RSR Research: A Return to Pricing 101
By Nikki Baird, Managing
Partner, RSR Research
Through a special arrangement, presented here for discussion
is a summary of an article from Retail Paradox, Retail Systems Research’s
weekly analysis on emerging issues facing retailers.
As RSR prepares to launch
the fourth edition of its pricing report, it’s easy to forget that as far as
price optimization has come, there is still a long way to go. At Retalix’s
recently held user conference, Lyle Walker, VP of marketing for KSS Retail,
reminded me that sometimes the basics need a refresh.
He presented three pricing "myths" and
explained why retailers should be working to blow up these myths internally.
Close enough pricing: When you have a private label brand, sometimes
the mandate is to keep the private label price "close enough" to
national brands — for example, if the national brand can of peas is .99, then
the private label should never be more than 20 cents away. But customers don’t
know your costs or margins, so you have an opportunity to be flexible here
— in fact, some stores may be next to serious price competitors. You don’t
have to kill the margin for the entire product line just to stay competitive.
You might find benefit by varying that price by region or location — either
or both the national and the private label brand.
Margin pricing: Sometimes retailers set margin objectives for their
private label — the private label brand should always achieve 35 percent margin,
for example. But if the private label product is not priced close enough to
the national brand, it sometimes creates a negative connotation for the customer.
Line Pricing: This example applies primarily to products that have
lots of flavors or colors. The temptation is to set the prices so that the
entire line is priced at the same price — all prices of a salad dressing line
are set at $1.29, for example. But a common differentiator for a smaller grocer
against a big chain is that they often carry a wider selection of flavors that
you can’t get elsewhere. So why give away margins on products your competitors
don’t even carry by pricing the entire line the same way?
The main point is
that traditional pricing technologies are designed to automate pricing decisions
across a lot of stores. Price optimization enables you to treat every single
store (if you want to go to that level) as its own demand pool, and gives you
insight into what makes for successful price strategies at that particular
store. There is a lot of value — our surveys on pricing show consistently
that I’m not understating this — in breaking from the one-size-fits-all pricing
strategies of the past.
Discussion Questions: What do you think are the biggest fallacies around traditional
pricing strategies? How well do retailers really understand the margin benefits
from more sophisticated pricing techniques?