Research Consortium: Price Rollbacks Better Than Discounts

Discussion
Feb 02, 2009

By Warren Thayer, Editorial
Director, Refrigerated & Frozen Foods Retailer

After a huge run-up
over the past year, commodity prices are back down again. But vendors unwisely
have been more inclined to deal off higher list prices or offer more trade
funding rather than to actually lower prices to retailers. That’s the view
of a new consortium of researchers led by Dechert-Hampe and Strategic Marketing
Sciences.

The resulting high
shelf prices in turn have driven a 10 percent to 15 percent jump in price
elasticity, as consumers shut their wallets if they think prices are too
high.

Retailers, meanwhile,
are battling with vendors for lower prices and more promotion, while they
ratchet up private label in nearly every category. Dan Graham, vice president
of consulting services for Dechert-Hampe, believes manufacturers and retailers
must partner to pass along everyday price decreases as the emerging pricing
and promotional strategies are weakening the major national brands.

"Over-reliance
on deep discounting is an inefficient mechanism for winning and retaining
customers," said Mr. Graham.

"Virtually every
manufacturer and retailer is playing a game of chicken – even as
it becomes obvious that everyday price rollbacks represent the last best
hope of winning back consumers," added Ben Ball, senior vice president,
Dechert-Hampe. "However, manufacturers understand that a list price
decrease is unlikely to get passed through to the consumer, so their preferred
strategy is to maintain the current high base prices and offer value by
dealing back through deep discounts. The issue with this particular
hi-lo strategy is that consumers quickly learn that full list prices are
artificially high and that they have the opportunity to buy comparable
brands or private label items with at a discount."

Mr. Graham listed a
few of key questions for manufacturers and retailers to address the new
consumer realities:

1. What
is my brand’s new price elasticity and promotional response? How will this
change as economic conditions change?

2. What
is the new consumption equilibrium as a result of the loss of access to
credit?

3. Is
my brand/store impacted by the loss of credit or is this dynamic actually
helping me by inducing my consumer to buy our products because of their
relative value?

4. Will
retailers partner with manufacturers to address consumer need for value?

"Price and promotional
responses are increasing as a result of consumers’ need for value," said
Hoss Tabrizi, managing director of Strategic Marketing Sciences. "However,
the marketing community should understand that these spikes may well be
driven by their own pricing and promotional tactics that induce value purchasing."

Discussion Questions: What are the pros
and cons of instituting everyday price rollbacks across retail over discounting?
What are the challenges in implementing price rollbacks?

[Author’s
commentary] Dechert-Hampe and Strategic Marketing Sciences, in conjunction
with three other analytic and consulting firms, are launching a major research
initiative aimed at measuring future consumer behavior and developing specific
strategies that can be used efficiently and effectively by manufacturers
and retailers. The group’s website is www.emergingconsumerconsortium.com.

Join the Discussion!

14 Comments on "Research Consortium: Price Rollbacks Better Than Discounts"


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Ed Dennis
Guest
Ed Dennis
9 years 2 months ago

This is when retailers should closely examine their suppliers. When a price increase is taken to reflect higher commodity pricing or freight cost, we understand even if we don’t like it. However, when the suppliers involved do not act as a partner and reduce these prices, then if and when the market corrects, those suppliers should be put to the test and competition should be encouraged. You might not be able to replace [national brand product] but you can sure promote your PL [product]. You can cut shelf space, reduce ad inches, etc, to make sure you don’t become a cash cow for a brand name manufacturer.

Doron Levy
Guest
Doron Levy
9 years 2 months ago

I have to agree with Ben’s assessment here. Rollbacks or EDLPs have more of a psychological bite than a sale price. The retailer’s brand will have more sticking power when the customer knows they can get that price anytime. How can loyalty be increased if the customer is buying their toothpaste or paper towels at 4 different stores?

Customers are looking for confidence builders now and knowing that something will stay the same puts them at ease. I know I will always pay the cheapest price for item x at store y. I no longer have to sift through circulars or comparison shop.

The actual rollback term is extensively used by Walmart and it has been really effective at turning merchandise. I have to look at it from the customer perspective. Show me that I can have the lowest price with the least amount of hassle and I’m your customer.

Li McClelland
Guest
Li McClelland
9 years 2 months ago

Here’s an idea: Instead of rollbacks, how about if manufacturers keep the price the same but announce on the carton/container, “NOW! 20% more product–same low price” and see what happens. I predict that consumers angrily getting used to having to watch out for grocery product “shrink” would be enthralled with a more-bang-for-the-buck approach and would reward these brands.

Bernice Hurst
Guest
9 years 2 months ago

As Ben said, “manufacturers understand that a list price decrease is unlikely to get passed through to the consumer.” But all consumers see is high prices in spite of reports that commodities and oil prices are down and reports of retailers pressuring suppliers for lower prices, allegedly for customers’ benefit. I don’t think they could give two figs about what goes on behind the scenes. Retailers should either cut prices in store or make sure customers know why they haven’t.

Nikki Baird
Guest
Nikki Baird
9 years 2 months ago

It depends on how long manufacturers and retailers expect underlying costs to stay down. For grocery, price increases were driven by two distinct trends in 2008: one, fuel prices, which had a spiral effect as high fuel costs drove up component prices. But two, and something that didn’t get nearly as much coverage in the US, there were significant food shortages/runs on basic commodities like rice and wheat, which also drove up food prices.

