Are retailers’ pricing strategies too complicated?

Discussion
Mar 05, 2015
Tom Ryan

According to a survey by Software Advice, 52 percent of retailers use more than 10 pricing tactics, although most revolve around a strategy of discounting.

The study questioned retailers about their experiences with 13 different pricing approaches and found only two percent used two or fewer pricing tactics.

The top eight were:

1. Discount: Discounts based on either product quantity, customer loyalty or tied to specific promotions.

2. Bundle: Multiples of the same product are sold together for a single price, typically lower than purchased individually.

3. Below competition: Products priced lower than the closest competitor pricing.

4. MSRP (manufacturer’s suggested retail price): Designed to maintain the manufacturer’s margins and brand perception.

5. Odd pricing: Ending prices in odd figures, such as 99 cents, for a psychology play on consumers.

6. Price lining: Prices set to create distinct categories of products, signaling a level of quality to the customer.

7. Dynamic: Prices change based on the willingness of the customer to pay.

8. High-low: Most products are priced above market rate with discounts offered on select items to attract customers.

The most used pricing tactic overall was discounting, used by 97 percent of respondents. That was followed by bundle and below competition approaches, both tied at 90 percent; MSRP (85 percent); and odd pricing (78 percent).

Among grocers, a significant majority (85 percent) rated discount as "very effective" or "extremely effective." In second place was below competition with 54 percent of respondents rating it as "extremely" or "very effective."

Everyday low prices (EDLP), another common grocery price strategy used by Walmart and others, was included in the survey, but was not ranked among the most effective. The authors felt EDLP requires winning concessions on price from suppliers and manufacturers, which is easier for large companies that place big orders. Software Advice’s sample consisted primarily of smaller retailers.

The survey found somewhat similar results when looking at the discount, specialty, department store and e-commerce channels.

Are most retailer pricing strategies too complicated? What is the optimal number of tactical pricing approaches? How are advances in price management software affecting how retailers price products?

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18 Comments on "Are retailers’ pricing strategies too complicated?"


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Keith Anderson
Guest
4 years 8 months ago

I would distinguish between complexity and clarity. There’s no question that transparent prices, proliferating loyalty and membership schemes, localization and more delivery/pick-up options are adding complexity to pricing and promotion.

Price optimization software is helping to reduce the complexity and improve the effectiveness of pricing strategy and execution.

But communicating price and value is often where things break down. The software and analysts tend to be rational, but shoppers’ perceptions are influenced by far more than just facts.

The most sophisticated approaches align merchants and pricing directors with marketers that help align a retailer’s positioning from the banner level down to the SKU level.

Chris Petersen, PhD.
Guest
4 years 8 months ago

Retailer pricing strategies are too complex if the consumer doesn’t respond to them.

The interesting question not addressed in this survey is how consumers actually go about researching and comparing prices. Such a survey would undoubtedly show that consumers price shop and compare retailer store prices with those found online, typically long before checkout.

It is interesting that online consumers can see a “final price” in the cart BEFORE checkout. Often you don’t see the final discounted price in-store until the item has been rung up on the cash register.

In the future a critical question may be how consumers vote based on price transparency and ease of price comparison.

Dick Seesel
Guest
4 years 8 months ago

It’s probably valid that too many overlapping promotional strategies only serve to confuse the customer. In the world of general merchandise, Kohl’s (for example) is working to simplify its multilayered promotions through its new loyalty program and mobile app. But there’s no doubt that “the thrill of the hunt” drives department stores’ business, and J.C. Penney learned the hard way about the cost of switching to an EDLP approach.

Meanwhile, other retailers depend on EDLP as a key piece of their overall strategy, whether in groceries, consumables or apparel. It’s not just Walmart that avoids sales on top of EDLP, but off-pricers and some fast fashion stores. So choosing which is the “best pricing strategy” depends—as usual—on the rest of your strategy and what drives your sales and profits effectively.

Tom Redd
Guest
4 years 8 months ago

Since the first days of retail, pricing has never been easy. There is no exact or optimal way to price for each retailer. There are internal and traditional elements in many retail shops that will just stay that way. Someday, after the U.S. penny is no longer manufactured, we might see the end to the .99 approach.

I have watched many a retailer jump on the pure technology-based price optimization bandwagon and jump off as they lost loyal customers. Optimization in price and mix is not just about the science retailers get sold—real optimization includes science and the shopper’s expectations.

