you rely on the less wealthy remainder, the more vulnerable you are to others discounting. Second, what role does value play in your brand strategy? If you promise “Never Knowingly Undersold” (like John Lewis) then your prices better reflect that. In contrast, if you promise “The relentless pursuit of perfection” like Lexus, then lowering prices may perversely harm value perception if consumers believe you had to cut corners to achieve that. Lastly, how secure is your business design relative to competitors at a lower price point? If you can’t profitably match discounts, responding with price cuts may be self‑defeating
Every proposition will have a pricing window. This is a range from low to high that consumers feel is reasonable to pay considering variations in product quality and service experience between alternative retailers. This lives in the minds of consumers – most don’t widely price check – so while its related, it can differ from true prices. Use a research technique such as Van Westendorp’s price sensitivity meter to keep track of that window. If you discount too far below that window, then consumers worry about compromises in quality. If you price too far above, they consider it insult pricing. Good branding enables companies to effectively stretch that pricing window for competitive advantage.
To bring that to life, let’s look at Aldi. Their brand promises the lowest prices without comprising on quality—and they have the food awards to demonstrate that. They also have a cost model that is leaner than most. As shoppers get more price sensitive, Aldi will naturally see higher volumes, so it doesn’t need to discount further. However, if competitors drop prices, then they must do so as well, or risk breaking their brand promise. But the good news? They can respond, secure in the knowledge that their cost-model ultimately allows them to remain profitable at prices almost no-one else can match.
In contrast, Wegmans is a premium grocer, and its shoppers are willing to pay more because they believe it’s a superior product backed by great service. They will have a higher mix of affluent shoppers and are therefore in a better position to resist discounting by retaining a perception of value through product quality.
It’s retailers in the middle that have the toughest challenge. They face a choice. They can seek to retain their position in the pricing window through matching discounts and holding a relative position. Alternatively, they can emphasize the benefit side of the value equation—think Publix’s reputation for outstanding customer service. Usually, it’s a mix of both, staying within the pricing window but without the need to fully match the discounts of lower cost-model competitors. Whatever they do, they need to keep brand and pricing strategy aligned or risk a loss of credibility with customers.
If you do that, in good times you build goodwill and loyalty; in harder times you draw down that equity to avoid destructive price competition. The crucial requirement is that your brand means something to your customers and that the promise is delivered distinctly and consistently — so customers understand why they should choose you over alternatives.
Economic cycles aren’t new and many brands have successfully navigated a path through. Those that do have asked and answered the following questions:
- Do you know the pricing windows for the products/services that most influence consumer perceptions of value in your market?
- Do you know where your brand is within that pricing window?
- Is your brand strategy aligned with your position within the pricing window? Ie. do your customers sufficiently value the benefit you bring relative to the price paid?
- As shoppers come under financial pressure, the pricing window will shift. Do you have a plan for how you intend to adapt?
Those that don’t will face a challenging holiday season this year and beyond. For those that do, while they may face short-term headwinds, the inherent strength of their brand and business design will see them come out stronger and win share in the eventual return to good times.
