What’s creating the pricing disconnects between retailers and vendors?

Photo: RetailWire
Jul 18, 2016
Warren Thayer

Through a special arrangement, presented here is for discussion is a recent article from Frozen & Refrigerated Buyer magazine.

Only 46 percent of retailers say they understand manufacturers’ pricing strategies. What’s more, they say they implement manufacturer pricing recommendations only about 30 percent of the time.

On the other side, 72 percent of manufacturers think retailers understand their pricing strategies just fine and figure their recommendations are executed by retailers about 70 percent of the time.

These vast disconnects — and their effect on sales and profits — are laid bare in Cadent Consulting Group’s 2016 Industry Pricing Study released last month.

Lots of manufacturers focus on closing price gaps versus competition, or elasticity-based calculations. But this approach falls short for retailers — they want pricing strategies based on consumer insights and innovation.

Indeed, retailers say consumer trends are the No. 1 consideration for manufacturers in setting persuasive pricing strategy. But manufacturers rank consumer trends at No. 13.

With retailers pushing for EDLP or promotion that doesn’t align with manufacturer objectives, a significant portion of trade spending goes into price reduction. For manufacturers, Cadent refers to this as the “Pricing Doom Loop,” whereby manufacturers become “highly reactive” to pricing. According to the study, “This can become very detrimental, particularly if manufacturers do not have a sense of what consumers are willing to pay for their products, or — said differently — protect the value drivers within their business.”

The study outlines how a manufacturer adjusted its product mix factoring in key benefits with high pricing power. With these value drivers identified, it evolved from a market driven portfolio of high-tier/low-tier, to a three- tier value-driven portfolio with premium-plus, premium and basic segments.

Cadent notes that its recent survey on trade spending revealed that about half of funding is used to lower prices to the consumer. But once value drivers have been established, they can be leveraged to drive promotion optimization. As the study says, “Marketers have often resorted to promotional reliance to build share, resulting in further pricing and value dilution on products where consumers are willing to pay more.”

DISCUSSION QUESTIONS: What do you believe is causing the disconnect between retailers and manufacturers over pricing strategies and goals? How should manufacturers think about resetting their traditional pricing, portfolio and promotional strategies in order to to better realize value at retail?

"I believe the major missing dataset in this disconnect is actual consumer future demand. "
"Data can only be effective when either manufacturers or retailers use it in lieu of more fundamental and organic paradigms."
"In grocery retailing, price reduction through promotion continues to be the preferred focus as it continues to be the best short-term catalyst..."

Join the Discussion!

10 Comments on "What’s creating the pricing disconnects between retailers and vendors?"

Notify of

Sort by:   newest | oldest | most voted
Kim Garretson

I believe the major missing dataset in this disconnect is actual consumer future demand. There is a lot of buzz among both retailers and manufacturers about big data predictive analytics helping guide the buying and pricing decisions, but of course these predictions are based on the past and we know that’s not the best measure for predicting the future. That’s why we are finally starting to see the future demand dataset at scale with actual consumer intent based on price via offering price alerts at product pages, and then tracking how consumers react to price drops via triggered alerts. Watch SPS Commerce and other software vendors sitting between retailers and manufacturers to start to leverage this new first-party dataset in coming closer to pricing decisions.

Kai Clarke

Ouch! The figures quoted give manufacturers no credence about understanding their products, positioning and pricing. Knowing as many salespeople and companies as I have over the years, these numbers seem slightly out of whack. The impetus on pricing is a retailer positioning issue, since they largely determine the gross margins they need, as well as the charges the manufacturer must bear (including returns and allowances deductions, deductions for dating, swell allowances, marketing development funds, price reduction allowances, backend monies, additional price protection monies, etc.). Retailers seem to always desire a 50 percent+ gross margin, yet expect the manufacturer to bear their costs of doing business. I don’t know of any manufacturers who aren’t familiar with their retail customers requirements and demands which impact their pricing strategies.

Ben Ball

Data can only be effective when either manufacturers or retailers use it in lieu of more fundamental and organic paradigms. That doesn’t happen very often — especially with retailers. Manufacturers want to sell more of their products, anywhere they can, and at optimal profitability. That drives their pricing structure. Retailers want to sell more stuff, in THEIR STORES (or channels), and routinely reach to price as the primary lever after assortment. That drives both their pricing structure and their constant push for lower pricing from manufacturers. This is a gulf bigger than big data.