Strong price management solutions leverage the past pricing techniques for future pricing and align with the retailer’s strategies by regions, shopper and much more. Price management is part of the end-to-end retail process and not just a quick-add best-of-breed solution.

Mark Heckman
Guest
4 years 8 months ago
It would seem that the more technology and software retailers have access to, the more complex their pricing strategies become. There is a line somewhere to be crossed between sophistication and chaos. Most retailers, first and foremost, price index off their key competitors, knowing that real or even significant perceptual differences in price affect demand and ultimately sales. From there, it is “Katie Bar the Door”, to include category-specific pricing roles, price zones based on competition and demographics, private label price-shielding, key competitively price items and more. Promotions add another layer of complexity with most retailers tiering pricing for loyalty programs in addition to weekly specials, extended specials, digital coupons, manufacturers coupons and of course Everyday Low Priced items. All of these elements have a rationale behind them. However, the true test of any pricing system is customer acceptance. If the customer understands how they can shop the retailer while obtaining real savings they will reward the retailer with their business. If the pricing system becomes too complex with too many signs, color codes and… Read more »
Tony Orlando
Guest
4 years 8 months ago

I firmly believe that there are too many pricing strategies out there, and the simpler the better is how I like to do it. Keep it simple and honest, and for me EDLP plus in-and-out incredible deals around the perimeter will keep them coming back. I know there are lots of loyalty cards with assorted programs tied into them that are attractive, but you shouldn’t have to jump through hoops to get a good deal.

The mobile technology is gaining strength, and the simpler it becomes the better received it will be by retailers and the customers. Providing value is what everyone wants, and for me I like a great deal without all the effort to get it, and I believe that is changing as we speak to provide a simpler way to shop.

Gordon Arnold
Guest
4 years 8 months ago

Software for pricing product and monitoring margins is not the reason retailers are having difficulties with price changes. In fact the software works well to entice sales and floor traffic to the benefit of businesses. What is a problem is the redistribution of price changes on sales floors in an accurate and timely basis with the system’s advertising software(s) communicating with the pricing software to ensure the advertised prices are the same as the store prices.

Another problem is short supply and out-of-stock issues not seen by either of the previous software packages. These are the reasons consumers are perturbed and left to seek other suppliers with fewer pricing and inventory accuracy issues. Too many software packages that are not connected or connectable to one another is the problem. Short and/or narrow sighted system investments to address strategic needs is the reason the problem exists and perpetuates.

Ian Percy
Guest
4 years 8 months ago

As the old saying goes, “Why do it the simple way when the complicated way works?” Can’t help but think of airline pricing while reading this article—arguably the most reviled industry since the beginning of time. What is happening with all this pricing song and dance is the emergence of distrust. Oh, customers will take advantage of a discount, it’s not the customer who is at risk. What I fear is that retailers are planting the seeds of their own destruction. Honestly, it all feels so desperate.

Mark Burr
Guest
4 years 8 months ago
This past Thanksgiving, my wife placed the shopping ads in my lap and said, “So what’s the price I’m going to pay for a turkey”? After looking at the ads, I shrugged my shoulders and said, “I don’t have a clue!” In short, it has become in many cases from all different types of retailers beyond “ridiculi” (Scanner’s plural for ridiculous). For grocery retailers in particular, the pricing strategies and quantity of pricing programs have made things so complex that nearly every item on the shelf in some stores is tagged or signed in some way shape or form. This is in addition to aisle stacks making many aisles so difficult to maneuver that it is impossible to thoroughly shop the store. Then they wonder why same-store sales increases are so difficult to achieve. From my view, every customer that walks through the door is your best customer. Give them the best value, play it straight and don’t make them have to be a mathematician to determine how the items are going to ring up… Read more »
J. Kent Smith
Guest
4 years 8 months ago

Am I the only person who as consumer gets both confused and a bit suspicious of anything other than a straight discount? As for EDLP, can we really say Walmart is strictly EDLP? What of the roll back prices?

The concept of effectiveness needs to be sliced by the consumer segment. We all know there’s the highly price-sensitive folks who are hardly loyal, and at the other end the ones who become loyal through trust. So at the risk of making the question more complicated, we need to consider effectiveness by customer segment.

But the answer to the overall question is yes. If you look at the most successful retailers they tend to be the most simple.

Dave Wendland
Guest
4 years 8 months ago

Thinking of the long-standing game show The Price Is Right, if retailers feel that their pricing complexities help consumers “come on down,” then I’m sure they will continue to produce numerous layers of pricing and strategies.