So, while current economic conditions and a collapse in oil prices has driven prices down in the short term, how long will that last? A year? Two years? Five years? If you’re only looking at a year or two before prices start creeping back up again, it might actually be worth it to hold the line now–because as much as it’s a psychological boost to see price cuts, it’s highly depressing to get sticker shock at the shelf, especially when budgets are tight.

Max Goldberg
Guest
9 years 2 months ago

It seems as if there always have been competing strategies: hi-lo versus EDLP. And some retailers engage in both strategies. These patterns are hurting brands and causing consumer distrust. Why is it that retailers make more money from manufacturers than from selling products? Why do brands hold prices artificially high, rather than passing savings on to consumers?

This doesn’t make sense and consumers know it. Retailers and manufacturers have gotten themselves into this mess and will have to work together to survive. The current economic crisis would seem to the be perfect time to “right” the system.

Gene Hoffman
Guest
Gene Hoffman
9 years 2 months ago

The value-cost system within each consumer’s brain seems to transcend the head games manufactures and retailers are endlessly imposing on the harried consumer today.

Ms. Consumer knows intuitively manufacturers and retailers are desperately trying to extract precious bucks from her bounty (that are now fated by other priorities) via their schemes that are well-supported by erudite research. The consumer watches and endures these games as they are played out before her eyes and then she decides what need, what want, what promotion and what price rollback best meets her immediate dwindling wants and current necessary needs. All she seems to be asking is to “play it straight with me.”

Kevin Graff
Guest
9 years 2 months ago

Ben has this absolutely right! Perpetual discounting destroys margin and consumer confidence. Retailers essentially train their customers not to buy (or trust) full price. MSRP has become something to laugh or sneer at.

The EDLP strategy works so well in creating the perception of low price (whether true or not). Combined with ‘price guarantees’, it has driven consumers in the doors and profits up.

Dan Raftery
Guest
9 years 2 months ago

Blurry concepts such as “price elasticity” and “consumption equilibrium” are wasteful distractions from functional business analytics that guide decisions about what to do today. Anyone who does not understand why retailers retain some of a price decrease needs a refresher course in Retailing 101. The goal today is survival. It is equally important to retailers and manufacturers and driven by consumers’ efforts to reach the same goal. Analyze that if you want to be here next year.

David Biernbaum
Guest
9 years 2 months ago

Retailers and vendor-suppliers are not communicating and understanding each other as well as they should be. Retailers are taking a sledge-hammer approach to the economy and making many erroneous assumptions about pricing, product assortment and discounts that are not only hurting themselves and their suppliers but also the job market, as well. Not every item in the store needs to be slashed, replaced by private label, nor even discounted. This recession has different connotations to different people, and it’s unwise to approach it with a broad brush.

Mark Lilien
Guest
9 years 2 months ago

Very few retailers practice everyday low pricing consistently, year after year, decade upon decade. Almost everyone is high-low, although from time to time a retailer issues a press release claiming EDLP. The EDLP policy lasts a few months until the poor comp sales trends totally unnerve the CEO, who goes back to high-low. But the high-low press release is never written.

Trust takes years to develop, but can be erased in a moment. And you can’t argue with success (or failure). Who has the guts to withstand months or years of difficult sales trends to reinforce EDLP?

Ted Hurlbut
Guest
Ted Hurlbut
9 years 2 months ago

Within the world of highly identifiable consumer basics, the fact is that whether suppliers and retailers adopt a hi-lo, EDLP or heavily promotional strategy, the ultimate price consumers pay will be bid down competitively. When the value proposition rests on price and price alone, as it so often seems to these days, price will be driven down and margins driven out. Even in the case of a megalith like Walmart, their strategy depends in large part on their ability to leverage their buying power with their suppliers. Their strategy doesn’t begin to assume any pricing power in the market.

M. Jericho Banks PhD
Guest
M. Jericho Banks PhD
9 years 2 months ago
A few thoughts. First, the value proposition does not and never will rest on “price and price alone,” as suggested in other comments. Every consumer’s personal value proposition (or value equation) is different, is comprised of several layers and considerations, and is constantly changing based on needs, advertising, availability of funds, timing, peer influences (party!), emotional influences, and so much more. In fact, in many value equations price does not even occupy the first position. Second, putting more stuff in packages and charging the same for it does not take into consideration the huge expenses of redesigning packaging, manufacturing that packaging, distributing that packaging to manufacturing plants, disposing of (or storing) the old packaging, and writing off the cost of the old packaging. Additionally, a minimum timetable for such an exercise is about a year. Third, our current “allowance” system of manufacturer pricing began when Nixon froze prices during our last recession. Smart manufacturers quickly “froze” unrealistically high prices and began dealing back from them in day-to-day negotiations with retailers. This system has survived and… Read more »
Dr. Stephen Needel
Guest
9 years 2 months ago

Research over the years has shown that deep discounting is not healthy for a brand with equity. However, if retailers won’t roll back prices in response to a manufacturer’s permanent reduction, the manufacturer doesn’t have much option but to try and deal the price down. This is a perfect example of category management gone awry. In theory, both parties should want to deliver value, in the form of lower prices, when the cost of goods goes down.

A key point to consider–in a category with price tiers, a price rollback needs to be consistent across all tiers. If a category is segmented as good/better/best, best better be higher priced than better.

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