Is MSRP becoming less credible?
Through a special arrangement, presented here for discussion is a summary of a current article from Frozen & Refrigerated Buyer magazine.
Some retailers are getting a tad overconfident about their pricing programs. They’re regressing into tactics to reach short-term category margin goals or quick hits for knee-jerk competitive reasons.
There are several reasons why long-term strategy is taking a back seat to quick fixes. First, there’s the need to please Wall Street every three months. Second, there’s pricing software now that is pretty darn good — but only if it is used correctly. And third is the lack of trust between trading partners, so that even honest attempts at the time-honored fantasy of win-win are often scuttled before the dance even begins. Simply put, you can never tell who’s fudging the numbers or just plain lying.
Despite all the talk of "partnership," too many vendors continue to be self-serving with their category management presentations and "consumer insights." If I had my way, they’d be required to wear warning labels during sales calls, since they’ve become so adept at misleading "interpretations" of "data" when they are "just trying to be helpful."
The lack of transparency and trust has made many retailers tap more deeply into their own scanner data and pony up for pricing software. Retailers often tell me, with irritation in their voices, that they don’t even want to hear suggested retail prices: "Yeah, like I need them to tell me what to sell it for, right?"
Well, at the risk of really ticking some of you off, maybe you do. Last month, my pals at IRI put together a white paper called "Drive Margin Growth of 1 to 3 Percent with Collaborative Pricing Strategies."
Now, I’m all in favor of retailers mining their own data and honing their analytical skills. Hey, algorithms can be a blast. But if you’re a retailer who doesn’t even listen to ideas offered by vendors — especially about pricing — you’re shooting yourself in the instep.
At bottom, pricing makes you or breaks you. You either lose a sale with too high a price, or lose margin with too low a price. IRI’s research says that for a typical $1 billion CPG retailer, a one percent improvement in price yields net earnings gains of $10 million. That same one percent improvement in merchandising costs yields just under $8 million. And for operating costs, it yields under $2 million.
What’s more, price per volume has shifted in some key categories since 2011, according to IRI. It’s amazing to see the shifts in yogurt, juices, meat and seafood across different distribution channels.
Discussion Questions
Are retailers losing out on profits by ignoring suggested retail prices from vendors? How can retailers and vendors work more closely on pricing to produce improved results for both parties?
Poll
BrainTrust
Paula Rosenblum
Co-founder, RSR Research
Last I knew, another word for “collaborative pricing strategies” was “co-op” … not just advertising, but shared markdown money.
I think there’s a dynamic going on underneath this dynamic, and it’s all about private label. As a retailer, I might not be too keen to price a name brand sharply when I’d prefer to lure the consumer to my own house brand.
So the question on profitability is less about item-by-item and more about total category profitability. And I think the article doesn’t even touch that issue as it ignores the private-label elephant in the room.
MSRP is a rarity in the shoppers minds. Meaning who cares what MSRP is? This should be cheaper! Want to improve this old term? Re-spin it … cut the “M” and make it SRP. How does a shopper define a manufacturer, and do the manufacturers know the shoppers BETTER than the retailers? Just a suggested retail price established by the alliance of retailers and providers is better. Catch up with the times and ditch old terms.
While retailers should take vendor recommendations with a grain of salt, they should still pay attention. We’ve done research for vendors to show retailers where they are missing the boat with their pricing. The smart retailers consider what the vendors are telling them. The skeptical smart ones listen and test it themselves, either with their software or preferably in a small controlled store test. The not-so-smart ones ignore the input.
Of course, this puts the onus on the vendor to present legitimate recommendations — otherwise they’ll lose credibility on the next go round.
I’m not sure what the difference is between “fudging the numbers” and “just plain lying” but let’s not quibble over words.
I’ve come to the conclusion that most of the numbers we all use to sell an idea or a product are simply made up. We go through the motions of calculating COGs and then choosing a multiplier but when you get down to it, someone just decides what he/she hopes will work in a given context.
We do this in business plans with financial projections five years into the future; in the current and pathetic political process, in retail pricing, in setting monetary policy, in claiming gas mileage, in declaring how big the universe is, in pretty well everything including golf scores. There’s even a huge debate going on in the scientific community over how much research can’t be replicated for all kinds of reasons including someone fudging the numbers. Some of that dubious research may influence the drugs you’ll take one day.
Technology doesn’t remove the fudging and lying — that technology was programmed by someone with their own biases and self-interests. If we ever knew how many numbers that influence our existence are almost impossible to justify we’d be frightened into immobility.
Vendor and retailer agreement on a price? Not going to happen. It almost always gets down to someone’s best, and hopefully wise, guess. Let’s just declare that as the rule leaving each of us to make the best decisions we can. Every price tag for itself.