Software capabilities have actually added to the confusion, making it easier for retailers to adjust on the fly and justify it all with fancy algorithms. Honest, base everyday pricing must be solidly established before adding promotional complexity. I fear that some retailers no longer have that solid foundation.

Ralph Jacobson
Guest
4 years 8 months ago

One pricing strategy may work well for one retailer, while the same strategy will not work for another. I don’t believe one strategy will ensure more success than another. You have to know your audience. If they appreciate complex strategies, then employ the tactics to cater to them. If the consumers want simple, effective and value-driven pricing, then do that. I think pricing is good or bad with regard to the perspective of the consumer. If it is perceived as a value, then it is the right strategy.

Lee Peterson
Guest
4 years 8 months ago

As is typical, the software makes it easier for the retailer, more confusing and meaningless to consumers. I was just in a Third Wave bakery and coffee shop who listed their prices like this: “coffee 3 / danish 2 / sandwich 5,” etc. All I could think of was how simple and refreshing that was. There was a point where Walmart was doing the same thing, you know, back when they were on fire. After countless pricing strategies and avalanches of signage wars, it could be time to re-visit that idea.

Question: Is it time to get rid of all the complication and just tell consumers what your price is in a simple and clear fashion? I’d say yes to that and no to HAL 9000, who seems to be running our stores now.

Lee Kent
Guest
4 years 8 months ago

Yes, pricing strategies are too complicated and yes, there are a few gamer-type consumers who love to play, but I would love to see the numbers on just how many gamer types there really are.

The rest of us feel taken advantage of or perhaps ripped off, with all the price changes. It is up to the retailer to make the strategy as transparent as possible in order to maintain the loyalty of the vast majority.

The other thing for retailers to keep in mind: It’s not always all about the price.

And that’s my two cents.

W. Frank Dell II
Guest
4 years 8 months ago

Most retail pricing is based on the local market which has the leader and its followers. The majority of retailers have a deal or discount addiction as the study shows. Before a retailer works on pricing tactics they should have pricing strategy. Strategies include traffic building, transaction building, profit contribution, cash generating, excitement creating, image creating and turf defending. Then there is Hi-Lo and EDLP. Price elasticity and price and space interrelationship are rarely considered. Velocity, size and flavor are the most common approaches. If anything, greater option consideration should be incorporated into retail pricing, not less. Further reliance on discounting should be reduced. The problem with pricing software is that it only plays back what you input. It doesn’t determine the optimum price or recommend a price, only the estimated effect of an inputted price.

Arie Shpanya
Guest
4 years 8 months ago

There isn’t a perfect number of pricing strategies because each retailer is unique. Different products and demographics warrant unique pricing strategies, but new technologies are taking a step in the direction of wedding them together. Pricing optimization software can integrate strategies and set rules to keep up with the competition. It combines many of the 8 strategies that Tom mentioned and makes it possible to switch off when it’s the most logical and profitable thing to do.

Naomi K. Shapiro
Guest
Naomi K. Shapiro
4 years 8 months ago

Keith is right about distinguishing between complexity and clarity. Also that the software and analysts tend to be rational, but shoppers’ (and retailers’) perceptions are influenced by far more than just facts.

We just posted a blog today on the same subject: Price Strategies Retailers Use To Increase Sales & Move Inventory, where we highlight some of the executions of the pricing strategies described in the survey.

When it comes to pricing technology, the most sophisticated, forward-looking global retail intelligence leaders offer SaaS-based intelligence and analytics solutions that transform the way retailers price, select merchandise, and manage products in order to maximize sales and optimize margins, empowering retailers to base all shopper-centric decisions on real-time market data. That includes solutions such as price intelligence; dynamic pricing; optimizing product selection; monitoring MAP; making relationships with suppliers better informed, and, the Holy Grail: Pricing predictively for optimal sales and profit.

Jenn Markey
Guest
4 years 8 months ago

Increased price transparency means a narrowed acceptable pricing target range for specific goods, necessitating new and differentiated retail pricing tactics and strategies to protect margins and win shoppers.

This post highlights that pricing has to be laser-focused and address the specific category dynamics and role that individual products play in a retailer’s assortment (i.e., trip driver vs. impulse buy). A one-size-fits-all pricing strategy would mean being either under- or over-priced virtually all of the time, adversely impacting both the top and bottom line. Even a retailer coveting the lowest price perception among consumers, would be ill-advised to exclusively use one strategy for all goods, all of the time.

Price management and price optimization software helps retailers navigate this new reality effectively and efficiently.

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