Mark Heckman

In grocery retailing, price reduction through promotion continues to be the preferred focus as it continues to be the best short-term catalyst for case movement. However, supplier/brand funds are slowly continuing to transition away from straight case discounts to deals contingent upon access to shopper data and new customer touchpoint technologies.

Accordingly, those suppliers/brands that are in the position to take the longer view of their business with their key retailers are smart to spend money on developing deeper marketing relationships with their retailers and their shoppers as opposed to diluting the value of their products by constantly promoting them and merely training the shopper to wait until a deal occurs before making the purchase.

Ian Percy

No surprise here. In ANY human-driven system, the gap in perceptions and behaviors widens as you move back from the end-point of that system. In examining customer or employee engagement and satisfaction, for example, it is not at all uncommon for senior executives of the company to think everything is wonderful. As you go down through the hierarchical layers of the organization to the customer-facing employee the perceptions and behaviors get significantly more negative. The final step, of course, is asking the actual customer what they think.

The same diminishing perceptions principle seems to be happening in this “pricing disconnect.” Frankly, pricing is probably just one manifestation of disconnection between manufacturer and retailer. Dealing with things you can attach numbers to is a lot easier to deal with than human issues like trust and transparency.

Relevant to this topic, we had an item in RetailWire the other day about customer distrust of honesty in the MSRP. So if you think there is confusion between manufacturers and retailers, just add in the customer!

Dick Seesel

While manufacturers’ suggested retail prices are less enforceable than in the past, manufacturers still have their brand equity at interest. Price maintenance (or at least MSRPs) is part of the equation, especially if the vendor is spending marketing dollars to help reinforce the branding message.

Most retailers today are more interested in their own brand position than in the equity of the brands they carry. And with the constant competitive pressure to beat the other guy (Amazon, Walmart, whoever), pricing will continue to follow a downward spiral. I’m not sure there is an easy answer to be found in data science.

Dr. Stephen Needel

Pricing is probably the least understood and researched of all marketing tools. Even our VR research is light on pricing work compared to packaging, category management, etc. We’ve seen lots of cases where the price structure, from the manufacturer’s perspective, is not optimal — usually because they decide to be parity-priced with competition, benefits not withstanding. While having to operate within a retailer’s desired price tier, there’s lots of flexibility to examine prices relative to in-store competition and optimize.

Mohamed Amer

Manufacturers tend to view their markets at the macro level through the prism of their products and cost structure. Retailers tend to view their world through the eyes of their customers and immediate competitive pressures.

The same product sold in different formats and banners will attract different customers and associated value equations and bundled services. That’s what makes retail so darn exciting and dynamic.

The disconnect on pricing is not going away any time soon unless both sides use the same worldview: the end-customer and how they use and experience their products. Hubris and past success are likely to keep the two sides apart longer than need be.

Ralph Jacobson

These two trading partners, retailers and manufacturers, obviously are looking at the market through very different lenses and they have very different objectives to meet. Further, for those in the ecosystem that are both retailers and manufacturers, private label provides an even more complex pricing issue to effectively manage. One can easily see why there are disconnects to a degree in the collaboration of these entities. That’s right, “collaboration” is not fully optimized, by any stretch. This is an age-old challenge and getting the pricing strategy aligned takes an intentional effort by all involved parties. Because this has been going on for so long it’s time to get serious and lay out a plan, perhaps even a template that could be leveraged throughout the industries.

Christopher P. Ramey

There will always be acrimony between the two. Manufacturers “merchandise” retailers just as retailers “merchandise” consumers. Each entity has their own perceptions, sets of rules and responsibilities to stockholders.

Furthermore, each retailer has their own point of view. It’s in their best interest that pricing and merchandising are not a straight line.

"I believe the major missing dataset in this disconnect is actual consumer future demand. "
"Data can only be effective when either manufacturers or retailers use it in lieu of more fundamental and organic paradigms."
"In grocery retailing, price reduction through promotion continues to be the preferred focus as it continues to be the best short-term catalyst..."

Take Our Instant Poll

How often do you think retailers should implement pricing recommendations from manufacturers?

View Results

Loading ... Loading ...