The only one using or talking about suggested retail price is the vendors. I recently called a vendor for a product. They offered to sell me the product at their suggested retail price or direct me to wholesaler that would sell the item to me at greatly reduced price. The retail food category mix has significantly changed over the years with different formats controlling some categories. This is means the retailer must look within and this includes their target consumers, not history and not vendors. For over 20 years collaboration has been sold as the win-win solution, yet it is still failing and always will. Vendor and retailer have different objectives. In one category management project, Coke and Pepsi submitted plans developed from the same data. It was easy to know who proposed what plan. The future for pricing is dynamic pricing that changed by demand and time.
MSRP is a great benchmark for retailers to use in their pricing strategies. But shoppers want to believe that retailers are cutting them a deal when they price below MSRP. The “S” in MSRP makes this tricky. If it’s just suggested and not required, why would retailers want to abide by it? After all, they might lose market share to competitors that have prices below MSRP.
I think the solution here is to put a combination of brand identity, perks and pricing strategy to work. A retailer that has consistently presented itself as a loss leader is going to have a tough time pricing products at MSRP, unless customers are offered a little extra (a better loyalty program, free shipping offers on certain orders). If vendors want to avoid a race to the bottom, they’ll have to find new ways to compete beyond price.
There is an aspect of product category here, whether we’re talking about apparel, food, DIY, etc. There is more or less adherence to vendor pricing guidance depending on where you look. With the abundance of price and promotion optimization capabilities available today, retailers need to partner with their vendors and maximize revenue and profit with these tools. That can be regardless of MSRPs.
MSRP is just a number to start with. But as a retailer, be careful what you wish for! If you decide to compete on low price, working with thinner margins in the hope that it will increase sales (and it probably will, at least for the short term), then be prepared to stay and compete in the low-price category. Once you are known for low prices, it means your loyal customers are loyal to you because of your price versus other value offerings such as customer service, knowledgeable sales reps, helpful people and more.
Retailers need to have the ability to merge MSRPs with their own data and the pricing in a market. With category management being practiced by both manufacturers and retailers the “fudge factor” can be eliminated with accurate analysis. Most of the market leaders are already on top of their pricing as part of their total marketing mix. The analysis of MSRPs has to be weighed with the impact it has on store brands and the total category. This is data that most manufacturers do not have.
When I was younger and dumber, I thought I got great deals at Kohl’s on Apt9 dress shirts regularly priced $44 and at 50% off. Then I went to Macy’s and noticed Van Heusen dress shirts MSRP $40 and then 50% off.
I caught on to that. Firstly I knew little about price, secondly Kohl’s was charging prices for off brand items that were above MSRP on similar branded items, and finally that the whole goal of most retailer pricing is to convince the customer they got a deal. I think MSRP sets a baseline for this stupid customer to know what an item costs, and there are still some brands out there that don’t allow discounts and require the stores to sell at MSRP.
Anyone else remember when stores like Office Depot and Home Depot showed “list price” then the lower “our price?” I think now both are charging “list price” since they put the smaller list price charging competition out of business.
Retailers have always used MSRP as a “reference point” to indicate the price above which you’re basically guaranteed to be the most expensive retailer in the market.
In the world where retailers publish a fixed resale price, the discount to MSRP is dictated by the retailer’s:
1) Overall pricing strategy (discounter vs. boutique).
2) Strategy for that product or category (traffic-driver vs. margin-driver).
3) Stock of the product (2-year-supply vs. selling-as-fast-as-we-get-em).
In the world of dynamic pricing, any first-year economics student will tell you that retailers can extract higher profits by setting higher prices for more motivated buyers.
In practice, the ability to do this effectively hinges not just on the availability of real-time information indicating each customer’s willingness to pay, but also on the degree to which a retailer loses customers as its dynamic pricing strategy becomes known.
Because of this last caveat, retailers probably ought to do dynamic pricing through “serendipitous” discounting instead of by publishing different prices for different shoppers. Serendipitous discounting reduces the risk of alienating customers who pay full price with the explanation that they just didn’t happen to get the promotion. Keep in mind, however, that to retain the higher priced sales these dynamic discounts cannot be broadcast widely—otherwise all sales end up discounted.
Finally, with regard to the specific discussion question posed, I am not optimistic that manufacturers’ efforts at “collaborative pricing” will change retailers’ age-old mandate to “buy low and sell high”.
The question of what the appropriate price should be to maximize profits for both vendor and retailer cannot be answered in a vacuum. If there is an active grey market online that completely ignores MAP, what the retailer prices the product at relative to MSRP is inconsequential. In order for both retailer and vendor to profit, the vendor must maintain a “clean” marketplace. Vendors are obligated to manage distribution and MAP tightly to avoid undermining their brand and pricing strategy. Only under these conditions can the vendor present a realistic pricing and profit projection to retailers, which may or may not include a discussion of MSRP.
How many manufacturers are shooting themselves in the foot by presenting an MSRP and LIST price as the same thing? They are not.